The Delaware Court of Chancery has issued a critical ruling, reinforcing the paramount importance of meticulously drafted and consistently enforced advance notice bylaws for corporate boards navigating the increasingly volatile landscape of shareholder activism. In a decision that serves as a timely reminder as public companies prepare for their annual director nomination windows, the court emphasized that these bylaws are powerful tools, but their efficacy hinges on the clarity of their requirements and strict adherence to their text. The case, ATG Capital Opportunities Fund LP v. Empery Digital, Inc., saw the board’s rejection of an activist investor’s director nominations deemed both contractually flawed and inequitable, underscoring the need for boards to draft bylaws with precision, apply them with fairness, and resist the temptation to leverage them for undisclosed disclosure obligations.
Background: A Company’s Strategic Pivot and an Activist’s Ascent
Empery Digital, Inc., a company that initially focused on electric powersports, underwent a significant strategic shift in July 2025, pivoting to a digital asset treasury strategy centered on acquiring and holding Bitcoin. By the end of that year, however, the company faced considerable financial headwinds, with its stock trading at a substantial discount to the market value of its Bitcoin holdings. This financial vulnerability quickly attracted the attention of activist investors.
Among those poised to challenge the incumbent board were ATG Capital Opportunities Fund LP and Tice Brown. Both entities began making strategic moves to position themselves for a potential proxy contest. This included acquiring additional shares and ensuring their holdings were registered in their own names, a common preparatory step for activist campaigns. By January 2026, the pressure mounted. Tice Brown initiated direct engagement with Empery’s leadership, explicitly demanding the liquidation of the company’s Bitcoin assets and signaling his independence from ATG Capital, stating he was “not working with ATG.”
The formal nominations began to surface in late February 2026. On February 26th, ATG Capital formally notified Empery of its intent to nominate a complete slate of directors for election at the company’s upcoming annual meeting. In parallel, Tice Brown submitted his own notice, intending to nominate himself.
Board’s Rejection and Alleged Deficiencies
The Empery board, in response to these nominations, began to express concerns. They reportedly suspected ATG Capital of holding a "short" position in Bitcoin, a strategy that could be perceived as adversarial to the company’s core asset. Furthermore, the board harbored suspicions that ATG Capital and Tice Brown were collaborating, despite Brown’s prior assertion of independence. These suspicions, coupled with alleged omissions in ATG Capital’s nominee questionnaires and its purported failure to disclose its alleged Bitcoin short position, led the company’s Nominating and Corporate Governance Committee to recommend rejecting the nomination notices. The board unanimously adopted this recommendation.
Empery’s official rejection letter to ATG Capital cited three primary deficiencies:
- Alleged Participant Deficiency: The board claimed that ATG Capital had failed to disclose Tice Brown as a "participant" in its nomination efforts, despite their prior interactions and the board’s suspicions of collusion.
- Alleged Short Position: The board asserted that ATG Capital had failed to disclose its alleged short position in Bitcoin, which they believed was a material omission.
- Nominee Questionnaire Deficiencies: The company indicated that the questionnaires submitted by ATG’s nominees contained inadequate or incomplete information.
Following the rejection, ATG Capital initiated legal action in early April 2026. In response to the ongoing litigation, Empery opted to delay its annual shareholder meeting. During this period of postponement, Empery underwent another significant strategic shift, making substantial investments in AI data centers and divesting half of its remaining Bitcoin holdings. ATG Capital subsequently amended its lawsuit, arguing that this dramatic corporate pivot warranted reopening the director nomination window.
Chancery Court’s Dual Review: Contractual Compliance and Equitable Fairness
The Delaware Court of Chancery, recognizing the urgency of the matter with the annual meeting approaching, conducted an expedited trial. The court focused its inquiry on two pivotal questions: first, whether the Empery board had breached the company’s bylaws or its fiduciary duties in rejecting ATG Capital’s nomination notice; and second, whether equitable principles necessitated the reopening of the nomination window in light of Empery’s strategic pivot to AI data centers.
The court applied a well-established legal framework for reviewing corporate actions that impact the stockholder franchise, a process described as being "twice tested"—first under the applicable law, and then under the principles of equity.
The Contractual Examination: Bylaws as Binding Agreements
In its contractual review, the court underscored that corporate bylaws constitute a binding agreement among the directors, officers, and stockholders. Applying fundamental principles of contract interpretation, the court reiterated that clear and unambiguous bylaw provisions are to be given their ordinary and plain meaning. Crucially, the court emphasized that any ambiguities within advance notice bylaws are to be resolved in favor of upholding and protecting the electoral rights of shareholders.
Regarding the "participant deficiency," the court acknowledged that the board possessed grounds for suspicion regarding a potential collaboration between ATG Capital and Tice Brown. However, the court meticulously examined Empery’s bylaws and found that they did not explicitly mandate the disclosure of third-party arrangements or groups, as might be required under federal securities regulations like Section 13(d) of the Securities Exchange Act of 1934. The court also applied the "narrow" definition of "participant" as commonly understood in the context of Schedule 14A regulations. Under this interpretation, Tice Brown did not qualify as a participant because ATG Capital had not nominated him, he had not financed ATG Capital’s nomination efforts, nor had he economically induced ATG Capital to transact in or vote Empery securities. The record, as presented to the court, did not demonstrate Brown’s participation in or financing of ATG Capital’s proxy contest.
