Chancery Court Enjoins Board Reduction Scheme Aimed at Derailing Election Contest

DELAWARE CORPORATE LAW BULLETIN

Chancery Court Enjoins Board Reduction Scheme Aimed at Derailing Election Contest

Also finds that board properly rejected nominees of dissident stockholders who failed to satisfy advance notice bylaw requirements

Robert S. Reder Professor of the Practice of Law, Vanderbilt University Law School / Retired Partner, Milbank LLP

Swayam Siddha Nanda LL.M. Candidate, Vanderbilt University Law School, May 2026

INTRODUCTION ............................................................................. 108 LEGAL BACKGROUND ......................................................... 108 I. FACTUAL BACKGROUND ..................................................... 110 II. Ionic Faces Rising Stockholder Discontent ............. 110 A. Board Reduction Resolution ................................... 111 B. Dissident Group Nominees Blocked by Advance C. Notice Bylaw .......................................................... 111 Litigation Ensues ................................................... 111 D. THE VICE CHANCELLOR’S ANALYSIS .................................. 112 Board Reduction Resolution ................................... 112 A. Advance Notice Bylaw ............................................ 113 B. CONCLUSION ................................................................................ 114

III.

In Vejseli v. Duffy, No. 2025-0232-BWD (Del. Ch. May 21, 2025) (“Vejseli”), dissident stockholders challenged an eleventh-hour maneuver by a board of directors to reduce its size in response to an election contest. The board also employed the company’s advance notice below to reject the stockholders’ board nominees. The dissidents sought injunctive relief from the Delaware Court of Chancery (“Chancery Court”), claiming the directors had breached their fiduciary duties by interfering with the looming election.

At the outset, Vice Chancellor Bonnie W. David recognized that the “predicate issue” for her analysis was the selection of the proper “standard of review.” In this connection, the Vice Chancellor turned to the relatively recent decision rendered by the Delaware Supreme Court (the “Supreme Court”) in Coster v. UIP Cos., Inc., 300 A.3d 656 (Del. 2023) (“Coster”). For a discussion of Coster, see Robert S. Reder & Austria C. Arnold, Delaware Supreme Court Examines Interplay Of Schnell “Inequitable Purposes” Doctrine And Blasius “Compelling Justification” Standard In Addressing Board Interference With Stockholder Vote, 77 VAND. L. REV. EN BANC 1 (2024).

Before Coster, Delaware courts employed a trio of decisions intermittently, and sometimes in tandem, to address defensive actions taken by boards of directors in the context of a contested election:

In Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del. 1971) (“Schnell”), an “incumbent board took admittedly legal action to move up the annual meeting date and change the location … to a remote destination,” thereby “prevent[ing] a dissident slate from waging an effective election campaign.” Explaining that “inequitable action does not become permissible simply because it is legally possible,” the Supreme Court determined that “the board’s purposeful manipulation of the election machinery to entrench themselves violated the board’s duty to act equitably toward stockholders.” Delaware courts have since applied the Schnell doctrine to scrutinize board maneuvers that, while facially compliant with governing instruments, appeared calculated to interfere with stockholder decision-making. In Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (“Unocal”), the Supreme Court applied “an enhanced standard of review to decide whether the directors ‘had reasonable grounds for believing that a danger to corporate policy and

effectiveness existed’ and that the board’s response was ‘reasonable in relation to the threat posed.’ ” While the Unocal analysis initially was utilized to address defenses mounted against hostile takeover tactics, Delaware courts have invoked Unocal’s two-pronged test of reasonableness in various contexts where directors have implemented measures that could affect stockholder voting rights in the face of a contest for control. In Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988) (“Blasius”), a 10% stockholder sought stockholder support to increase the board “from seven to fifteen members and elect[] eight new directors nominated” by the 10% stockholder. In response, the board added two new members, effectively blocking the 10% stockholder from electing a board majority. Because the board was acting in “good faith” to stymie a potentially harmful leveraged recapitalization sponsored by the 10% stockholder, the Chancery Court declined to apply Schnell. Nonetheless, because the board’s “primary purpose” was to interfere with a stockholder vote, the Chancery Court required the board to demonstrate a “compelling justification” for its action. Blasius emphasized the central role of the stockholder famously franchise observing that “the shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.” Pure Blasius review has been applied only in extreme cases of intentional disenfranchisement; however, its core insight—that interference with voting rights demands close scrutiny and extraordinary justification—permeates Delaware law. Modern decisions have recognized that board actions impacting elections call for the “sensitivity to the stockholder franchise” described in Blasius, even when evaluated under other standards, including Unocal. Then,

