Opinion ID: 2275517
Heading Depth: 1
Heading Rank: 8

Heading: Challenges Board Expansion

Text: On August 26, 2002, MM filed its initial lawsuit challenging the Board's decision to add two directors. In the initial complaint, MM alleged that the Board expansion interfered with MM's ability to solicit proxies in favor of its two nominees for election to the Liquid Audio board at the annual meeting. In support of this claim, MM alleged that some stockholders would believe that electing two members of a seven-member board, rather than two members of a five-member board, would not be worthwhile, and, thus, such stockholders simply would not vote. At the September 26, 2002 annual meeting, the two directors proposed by MM, Holtzman and Mitarotonda, were elected to serve as directors of the Board. Liquid Audio's stockholders, however, did not approve MM's takeover proposals that would have expanded the Board and placed MM's four nominees on the Board. The stockholders' vote on both issues was consistent with the recommendation of Institutional Investor Services (ISS), a proxy voting advisory service, which had recommended that the stockholders vote in favor of MM's two nominees, but recommended against stockholders voting to give MM outright and immediate control of the Board. Following the election of MM's two nominees to the Liquid Audio board of directors at the annual meeting, MM filed an amended lawsuit, challenging the Board's appointment of directors Somes and Frank. In the amended complaint, MM alleged that the expansion of the Liquid Audio board, its timing, and the Board's appointment of two new directors violated the principles of Blasius and Unocal. According to MM, that action frustrated MM's attempt to gain a substantial presence on the Board for at least one year and guaranteed that Liquid Audio's management will have control of, or a substantial presence on, the Board for at least two years.