In Vejseli v. Duffy, C.A. No. 2025-0232-BWD (Del. Ch. May 21, 2025), stockholders of Ionic Digital Inc. (Ionic) accused its classified board of directors (the Board) of breaching its fiduciary duties by passing a resolution that impeded the stockholders’ ability to elect directors to the Board. The Board adopted a board reduction resolution (the Board Reduction Resolution) in response to the plaintiff stockholders’ call for a special meeting of the stockholders to replace certain directors of Ionic. The Board adopted the Board Reduction Resolution to reduce the Board’s size by one Class I director. The stockholders also accused the Board of improperly rejecting their nomination notice to nominate director candidates for positions on the Board. The defendants, the directors of Ionic’s Board, asserted that the Board Reduction Resolution increased efficiencies by (1) reducing costs and (2) creating a Board with an odd number of directors to avoid deadlocks.
When stockholders challenge board actions that allegedly interfere with director elections, Delaware courts apply enhanced scrutiny under Unocal Corp. v. Mesa Petroleum Co. Under this standard, the board of directors has the burden to prove (1) that the board of directors faced a threat to an important corporate interest or to the achievement of a significant corporate benefit, and (2) that the board’s response was reasonable in relation to the posed threat and did not deprive stockholders of their vote or coerce their vote. The Court of Chancery held that Ionic’s Board failed to prove that the Board Reduction Resolution passed for valid, reasonable, non-pretextual corporate purposes. However, the Court also held that the directors did not breach their fiduciary duties by rejecting the stockholders’ nomination notice.
In analyzing the Board Reduction Resolution, the Court of Chancery observed that there was no record of the Board actually meeting to discuss the Board Reduction Resolution. Additionally, the Court found that there was no evidence supporting the claimed increased efficiency as a motivation for eliminating a director position. The only evidence of the Board’s motivations came in the form of trial testimony from the direct defendants. The Court found that this testimony, standing alone, did not meet the standard of proof required. The Court instead suggested that the Board had other motives, like the upcoming stockholder proxy contest, as it pertained to eliminating a Board position.
The Board prevailed over the stockholders’ allegation that the Board’s rejection of their nomination notice was pretextual and only served to suppress the stockholders’ opposition to the Board’s decisions. The Board contended that, per Ionic’s bylaws, stockholders failed to disclose the existence of material agreements with non-stockholder groups. Here, Vice Chancellor David held that Ionic’s bylaws served an important purpose by giving stockholders transparency when they evaluate candidates for director positions. Though the Board breached its fiduciary duties by eliminating a Board position without a valid reason, it rightfully rejected the stockholders’ nomination notice in order to maintain fairness throughout the stockholder voting process.
This ruling is important for Delaware directors, stockholders and those advising Delaware corporations because it provides insight into how courts determine when boards are making reasonable adjustments to boards, and what level of evidentiary showing will be required for the director defendants to carry their heavy burden. This ruling also reinforces that shareholders will be held accountable for adhering to their corporation’s bylaws when pursuing corporate and shareholder interests.
*Rosa Rowe, a summer associate at the firm not yet admitted to the bar, contributed to this alert.