legitimizing directorial authority,

the Supreme Court

in

in Coster,

the Schnell/Blasius dichotomy in connection with a board’s adoption of measures to neutralize the blocking power of a 50% stockholder. The Supreme Court announced that the applicable standard “[w]hen a stockholder challenges board action that interferes with the election of directors or a stockholder vote in a contest for corporate control” is “Unocal, with sensitivity to the stockholder franchise under Blasius” and Schnell. Specifically,

reconciled

“When Unocal is applied in this context, it can ‘subsume[] the question of loyalty that pervades all fiduciary duty cases, which is whether the directors have acted for proper reasons’ and ‘thus address[] issues of good faith such as were at stake in Schnell.’ ”

“Unocal can also be applied with the sensitivity Blasius review brings to protect the fundamental interests at stake—the free exercise of the stockholder vote as an essential element of corporate democracy.” Reminiscent of the two-step Unocal test of reasonableness, the Supreme Court explained in Coster that “[w]hen a stockholder challenges board action that interferes with the election of directors or a stockholder contest for corporate control, the board bears the burden of pro[ving]”

“First, the court review[s] whether the board faced a threat to ‘an important corporate interest or to the achievement of a significant corporate benefit.’ ” “Second, the court review[s] whether the board’s response to the threat was reasonable in relation to the threat posed and was not preclusive or coercive to the stockholder franchise.”

* * *

Against this backdrop, Vice Chancellor David considered the

competing arguments presented to the Chancery Court in Vejseli.

A. Ionic Faces Rising Stockholder Discontent

Ionic Digital, Inc. (“Ionic” or the “Company”) was formed to hold “digital currency mining assets” spun off by a bankrupt company to a group of stockholders consisting largely of former creditors. By mid2024, Ionic stockholders “had already begun to publicly vent frustration with the Company’s . . . failure to publicly list Ionic shares” for trading. United by a common dissatisfaction with Ionic management, three Ionic stockholders (“Plaintiffs”) entered into a series of agreements with two non-stockholders who previously, albeit unsuccessfully, sought to do business with Ionic (together with Plaintiffs, the “Dissident Group”). The purpose of these agreements was, among other things, to support Plaintiffs ‘‘in their efforts to achieve the election of the persons they have nominated . . . to the Board . . . at the 2025 [A]nnual [M]eeting . . . of . . . [Ionic].’ ” By January 2025, the Dissident Group had signaled a proxy fight at the upcoming annual stockholders meeting.

B. Board Reduction Resolution

With the threat of a proxy contest looming, Ionic’s classified board of directors (the “Board”) signed a unanimous written contest on February 6. The written consent (i) scheduled Ionic’s annual stockholders meeting for March 17 (the “Annual Meeting”) and (ii) reduced the size of the Board class to be elected at the Annual Meeting from two seats to one (the “Board Reduction Resolution”). Later “that evening,” Ionic issued a press release (the “February 6 Release”) announcing the date for the Annual meeting, thereby “triggering a tenday window for any stockholder to submit a director nomination notice under Ionic’s advance notice bylaw” (the “Advance Notice Bylaw”). Notably, the February 6 Release said nothing about the Board reduction. In fact, the Board reduction finally was publicly disclosed on February 20 when “Ionic updated its website to disclose that the Board had adopted the Board Reduction Resolution.”

