Court Permits “Do-Over” for Non-Compliant Nomination Notice Under Company’s Advance Notice Bylaw—Ionic Digital

In Vejseli v. Duffy ("Ionic") (May 21, 2025), the Delaware Court of Chancery, in a post-trial decision, held that the directors of Ionic Digital, Inc., who were facing an imminent proxy contest over control of the board, (i) breached their fiduciary duties when they reduced the size of the board so that only one director would be elected at the upcoming annual meeting; but (ii) did not breach their fiduciary duties when they rejected Plaintiffs' nomination notice on the basis that it did not comply with the requirement under the company's advance notice bylaw that all agreements relating to the nominations be disclosed. The court ordered that, given the directors' breach in reducing the board size, the company had to reopen its window for nominations so that all stockholders, including Plaintiffs, could nominate the two directors that would have been up for election if the board size had not been reduced.

Key Points

• The court stressed the critical informational function served by an advance notice bylaw requirement that all agreements relating to the nomination be disclosed. Of note, the court suggested that even such agreements that had been recently terminated potentially had to be disclosed. And, in any event, the court held, a provision in a terminated agreement that survived termination of the agreement had to be disclosed.
  
  
• The court permitted Plaintiffs a "do-over" although they had submitted a non-compliant nomination. The court explained that, although normally a party that submitted a non-compliant nomination notice would not be permitted to submit a corrected notice, in this case, where it was the wrongful conduct of board that necessitated reopening the nomination window, there was no reason not to permit Plaintiffs to submit a new nomination notice.
  
  
• The court, applying the Coster standard of review to both actions by the board, focused on the directors' motivations and justifications. The court reaffirmed that the standard established in Coster v. UIP (Del. Supreme Court 2023) applies to board actions that are defensive in nature, not adopted on a "clear day," and affect the stockholder franchise. While some practitioners speculated that the Coster standard might be more objective than the former Blasius standard, with less focus on directors' motivations and justifications, in each case in which the new standard has been applied (Coster, Kellner v. AIM (2024), and Ionic), the judicial focus has been on the directors' motivations and justifications-suggesting that the court's analyses and outcomes may not may not be significantly different than they were under Blasius.

Background. In January 2024, as part of the Chapter 11 bankruptcy plan of Celsius Network, LLC (a cryptocurrency lending platform), Celsius' digital currency mining assets were spun off into a new entity, Ionic. Many Celsius creditors, including Plaintiffs, thus became Ionic stockholders. By the summer of 2024, Ionic's stockholders were publicly venting frustration with Ionic's leadership, particularly with respect to their failure to have publicly listed Ionic's shares. In the seventeen months from Ionic's formation, five of the directors on its eight-seat classified Board had left; there had been three different CEOs, two CFOS and two CLOs; and the company's auditor had resigned.

In May 2024, Figure Markets Inc., which runs a blockchain exchange for digital assets, had proposed to Ionic's board (the "Board") that Ionic's securities be listed on Figure Market's exchange. Also, GXD Labs, LLC, a Bitcoin mining service provider, had proposed to the Board that GDX replace U.S. Bitcoin ("Hut 8") (the bankruptcy plan sponsor) as Ionic's service provider. The Board had rejected both proposals.

Plaintiffs-three Ionic stockholders who had been vocal and public about their discontent-partnered with Figure Markets and GXD (neither of which was an Ionic stockholder) to call a special meeting to replace two directors on the then four-person Board. Their plan then changed to conducting a proxy contest at Ionic's first annual meeting, at which two Class I directors were to be elected. In October 2024, Plaintiffs, Figure Markets and GDX, and their legal counsel, met with the Board and encouraged it to replace directors, appoint a new CEO, immediately list Ionic's stock, and replace its service provider with GXD. Plaintiffs continued to engage with the Board through January 2025.

