Veton Vejseli, et al. v. Scott Duffy, et al., 2025-0232-BWD (Del. Ch. May 21, 2025)
On May 21, 2025, following a two-day expedited trial, Vice Chancellor Bonnie W. David held that adoption of a board resolution reducing the number of director seats up for election at Ionic Digital, Inc.’s (“Ionic”) upcoming annual meeting was a breach of the directors’ fiduciary duties after applying enhanced scrutiny to the Board’s decision. The Court also held that the Ionic Board’s rejection of a director nomination notice was proper under Ionic’s advance notice bylaw but issued a mandatory injunction re-opening the nomination window for an additional ten days to remedy the directors’ breach of fiduciary duty.
Factual Background
Ionic is a company that emerged out of the bankruptcy of Celsius Network, LLC, a cryptocurrency lending platform, in January 2024. Ionic holds and operates the digital currency mining assets formerly owned by Celsius and many Celsius creditors became Ionic stockholders. As early as the summer of 2024, Ionic stockholders began publicly expressing frustration with Ionic’s leadership, most notably the failure to publicly list Ionic’s shares.
Due to this frustration, Ionic stockholders partnered with non-stockholder entities Figure Markets Inc. (“Figure Markets”) and GXD Labs, LLC (“GXD”) to seek change at Ionic. Figure Markets and GXD had previously proposed commercial arrangements with Ionic, which Ionic had rejected. The arrangement between the stockholders, Figure Markets and GXD aimed to generate stockholder support for a special meeting of stockholders to replace Ionic directors and to run a proxy contest at Ionic’s first annual meeting.
With the threat of the proxy contest looming, Ionic’s Board, which had three classes, executed a unanimous written consent that set the date of the annual meeting and reduced the size of the Board to eliminate one of the director seats up for election, bringing the number down from two seats to a single seat (the “Board Reduction Resolution”). The Ionic Board announced the date of the annual meeting but did not immediately disclose the Board Reduction Resolution. The announcement of the annual meeting date triggered a ten-day window for stockholders to submit director nomination notices under Ionic’s advance notice bylaw.
Plaintiffs, who had secured backing from Figure Markets and GXD, submitted a nomination notice for two candidates for the two director seats they thought were up for election. The notice summarized but did not attach certain agreements between Plaintiffs, Figure Markets and GXD and failed to disclose certain other agreements between members of the group. The Ionic Board thereafter disclosed the Board Reduction Resolution. The Ionic Board rejected Plaintiffs’ nomination notice for failure to disclose and attach copies of Plaintiffs’ agreements with Figure Markets and GXD.
Plaintiffs brought three separate claims for breach of fiduciary duty based on: (i) the Ionic Board’s adoption of the Board Reduction Resolution; (ii) the Ionic Board’s rejection of the nomination notice and (iii) the Ionic Board allegedly issuing false and misleading disclosures.
Enhanced Scrutiny Review of Adoption of Board Reduction Resolution
The Court began its analysis by considering whether the directors breached their fiduciary duties by adopting the Board Reduction Resolution. The Court first concluded that enhanced scrutiny, Delaware’s intermediate standard of review, applied to the Board Reduction Resolution because it was adopted as a defensive measure in the face of a looming proxy contest. The Court highlighted the recent holding of the Delaware Supreme Court in Coster v. UIP Companies, Inc., “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.” The Court distinguished cases cited by the director defendants applying business judgment review to director resolutions reducing the size of the board because, as the Court explained, in those cases the board had adopted the resolution on a “clear day” and not in the face of an imminent proxy contest. In this case, the Court concluded that the trial evidence was “overwhelming” that the Board Reduction Resolution was not adopted on a clear day.
In its application of the enhanced scrutiny standard, the Court reiterated that “[w]hen a stockholder challenges board action that interferes with the election of directors or a stockholder vote in a contest for corporate control, the board bears the burden of proof.” The determination of whether the Board has met its burden involves two prongs: (i) whether the board faced a threat to an important corporate interest or to the achievement of a significant corporate benefit and (ii) 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.
As to the first prong, the Court concluded that the Ionic Board failed to prove that the Board Reduction Resolution was adopted for a valid, non-pretextual corporate purpose. Although the Board offered justifications at trial that the resolution increased efficiencies, including resulting in an odd number of directors to avoid deadlock, and reduced costs, the Court concluded that there was no contemporaneous record that the Ionic Board actually considered those corporate purposes in approving the Board Reduction Resolution. Therefore, although these justifications for the Board Reduction Resolution were not improper as a general matter, the Court found that the record did not support these justifications as the Board’s actual motivations for adopting the Board Reduction Resolution. Rather, the Ionic Board seemed to have acted due to the difficulty of finding a second Board nominee, but the Court noted 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.”
