Coster v. UIP: Delaware Court Upholds Stock Issuance Decision

The dispute in Coster v. UIP Companies, Inc. centered on a corporate deadlock and the board's decision to issue stock to a key employee. The conflict arose between two 50% shareholders of UIP Companies, Inc.: Marion Coster and Steven Schwat. Following the death of her husband, Coster inherited his shares, leading to a deadlock in corporate decision-making, as neither shareholder could outvote the other.

In response to the deadlock, Coster sought the appointment of a court-appointed custodian under Delaware law. To prevent this, the UIP board issued stock to a long-term employee, reducing Coster’s ownership interest and effectively resolving the deadlock. Coster challenged the stock issuance, arguing that it was an improper action taken to diminish her voting power.

The case went through multiple rounds of litigation, with the Delaware Supreme Court remanding the matter for further review under a compelling justification standard—a legal test applied when board actions interfere with shareholder voting rights.

Supreme Court’s Decision

On remand, the Delaware Court of Chancery upheld the stock issuance, finding that the board had a compelling justification for its actions. The Delaware Supreme Court affirmed this ruling, emphasizing several key findings:

• The deadlock posed a significant risk to UIP's continued operations, as many of its contracts contained provisions that could be terminated if a custodian were appointed.
• The stock issuance was part of a long-planned succession strategy, ensuring the company’s stability by securing the loyalty of a key employee.
• The board’s decision was not primarily motivated by a desire to entrench control but was instead a reasonable response to an existential threat to the company.

The Supreme Court agreed that, under the unique circumstances, the board’s decision met the legal threshold for a compelling justification, and therefore did not unlawfully infringe on Coster’s voting rights.

Implications for Corporate Governance

This ruling reinforces the principle that corporate boards can take proactive measures to resolve deadlocks when there is a legitimate business purpose:

• Shareholder deadlocks can justify dilutive stock issuances if necessary to protect the company’s survival.
• Courts will closely scrutinize board actions that impact shareholder voting rights, applying enhanced judicial review to ensure decisions serve a compelling corporate interest.
• Business owners and shareholders in closely held corporations should carefully structure agreements to address potential deadlocks in advance.

Conclusion

The Delaware Supreme Court’s ruling underscores the need for shareholders in closely held corporations to anticipate and plan for potential deadlocks. While the ruling upholds the board’s authority to act in the company’s best interest, it also sets a high standard for justifying actions that alter shareholder voting power.

Business Succession and Corporate Governance Guidance

Shareholder disputes and corporate deadlocks can threaten a company’s stability. Proper succession planning and governance structures help prevent costly legal battles. If you need assistance with business succession or shareholder agreements, contact us for legal support.