On February 4, 2025, the Board adopted a resolution by unanimous written consent, setting the date for the annual meeting at March 17, 2025 and reducing the size of Class I of the Board so that only one director (rather than two) would be up for election at the annual meeting. There also remained a vacant seat in Class I, to be filled by Ionic's CEO when a new one was hired. Ionic announced the meeting date, but did not disclose the reduction in the Board's size. Announcement of the meeting date triggered opening of a ten-day window, under Ionic's Advance Notice Bylaw, to submit nomination notices. On February 14, Plaintiffs, Figure Markets and GDX agreed with one another, in a Solicitation Agreement, that Figure Markets and GDX would support Plaintiffs' efforts to elect nominees at the annual meeting. Also on that date, Plaintiffs submitted a notice (the "Nomination Notice") nominating two individuals for the two Class I director seats they believed were up for election.

The ten-day nomination window closed on February 17. On February 20, Ionic updated its website to disclose that the Board size had been reduced. The board's Nominating Committee met twice and concluded that Plaintiffs' nominees were unsatisfactory and that reelecting the existing Class I director was in Ionic's best interests. On February 28, the Board rejected the Nomination Notice as not compliant with the requirement in the Advance Notice Bylaw that all agreements relating to the nomination be disclosed. On March 5, Plaintiffs, while claiming the Board's issues with the Nomination Notice were pre-textual, sent the Board copies of the undisclosed agreements.

Plaintiffs brought suit, claiming that Ionic's directors breached their fiduciary duties by reducing the size of the Board and by rejecting the Nomination Notice. Vice Chancellor Bonnie W. David held that the reduction in the Board's size was a breach of fiduciary duties, but that the rejection of the Nomination Notice was not. To restore Ionic stockholders' ability to elect two Class I directors at the annual meeting, the Vice Chancellor ordered the Board to open a new ten-day nomination window to permit any stockholders, including Plaintiffs, to submit nominations for the two seats.

Discussion

Rejection of Nomination Notice

Of note, the court suggested that even recently terminated agreements might have had to be disclosed in the Nomination Notice. The Advance Notice Bylaw required disclosure in a nomination notice of all material agreements relating to the nomination. Plaintiffs' Nomination Notice disclosed the Solicitation Agreement, but did not disclose earlier agreements among Plaintiffs, Figure Markets and GDX relating to Plaintiffs' nominations. Plaintiffs argued that they did not have to disclose the earlier agreements because those agreements "were no longer operative at the time of the Nomination Notice." Specifically, Plaintiffs stated: on October 7, 2024, the parties' "Second Group Agreement" had amended and restated their "First Group Agreement"; on October 21, 2024, their "Third Group Agreement" had "disbanded the group" under the Second Group Agreement; and on February 14, 2025-the same day the Nomination Notice was submitted-the Solicitation Agreement had terminated the Third Group Agreement. The court emphasized that the function of a requirement to disclose agreements about a nomination is to allow a board "to knowledgably make recommendations about nominees and ensur[e] that stockholders cast well-informed votes." The court wrote that those informational purposes are "ill served if a stockholder omits disclosing an agreement terminated the same day it submits a nomination notice, as Plaintiffs did here." The court added: "There is little doubt that stockholders would want to know about recently terminated agreements when deciding how to vote their shares."

The court held that a material provision in a terminated agreement that survived the termination had to be disclosed in the Nomination Notice. The court stated that, even assuming Plaintiffs were only required to disclose extant agreements, the Nomination Notice failed to disclose a material provision in a terminated agreement that survived the termination. Specifically, Paragraph 7 of the Third Group Agreement stated that, for one year, "no Member of the Group shall enter into any agreement, arrangement or understanding with Ionic relating to the Purpose [of the Agreement]" unless such agreement, arrangement or understanding included certain specified commitments by Ionic-including its forming board committees to search for a new CEO, to conduct a strategic and operating review of the business, and to consider replacing Ionic's service provider with GXD and consider listing Ionic's securities on Figure Markets' exchange. Plaintiffs argued that this provision was "moot because the focus of the Group ha[d] shifted from holding a special meeting [(the subject of the prior agreements)] to running a proxy contest at the Annual Meeting [(the subject of the Solicitation Agreement)]." The court stressed, however, that the contractual obligation set forth in Paragraph 7 had not been terminated or waived before the Nomination Notice was sent-and that "the existence of a commitment to support the types of proposals described in Paragraph 7 would have been important to stockholders in deciding which director candidates to support."

