Shareholders get few meaningful protections under Delaware common law. One of them has been the Blasius standard. Blasius has held that actions taken in order to prevent the proper exercise of the franchise by shareholders must be supported by a "compelling justification." The court in Blasius came to the conclusion that these matters were not appropriately reviewed as a matter of business judgment but deserved a higher standard of review.
Blasius has been applied in cases where directors filled board vacancies or changed the date of a shareholder meeting. In other words, it applies to what otherwise would be routine functions of the board. It is the motive of the board that takes the actions out of the routine. The standard is sufficiently high that, once the courts have found the Blasius standard to be applicable, boards have had a difficult time showing the requisite compelling justification. Only one case so far has held that the board met this standard. See Mercier v. Inter-Tel, 2007 Del. Ch. Lexis 119 (Del. Ch. 2007).
There is, however, growing opposition to the Blasius standard in the Chancery Court. In Mercier, the court argued that the applicable analysis should be the reasonableness standard from Unocal. Since the "reasonableness" standard in Unocal is an easy one to meet, the effect of the change would be to reduce the protections afforded shareholders and give management greater latitude to interfere with the franchise.
In Keyser v. Curtis, 2012 Del. Ch. Lexis 175 (Del. Ch. July 31, 2012), the erosion of the Blasius standard in the Court of Chancery continued. The case involved allegations that the sole director of the company created a class of Series B shares, each with 1000 votes and each redeemable (at the demand of the holder) for $1.00. The director purchased 25,000 shares for $0.01 per share. As the court reasoned, the shares were issued "in order to prevent [the insurgent] and his allies from electing a new Board, which is the quintessential Blasius trigger."
Given that the case implicated Blasius, the applicable standard of review ought to have been the compelling justification standard. The court, however, decided otherwise. It first noted that the "main role" of the Blasius standard, "to the extent it has one," was "as a specific iteration of the intermediate standard of review laid out in Unocal Corp. v. Mesa Petroleum Co." The court went on to conclude that in cases involving self interested transactions, such as the one at issue, "[a] standard of review that was established to review selfless conduct is, by definition, ill-suited to serve as a standard of review for self-dealing conduct." As a result, the court opted to apply the entire fairness doctrine.
We will discuss the implications of this decision in the next post.
Primary materials in this case are posted on the DU Corporate Governance web site.