C. Dissident Group Nominees Blocked by Advance Notice Bylaw

The Dissident Group moved quickly following the February 6 Release. Believing two seats were open for election at the Annual Meeting, Plaintiffs, with financial backing from the non-stockholder members of the Dissident Group, submitted a notice nominating two candidates (the “Nomination Notice”). The Nomination Notice summarized the current arrangements among the Dissident Group but failed to either describe previous agreements that had been superseded or attach any of the agreements among the members as required by the Advance Notice Bylaw. Based on these perceived deficiencies, “the Board unanimously determined to reject the Nomination Notice because it failed to comply with the Advance Notice Bylaw.” As a result, neither of the Dissident Group’s nominees would be eligible to stand for election at the Annual Meeting, assuring that the incumbents would remain unopposed for the open seat.

D. Litigation Ensues

In response, Plaintiffs asked the Chancery Court to enjoin the Annual Meeting. In support of their plea for relief, Plaintiffs alleged, among other things, that the Board had breached its fiduciary duties by (i) adopting the Board Reduction Resolution and (ii) rejecting the Nomination Notice.

While upholding the Board’s decision to reject the Nomination Notice, Vice Chancellor David found that Plaintiffs had successfully challenged the Board’s adoption of the Board Reduction Resolution on fiduciary duty grounds. To remedy this breach the Vice Chancellor issued “an order invalidating the Board Reduction Resolution and restoring the Board to six directors.” Further, despite her finding that the Nomination Notice did not satisfy the Advance Notice Bylaw, the Vice Chancellor ordered “the Board to reopen the ten-day nomination window under the Advance Notice Bylaw to allow . . . Plaintiffs . . . and any other Ionic stockholder to submit director nominations.”

A. Board Reduction Resolution

1. Enhanced Scrutiny the Appropriate Standard of Review. Vice Chancellor David announced at the outset that “Delaware’s intermediate standard of review—enhanced scrutiny—applies to the Board Reduction Resolution.” Citing Coster, the Vice Chancellor reaffirmed

Rejecting the Board’s argument “that the business judgment review should govern review of the Board Reduction Resolution,” the Vice Chancellor explained that “[b]ecause the Board Reduction Resolution was not adopted on a ‘clear day,’ but in the face of a mounting proxy contest, enhanced scrutiny applies.”

2. Application of Enhanced Scrutiny. Next, the Vice Chancellor observed that “Coster lays out the roadmap for applying enhanced scrutiny under Unocal and Blasius.” Under this approach, the Board bore the burden of proof that

(a) it “faced a threat to an important corporate interest or to the achievement of a significant corporate benefit,” which “threat must be real and not pretextual, and the board’s motivations must be proper and not selfish or disloyal”; and

(b) its “response to the threat was reasonable in relation to the threat posed and was not preclusive or coercive to the stockholder franchise.” The Threat. The Board offered ostensibly benign reasons for reducing the number of seats, including avoiding potential deadlocks inherent in an even-number Board and saving money on director

“the

record

of any

compensation. Given supporting lack the[se] . . . justifications,” the Vice Chancellor observed, they “raise eyebrows.” In fact, the Vice Chancellor found that “a different explanation” offered by the Board “rang truer”: “the Board did ‘not want[ ] to try to recruit a new director into a situation that was such a pitched environment’ and ‘was afraid [Ionic] wouldn’t be able to recruit a high-quality board member until [it] calmed the waters a bit.’ ” Put differently, “it would be difficult for the Board to find a nominee to recommend for the second vacancy at this time.” That excuse, however, “is not a legitimate corporate purpose.” Rather, “[a]s our law makes clear, ‘[t]he notion that directors know better than the stockholders about who should be on the board is no justification at all.’ ”

The Response. Vice Chancellor David determined that the Board Reduction Resolution was not reasonable—it “was not necessary to accomplish [the Board’s] objectives”—and was preclusive—it “ ‘made success in a proxy contest realistically unattainable’ by ‘eliminat[ing] the possibility of success for two seats.’ ” In effect, “the Board imposed its favored outcome on the stockholders: no new directors.”

Because the Board’s adoption of the Board Reduction Resolution failed both prongs of the Coster test, the Vice Chancellor concluded that the directors “breached their fiduciary duties.” In other words, though the Board had the technical authority to set the number of directors, doing so in this manner and under these circumstances was inequitable.