Empery had attempted to argue that its bylaws incorporated proxy statement disclosure requirements under Section 14(a) of the Exchange Act, which includes disclosures about arrangements between "participants" and others concerning issuer securities. They further contended that Rule 14a-9 mandated disclosure of ATG’s suspected relationship with Brown. However, the court sidestepped a definitive ruling on these federal securities law defenses. The critical factor was that Empery’s rejection letter to ATG Capital had not cited the Section 14(a)-based bylaw provision or Rule 14a-9 as independent grounds for invalidating the nomination. Having initially rejected the notice based on the alleged failure to disclose Brown as a participant, the court held that Empery could not shift its legal theories mid-litigation.
Turning to the "short position deficiency," the court found that Empery’s bylaws specifically required disclosure of short positions in the company’s stock, not in unrelated exchange-traded funds (ETFs). Similarly, the nominee questionnaires provided by the company did not solicit information about ETF positions. The court concluded that standard proxy rules do not mandate the disclosure of investments in unrelated assets or potential alignments of stockholder interests that are not directly tied to the company’s securities. Furthermore, any potential argument based on Rule 14a-9 was deemed waived, as it was not included in the initial rejection letter.
The Equitable Review: Scrutiny of Defensive Measures
Having determined that ATG Capital’s nomination notice substantially complied with the company’s bylaws, the court proceeded to an equitable review of the board’s rejection. The court found that the board’s action, which directly impacted the stockholder franchise, warranted enhanced scrutiny. Under Delaware law, directors undertaking defensive measures that interfere with shareholder voting rights must demonstrate a genuine, non-pretextual threat to a legitimate corporate interest or the achievement of a significant corporate benefit. They must also prove that their motivations were proper and that their response was reasonable, non-preclusive, and non-coercive in relation to the identified threat. The court concluded that the Empery board failed to meet this stringent burden.
While the court acknowledged that the board had legitimate concerns about ATG Capital potentially seeking control and liquidating Empery’s Bitcoin holdings, it held that this apprehension did not empower the board to prevent shareholders from exercising their right to vote on ATG Capital’s proposed plans. Vice Chancellor Lori Will explicitly stated that Delaware law does not permit directors to thwart a proxy contest simply because they believe an insurgent’s strategy is ill-advised. The court deemed the board’s rejection to be disproportionate and preclusive, effectively preventing shareholders from having a choice. The court suggested that the board could have effectively communicated its concerns and strategic vision to the stockholders directly, rather than resorting to a measure that assured an uncontested election.
Reopening the Nomination Window: No Manipulation Found
Given that the court had invalidated the board’s rejection of ATG Capital’s nomination notice, it was clear that Empery’s stockholders would have a choice on the ballot between the incumbent board and ATG Capital’s nominees. Consequently, the court determined that Empery’s recent pivot to AI data centers did not constitute manipulation of the corporate machinery or jeopardize electoral fairness in a way that would justify reopening the nomination window. The court found that ATG Capital had not established that the board had breached its fiduciary duties by declining to reopen the nomination period.
Delaware Supreme Court Upholds Chancery’s Ruling
Empery Digital appealed the Court of Chancery’s decision to the Delaware Supreme Court. On October 8, the Supreme Court affirmed the lower court’s judgment in its entirety. The high court specifically upheld the Court of Chancery’s interpretation of the term "participant" and its conclusion that Empery had waived certain disclosure theories by raising them late in the expedited proceedings. With the legal challenges resolved, Empery’s stockholder meeting was scheduled for October 14, with ATG Capital’s director nominees officially listed on the ballot, setting the stage for a contested election.
Key Takeaways for Corporate Boards
The ATG Capital v. Empery Digital decision offers several critical takeaways for corporate boards and their legal counsel as they navigate the complexities of shareholder activism and the upcoming director nomination seasons:
- Bylaw Precision is Paramount: Advance notice bylaws must be drafted with extreme clarity and specificity. Ambiguities will be interpreted in favor of shareholder franchise rights, and courts will strictly adhere to the plain text of the bylaws. Boards cannot rely on implied obligations or general principles of securities law if they are not explicitly incorporated into the bylaws.
- Consistent and Fair Enforcement: Bylaws must be applied uniformly and fairly to all nominees. Boards must avoid selectively enforcing provisions or attempting to impose disclosure requirements that are not clearly articulated within the bylaw text. Deviations from the literal terms of the bylaws, especially in a manner that appears to be defensive or retaliatory, are likely to face judicial scrutiny.
- Waiver of Theories: Companies must present all grounds for rejecting a nomination notice at the time of rejection. Failing to do so can result in the waiver of those arguments, as demonstrated by Empery’s inability to introduce new theories at trial that were absent from its initial rejection letter.
- Equitable Scrutiny of Defensive Measures: Any board action that impacts the shareholder franchise, particularly defensive tactics against activist campaigns, will be subject to enhanced equitable review. Directors must be prepared to demonstrate a compelling, non-pretextual justification for their actions and show that their response is proportionate and reasonable.
- Strategic Pivots and Nomination Windows: While significant corporate strategic shifts can sometimes warrant a reopening of the nomination window, this is not automatic. Shareholders seeking to reopen the window must demonstrate that the company’s actions manipulated the process or created an unfair electoral environment.
In essence, the Delaware courts have once again reinforced the principle that corporate governance tools, such as advance notice bylaws, are only as effective as the care taken in their creation and the rigor with which they are applied. For boards seeking to proactively manage shareholder engagement and potential activism, meticulous bylaw drafting and unwavering adherence to their provisions are not merely best practices, but essential safeguards against legal challenges and a fundamental requirement for maintaining the integrity of the corporate franchise. The decision in ATG Capital v. Empery Digital serves as a potent reminder that in the Delaware corporate landscape, substance and textual compliance remain the cornerstones of effective governance.