Under the second prong, the Court held that the Ionic Board also failed to prove that the Board Reduction Resolution was reasonable and not preclusive. The Court explained that even if cost savings and avoidance of deadlock were the Board’s actual objectives, the Board Reduction Resolution was not necessary to accomplish those objectives. Furthermore, the Court concluded that the Board Reduction Resolution was preclusive, because it “made success in a proxy contest realistically unattainable by eliminating the possibility of success for two seats.” In so doing, “the Board imposed its favored outcome on the stockholders: no new directors.”
Because the Ionic Board failed to prove that the Board Reduction Resolution was adopted for a valid, non-pretextual corporate purpose and failed to demonstrate that it was reasonable and not preclusive, the Court held that the directors had breached their fiduciary duties by adopting it.
Enhanced Scrutiny Review of Board’s Rejection of Stockholders’ Director Nomination Under Advance Notice Bylaw
After holding that the adoption of the Board Reduction Resolution was a breach of fiduciary duty, the Court analyzed whether the rejection of the stockholder nomination notice was also a breach of fiduciary duty. The Court held that it was not a breach, because the nomination notice failed to comply with Ionic’s advance notice bylaw and enforcement of the advance notice bylaw satisfied enhanced scrutiny.
Specifically, the Court concluded that the Plaintiff’s position that it did not have to disclose the stockholders’ agreements with Figure Markets and GXD, including an agreement that expired the same day the nomination notice was submitted, because they were no longer operative “contravenes the informational purpose of the Advance Notice Bylaw.” The Court explained that these informational requirements “serve an important disclosure function, allowing boards of directors to knowledgably make recommendations about nominees and ensure that stockholders cast well-informed votes.” The Court stated that this purpose would be ill served if stockholders could omit disclosure of an agreement that terminated the same day a nomination notice is submitted. Even assuming that a stockholder does not have to disclose recently terminated agreements, however, the Court held that the terminated agreement contained at least one material provision that survived termination, which was not disclosed, although it would have been important to stockholders in deciding which director candidates to vote for. Therefore, the nomination notice failed to comply with the advance notice bylaw’s disclosure requirements.
The Court then considered whether the Ionic Board’s rejection of the nomination notice was inequitable, because, under Schnell, “the court’s analysis does not necessarily end if a stockholder fails to comply with the plain terms of an advance notice bylaw.” Applying enhanced scrutiny to this decision, the Court concluded that the Ionic Board proved that it rejected the nomination notice to advance important corporate interests, namely the legitimate objectives served by the disclosure requirements, and that the rejection was reasonable and not preclusive, because enforcement of the bylaw was a reasonable means of ensuring material information regarding director nominees is received by stockholders and stockholders were not precluded from submitting a timely nomination notice.
Mandatory Injunction Reopening Nomination Window As Remedy for Breach of Fiduciary Duty
Finally, in determining the appropriate remedy for the Board’s breach of fiduciary duty in adopting the Board Reduction Resolution, the Court considered the requirements for issuing a mandatory injunction. Because the Court had already concluded that the Plaintiffs succeeded on the merits of the breach of fiduciary duty claim, the Court was left to analyze whether Plaintiffs had established irreparable harm and whether the balance of the equities favored an injunction. On irreparable harm, the Court noted that “[c]ourts have consistently found that corporate management subjects shareholders to irreparable harm by denying them the right to vote their shares.” Considering the balance of the equities, the Court stated that without an injunction, stockholders would lose “sacrosanct” voting rights, while the directors faced no hardship from an injunction.
The Court concluded that Plaintiffs were entitled to an order invalidating the Board Reduction Resolution, restoring the Ionic Board to six directors, and directing the Ionic Board to reopen the ten-day nomination window under the advance notice bylaw to allow for the submission of director nominations. The Court expressly extended the right to submit new director nominations to Plaintiffs, despite their previous noncompliance with the advance notice bylaw, because, although a stockholder would normally not get a “do-over” after failure to comply with an advance notice bylaw, here it was the Ionic Board’s wrongful conduct that necessitated reopening the nomination window. Nor had Plaintiffs intentionally concealed material information in making its director nominations and had disclosed all agreements just days after submitting the nomination notice. Therefore, the Court held there was no reason why Plaintiffs should not be permitted to submit a new nomination notice so that the Ionic stockholders could decide for themselves who should serve on the Ionic Board.
As a final issue, the Court ordered Ionic to make corrective disclosures prior to the upcoming election, including the Court’s ruling, the new date of the annual meeting, and the Court’s order reopening the nomination window for ten days.