B. Advance Notice Bylaw

After confirming that Plaintiffs “failed to show that the Nomination Notice complied with the Advance Notice Bylaw’s disclosure requirements,” Vice Chancellor David turned to Plaintiffs’ claim that the Board nonetheless breached its fiduciary duties when it rejected Plaintiffs’ nominees. Per Schnell, “[t]he court’s analysis does not necessarily end if a stockholder fails to comply with the plain terms of an advance notice bylaw.”

Once again, the Vice Chancellor invoked the Coster approach, applying “enhanced scrutiny with a Blasius gloss to determine (1) if the Board rejected the nomination notice for legitimate, rather than pretextual, selfish, or disloyal, reasons, and (2) if the rejection was reasonable and was not preclusive.” In this connection, “[t]he Board bears the burden of proof.”

The Threat. According to the Vice Chancellor, unlike in the case of the Board Reduction Resolution, “[t]he Board proved at trial that it rejected the Nomination Notice to advance important corporate interests.” Although “the Board’s inequitable adoption of the Board

Reduction Resolution colors its rejection of the Nomination Notice . . . . I remain convinced that the Board properly rejected the Nomination Notice.” Specifically, by failing to provide all the agreements among the Dissident Group, Plaintiffs deprived the Board and stockholders of potentially important context for their vote.

The Response. The Vice Chancellor found that the Board’s rejection of the non-compliant Nomination Notice was a reasonable and non-preclusive response under the circumstances. Enforcing the Advance Notice Bylaw did not forever bar Plaintiffs from exercising their voting rights or nominating Board candidates. Plaintiffs also argued that the Board acted inequitably by waiting until after the tenday window closed to disclose the Board Reduction Resolution, preventing them from knowing that only one seat was available. Although critical of the Board’s timing, the Vice Chancellor did not believe the Board acted inequitably in rejecting the Nomination Notice. Plaintiffs had full opportunity to submit a compliant notice during the window, “but they did not.”

Vejseli reaffirms Delaware’s commitment to protect the stockholder franchise against not just blatant, but also subtle, encroachments by incumbent boards. The decision illustrates that advance notice bylaws will be enforced only so long as they are applied equitably and not as a pretext for entrenchment. In Vejseli, Vice Chancellor David found the Advance Notice Bylaw to be valid and applied equitably—stockholders are expected to observe reasonable disclosure rules when nominating directors, and failure to do so will bar their nominees.

At the same time, Vejseli makes clear that directors may not exploit their corporate powers to disenfranchise stockholders. The Board’s gambit to reduce its size—with no public disclosure and on the eve of the Annual Meeting—although legal, crossed a fiduciary “red line” that triggered enhanced scrutiny and resulted in a finding that the Board unjustifiably interfered with the election.

With the Supreme Court’s decision in Coster, as applied by Vice Chancellor David in Vejseli, Delaware courts have synthesized Schnell, Unocal, and Blasius into a robust framework granting fundamental protection of stockholder voting rights. Vice Chancellor David’s remedy—enjoining inequitable Board action and reopening the nomination process—demonstrates the Chancery Court’s willingness to employ flexible equitable remedies to ensure that stockholders are not denied a fair choice in corporate elections.

Going forward, while advance notice bylaws remain a viable mechanism for promoting informed voting and orderly elections, they are not a license to play “gotcha” with stockholder voting rights. A board that is aware of an impending challenge must resist the temptation to tilt the playing field in a manner that frustrates the free exercise of the stockholder franchise. Such actions will be viewed with skepticism and subjected to enhanced judicial scrutiny, with directors bearing the burden to justify their conduct. As Vejseli underscores, Delaware courts stand ready to vindicate the ideological underpinning of stockholder rights, even if it means granting a rare second chance to nominate or resetting the corporate calendar. The sanctity of stockholder voting remains paramount in Delaware.

--- FOOTNOTES ---

INTRODUCTION

I. LEGAL BACKGROUND

II. FACTUAL BACKGROUND

III. THE VICE CHANCELLOR’S ANALYSIS

that when a stockholder challenges board action that interferes with the election of directors, the Court applies enhanced scrutiny under Unocal, with sensitivity to the stockholder franchise under Blasius, ‘to protect the fundamental interests at stake—the free exercise of the stockholder vote as an essential element of corporate democracy.

CONCLUSION