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Delaware General Corporation Law Amended to Provide (1) New Procedure for Curing Defective Corporate Acts and (2) Related Proceedings in Court of Chancery

March 24, 2014


Effective April 1, 2014, newly-enacted Delaware General Corporation Law (“DGCL”) Sections 204 and 205 will provide a statutory process by which Delaware corporations can remedy defective corporate acts and stock, and corresponding rights of action in the Delaware Court of Chancery by which affected parties may, among other things, seek a determination of the validity of the defective corporate act ratified or otherwise subject to ratification under the new statute.   See 8 Del. C. §§ 204 and 205.

Section 204.  Section 204 provides a statutory mechanism by which boards and stockholders of Delaware corporations may ratify corporate acts or transactions permitted by the DGCL but rendered void or voidable due to a failure of authorization.  The process is explicitly laid out in the new statute, which provides instructions regarding (a) the content of the initial board resolution, (b) when stockholder approval is and is not necessary, (c) which stockholders must be notified of the remedial action, (d) the form and content of stockholder notice and (e) the form and content of public filings necessary after the resolution has been approved.  Significantly, the required notice is to include a statement advising that any challenge to the remedial action must be brought within 120 days from the effective time of the ratification.

Section 205.  Section 205 provides a vehicle by which a corporation, a successor entity, a board member, a record or beneficial holder of stock or putative stock, “or any other person claiming to be substantially and adversely affected by a ratification pursuant to section 204” may petition the Delaware Court of Chancery to determine the validity of the defective corporate act or stock ratified or otherwise subject to ratification under section 204.  In particular, