DGCL Now Provides Mechanism to Ratify Certain Defective Corporate Acts

As of April 1st, the Delaware General Corporation Law contains a new § 204, which provides Delaware corporations with a statutory safe harbor procedure for ratifying acts or transactions (including stock issuances) that due to a “failure of authorization” would be void or voidable. A copy of the Synopsis and Bill are attached here.

This is an important addition to the DGCL, as it allows companies to “clean up” certain prior missteps in approving corporate events, and represents the General Assembly’s intent to overturn case law such as STARR Surgical Co. v. Waggoner, 588 A.2d 1130 (Del. 1990), which made it difficult to ratify or otherwise seek validation on equitable grounds acts that were taken but not in strict compliance with the DGCL or the company’s governing documents.

Subsections (b)-(d) of the statute set forth the procedures for ratification by the current board of directors, and if necessary, the stockholders. The procedure starts with the adoption of a resolution by the board setting forth specific information regarding the act to be ratified. If a shareholder vote would have been required to approve the defective act (or if the act would now require a stockholder vote), the ratification must be submitted to the stockholders for a vote. Any vote by the stockholders may occur only after compliance by the company with specific notice requirements outlined in the statute.

Importantly, any ratification of defective corporate acts pursuant to this statute shall be retroactively effective to the time of the original—but defective—act. Moreover, because of the notice requirements of any ratification under § 204, the stockholders are prohibited from challenging any such ratification more than 120 days from the effective date of the ratification.

Finally, a new companion section, § 205, was also added to the DGCL conferring jurisdiction upon the Court of Chancery to hear challenges to ratifications pursuant to § 204., to review the validity of any corporate act or transaction and any stock or rights or options to acquire stock, and to modify or waive any of the procedures of § 204.

Given this new “safe-harbor,” now is a perfect time to take stock of whether the corporate house is in order. If not, the procedures set forth in § 204 may provide a path towards ratification. Indeed, just one day after the effective date of the statute, the first petition pursuant to § 205 was filed in the Court of Chancery.

If readers think they might benefit from using § 204 to ratify certain corporate acts (for either themselves or their clients) please feel free to reach out to either Chris Winter or Richard Renck in Duane Morris’ Wilmington, DE, office for assistance.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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