The court applied the Coster standard of review to determine whether the Board's rejection of the Nomination Notice, although legally permissible, was inequitable. The court reiterated in Ionic that the Coster standard applies "enhanced scrutiny under Unocal, with sensitivity to the stockholder franchise under Blasius." The former Blasius standard required a board to have a "compelling justification" for actions that interfered with the stockholder franchise. Under the Coster standard, however, the court considers, first, whether the Board reasonably perceived a threat to corporate policy or effectiveness (which threat must have been real and not pretextual), with the board having been motivated by valid corporate interests rather than selfish or disloyal interests; and, if so, then, whether the action the board took in response was reasonable in relation to the threat posed and not preclusive of the stockholder franchise. The court found the Ionic Board faced a real threat to corporate control in light of the planned proxy contest, particularly as the "Nomination Notice was backed by two non-stockholders motivated by separate commercial interests." The Board acted for a valid corporate purpose, namely ensuring that stockholders were informed of all agreements relating to nominations for directors so that they could decide on an informed basis whom to support. The court viewed the directors as having "credibly testified that they believed understanding the specifics of all arrangements between Plaintiffs, Figure Markets, and GXD would be highly material to stockholders deciding who to support at the Annual Meeting." The court also readily concluded that rejection of the Nomination Notice was not preclusive. Preclusive in this context means that a board's action made it impossible as a practical matter for a proxy contest to succeed. In this case, Plaintiffs were not precluded "from submitting a compliant Nomination Notice," the court wrote. "[They] could have complied with the Advance Notice Bylaw's disclosure requirements, but they did not." Consequently, the rejection of the notice was not preclusive, even though, without the reopening of the nomination window, Plaintiffs could not have proceeded with a proxy contest.

The court ordered reopening of the ten-day window for nominations, including for Plaintiffs. Ionic's directors argued that Plaintiffs should be precluded from submitting a new nomination notice, as they should not be afforded a "do-over" after submitting a non-compliant notice. The court agreed that this would normally be the case, but should not be in this case, given "the unusual facts," where it was the Board's wrongful conduct (in having reduced the size of the Board) that necessitated reopening the nomination window; Plaintiffs had not "intentionally concealed" material information; and the directors had offered "no real reason why Plaintiffs should not be permitted to submit a new nomination notice during the reopened nomination window so that, with the benefit of full disclosure, Ionic's stockholders, who have not been able to exercise their voting rights since the Company's incorporation, can finally decide for themselves who should serve on the Board."

Reducing the Board's Size

The court applied the Coster standard to the Board's reducing the size of the Board. The Coster standard again applied, because the Board did not decide on a "clear day" to reduce the size of the Board. Rather, when it resolved to reduce the size, it was aware of Plaintiffs' plans to mount a proxy contest to replace Ionic directors. The court thus considered whether the action was reasonable and non-preclusive.

The court found the directors' purported purposes in reducing the Board size were pre-textual. The directors contended that their purpose in reducing the Board's size was to promote efficiency, reduce expenses, and avoid deadlocks. The court concluded that these purposes were pre-textual. The court noted that there was no contemporaneous evidence that the Board had considered these purposes; and, during trial, Plaintiffs had offered "shifting explanations" as to their purposes. The court credited the testimony of one Ionic director as being the most credible-he testified that the board size was reduced because it would be difficult for the Board to recruit a high-quality board member to fill the vacant Class I seat unless the Board first "calmed the waters a bit" by changing the Board's composition. The court responded that "[r]educing the number of directors so that the Board, rather than the stockholders, could later identify better candidates is not a legitimate corporate purpose."

