Amendments to Delaware General Corporation Law Allow Delaware Corporations to Ratify Defective Corporate Acts

Effective April 1, 2014, the Delaware General Corporation Law (“DGCL”) has been amended to include new Sections 204 and 205 that will provide Delaware corporations with an avenue to cure certain defective corporate acts, including ratification of an unauthorized issuance of stock. In the past, certain defective corporate acts that were classified as “void” due to a failure by the corporation to comply with the provisions of the DGCL or the corporation’s certificate of incorporation, bylaws or other governing documents were incapable of ratification or validation as a matter of equity.1

Section 204. Section 204 provides that no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in Section 204 or validated by the Court of Chancery in a proceeding brought under DGCL Section 205.

Under Section 204, the board of directors may ratify a defective corporate act by adopting a resolution stating:

  • the defective corporate act to be ratified; 
  • the time of the defective corporate act; 
  • the number and type of shares of putative stock issued and the date or dates upon which those shares were purported to have been issued—if the act involved the issuance of shares of putative stock (i.e., shares that would have been valid stock but for the failure of authorization); 
  • the nature of the failure of authorization regarding the defective corporate act to be ratified; and 
  • that the board of directors approves the ratification of the defective corporate act.

The resolution adopted pursuant to DGCL Section 204(b) will be submitted to stockholders for adoption unless no other DGCL section or corporation’s organizational document would have required stockholder approval of the defective corporate act to be ratified, either at the time of the defective corporate act or at the time when the resolution required by Section 204(b) is adopted, and the defective corporate act to be ratified did not result from a failure to comply with DGCL Section 203 (which deals with business combinations with interested stockholders). If resolutions must be submitted to the corporation’s stockholders, due notice should be given at least 20 days before the date of the meeting to each holder of valid stock and putative stock, whether voting or nonvoting, at the holder’s address that appears in the corporation’s records. The notice should also be given to the holders of record of valid stock and putative stock, whether voting or nonvoting, as of the time of the defective corporate act. The section describes the required content of the notice.

If the ratified defective corporate act would have required under the DGCL the filing of a certificate in accordance with DGCL Section 103, then, whether or not a certificate was previously filed in respect of such defective corporate act and in lieu of filing the certificate otherwise required by the DGCL, the corporation should file a certificate of validation in accordance with Section DGCL103. Section 204(e) sets forth the requirements to be included in the certificate.

Regardless of the requirement of stockholder approval of the ratification, DGCL Section 204 still requires that the corporation provide notice of the adoption of the ratifying resolution to all valid or putative current stockholders and also to all valid or putative stockholders as of the time of the defective corporate act.

Pursuant to DGCL Section 204, each defective corporate act in the resolution adopted pursuant to Section 204(b) will not be deemed void or voidable as a result of a failure of authorization identified in the resolution and will be ratified retroactively to the time of the defective corporate act. Each share or fraction of a share of putative stock issued or purportedly issued pursuant to such defective corporate act and identified in the resolution required by Section 204(b) will not be deemed void or voidable as a result of a failure of authorization identified in the resolution and, in the absence of any failure of authorization not ratified, will be deemed to be an identical share or fraction of a share of outstanding stock as of the time it was purportedly issued. 2

Section 205. Section 205 confers exclusive jurisdiction on the Delaware Court of Chancery to hear and determine the validity of any ratification effected pursuant to Section 204, the validity of any corporate act and any stock not ratified effectively pursuant to Section 204.

Under certain circumstances, an action may be brought under Section 205 in the Delaware Court of Chancery by the corporation, any member of the board, or any record or beneficial holder of valid or putative stock to petition the court to, among other things, determine the validity and effectiveness of: the ratification of any defective corporate act under Section 204; any defective corporate act not ratified or not ratified effectively under Section 204; and any corporate act or transaction and any stock, rights or options to acquire stock. Section 205 gives the Court of Chancery broad powers to fashion declaratory and other remedies, and specifies considerations to be weighed by the court in fashioning these remedies. Anyone having notice of a proposed ratification must file any claim challenging the ratification within 120 days from the date that the defective act is validated. After that time, a defective corporate act ratified pursuant to Section 204 may not be invalidated or subject to the imposition of conditions in an action under Section 205.

See, e.g., STAAR Surgical Co. v. Waggoner, 588 A.2d 1130 (Del. 1991) and Blades v. Wisehart, 2010 WL 4638603 (Del. Ch. Nov. 17, 2010).

2 See 8 Del. C. § 204(f).

Topics:  Corporate Governance, Defective Corporate Acts, Stocks

Published In: Business Organization Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McCarter & English, LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »