Gail Weinstein is Senior Counsel, Philip Richter and Michael P. Sternheim are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Sternheim, Steven Epstein, Brian T. Mangino, Amber Banks, and is part of the Delaware law series; links to other posts in the series are available here.
Coster v. UIP (June 28, 2023) is the first decision (so far as we know) in which a Delaware court, in the context of a contested board election, has validated a board of directors’ action that had the effect of disenfranchising a stockholder. Notably, the case presented a highly unusual factual setting. In the decision, the Delaware Supreme Court addressed the overlapping applicability of the Schnell, Blasius and Unocal standards in this context and, combining these doctrines, established a unitary standard for review of board actions that have a disenfranchising effect.
Key Points
- The new standard appears to be, essentially, a heightened Unocal standard. Under the new standard, a board action that has the effect of disenfranchising a stockholder in the face of a contested director election or stockholder vote touching on board control is permissible if it is a “reasonable and proportionate” response to a threat to the corporation (the Unocal standard), but the court will apply the “special sensitivity” toward stockholder disenfranchisement issues that the Schnell and Blasius doctrines bring. The decision furthers the Delaware courts’ longstanding trend of blending these doctrines, with the effect, clarified in UIP, of essentially relegating Schnell and Blasius to being specific applications of the Unocal standard rather than being standards of review themselves.
- In our view, there will still be a very high bar to judicial validation of board action that has the effect of disenfranchising a stockholder in the face of a contested director election or stockholder voting touching on board control. The standard of review the Supreme Court articulated in UIP may appear to be less stringent than the Schnell and Blasius standards that have often been applied in this context. However, we believe it likely that the new standard will not significantly change the court’s general approach to or outcome in these cases—first, because the decision just reaffirms the court’s evolution toward a combination of the Schnell, Blasius and Unocal doctrines in this context; and, second, because, as the Supreme Court emphasized, the facts in UIP were highly unusual.