Further, the court concluded that, irrespective of the Board's purposes, reducing the size of the Board was not a reasonable response and was preclusive. The court stated that, even if the Board's purported purposes were the actual purposes, the reduction was not necessary to accomplish those objectives. For example, if saving costs had been the purpose, "the Board could have explored other solutions for saving costs that did not involve eliminating a director seat immediately prior to the stockholders' first opportunity ever to elect directors"-and there was no record that any alternative cost saving measures were considered. Also, reducing the Board by one seat did not accomplish the purpose of avoiding deadlocks, because, while it led to an odd number of seats, there was still a vacant seat, so, after the size reduction, the actual number of directors was an even number. In addition, the reduction in the size of the board was preclusive, the court found-as it "made success in a proxy contest realistically unattainable by eliminating the possibility of success for two seats."

Practice Points

• A board should understand and be able to articulate the specific corporate purpose for which it rejects a nomination notice. Even if rejection of a nomination notice may be legally permissible on the basis that it does not comply with the company's advance notice bylaw requirements, the rejection also must be equitable-that is, done for the purpose of advancing a legitimate corporate purpose, and not for pretextual, selfish, or disloyal reasons.
  
  
• When considering a nomination notice, a board should consider whether the notice complies with the requirement that all agreements relating to the nomination must be disclosed. Given the court's focus in Ionic on the validity and importance of this requirement for an informed stockholder vote, a board evaluating a nomination notice should carefully consider what its advance notice bylaw requires with respect to disclosure of agreements and whether the requirement has been met.
  
  
• Boards should consider specifying in an advance notice bylaw that recently terminated agreements and surviving provisions of terminated agreements must be disclosed. Even if (as in Ionic) the bylaw does not so provide expressly, the board should consider whether non-disclosure of such agreements or provisions renders the nomination notice at issue non-compliant.
  
  
• A board should make governance changes on a "clear day" when possible. Such actions, even if defensive in nature, will be reviewed under the business judgment rule. If such actions are defensive, affect the stockholder franchise, and are not adopted on a clear day, then enhanced scrutiny under the Coster standard will apply instead.

• Boards should draft advance notice bylaws clearly and with careful attention to the (still-evolving) parameters as to their permissible breadth. We note that, in Kellner v. AIM (2024), the court invalidated advance bylaw notice provisions that it viewed as being overbroad, ambiguous, and/or so "dense" as to be incomprehensible. The court viewed such defects as: restricting the stockholder franchise without accomplishing a reasonable approach to information gathering; suggesting an intention to block dissidents' nomination efforts; and giving the board license to reject a nomination notice based on the board's "subjective interpretation" of the provisions.

• There remains an open issue as to how broadly the Coster standard applies. It has not been clear whether the Coster standard applies only to board responses taken on a "rainy day" when they relate to the election of directors or issues touching on control-or, instead, as may be suggested by certain language in Coster, it applies to all stockholder votes. As Coster and Kellner, and now Ionic, all have involved elections of directors, the question remains unanswered.

• Siegel v. Morse (Apr. 14, 2025). In another recent Court of Chancery decision on advance notice bylaws, the court rejected a challenge to The AES Corp.'s advance notice bylaw that was adopted on a "clear day." The plaintiffs in Siegel did not challenge the facial validity of the bylaw, but, rather, claimed only that the bylaw was "unenforceable" because it was adopted for defensive purposes and had a "chilling effect on the stockholder franchise." The plaintiff had no intention of nominating director candidates and knew of no stockholder who had such an intention. The court stressed that it would not consider an equitable challenge to an advance notice bylaw where the plaintiff could not identify a stockholder who was deterred by the challenged bylaw from nominating a director candidate. Equitable review of a bylaw is only appropriate, the court stated, when there is a "genuine, extant controversy involving the adoption, amendment, or application" of the bylaw.

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