How a Delaware Ruling Offers Guidance for Defensive Board Action

Proxy contests drain valuable company resources over issues that may not affect stockholder value in any meaningful way. Surviving these contests is fraught with legal technicalities and public relations potholes.

Advance notice bylaws are the most crucial tool used to manage these proxy contests. These are guidelines that stockholders must follow to nominate directors and make proposals at stockholder meetings. Activist investors have challenged dozens of advance notice bylaws formally in litigation and informally through demand letters, books and records requests, or other pressure campaigns, causing some companies and advisers to suffer from the yips when dealing with the issue.

One recent Delaware ruling offers a roadmap for board action in preparation for and during proxy contests and illuminates the importance of maintaining good internal governance practices.

In Vejseli v. Duffy, the board of Ionic Digital Inc., a private Delaware corporation facing an imminent proxy contest, reduced the size of the board by eliminating the two open director seats. Without disclosing the reduction, the board announced the date of the stockholder meeting, triggering a 10-day window in Ionic’s advance notice bylaw for stockholders to nominate directors for election at the upcoming stockholder meeting.

The stockholders mounting the proxy contest submitted nominations for two open board seats. After the nomination window expired, the board disclosed the reduction and rejected the nomination notice because the stockholders failed to comply with certain requirements in the advance notice bylaw. The stockholders sued.

Because the board approved the reduction during an imminent proxy contest, the Delaware Court of Chancery applied a heightened standard of review. That caused the court to find that the purpose of reducing the board seats was to prohibit the stockholders from nominating candidates—an invalid corporate purpose under Delaware law. In essence, the board rigged the game against stockholders mounting a proxy contest.

However, underscoring the importance and commonplace nature of advance notice bylaws, the court also held that the board properly rejected the stockholders’ nomination notice for failure to comply with certain disclosure requirements found in Ionic’s advance notice bylaw.

In its reasoning, the court noted that Ionic’s disclosure requirements served legitimate objectives and that the lack of disclosure or concealment of facts important to a stockholder nominations or proposals could threaten an informed stockholder vote.

This portion of the ruling demonstrates Delaware courts’ willingness to uphold advance notice bylaws and their enforcement when done properly.

Nevertheless, the court invalidated the board size reduction and ordered Ionic to reopen the 10-day nomination window under its advance notice bylaw so stockholders could nominate directors for the two original open seats, giving the stockholders a rare “do-over.”

Companies can view this ruling (and other recent Delaware rulings such as Assad v. Chambers, Siegel v. Morse, and Kellner v. AIM Immunotech Inc.) as a guide for how to best plan for, address, and survive a proxy contest. A few important takeaways:

• Boards should engage legal counsel periodically to have an orderly and effective process in place before any stockholder activism. Counsel should review and update bylaws and other internal governance documents, policies, and procedures to address stockholder nominations and proposals and other important corporate governance developments.
• The board should discuss any action that may restrict stockholder nominations and proposals or other important stockholder rights with legal counsel and other appropriate outside advisers. Boards should take these types of actions only for valid corporate purposes.
• Appropriate officers or legal counsel should contemporaneously document the reasoning, purposes, and justifications for taking any action that may restrict stockholder nominations and proposals or restrict other important stockholder rights. This documentation should be reflected in meeting minutes approved by the board shortly after the meeting—whether before, during, or after a proxy contest.
• Communications between and among the board, management, and outside parties in connection with any board action that may restrict stockholder rights should take place through formal, pre-designated channels only and remain consistent.
• If a board finds itself in a proxy contest and finds it necessary and in the best interest of the company and its stockholders to take actions that may be adverse to the stockholder(s) waging the contest, the board should engage legal counsel and other appropriate advisers before taking such action.

With shareholder activism continuing to be somewhat commonplace, advance notice bylaws remain one of the most important tools for corporate boards to manage its meeting process effectively and efficiently.

These recent Delaware decisions highlight the importance for boards to be proactive rather than reactive in maintaining current governance best practices. Boards must be vigilant in tracking the latest developments in governance best practices and regularly review their internal governance documents to keep up with the latest tools for managing activism.

The case is Vejseli v. Duffy, 2025 BL 174010, Del. Ch., C.A. No. 2025-0232-BWD, decided 5/21/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alexandra Clark Layfield is a partner in the corporate practice group of Jones Walker in Baton Rouge.

Alexander N. Breckinridge, V is a partner in the litigation practice group of Jones Walker in New Orleans.

Thomas D. Kimball is a partner in the corporate practice group of Jones Walker in New Orleans.

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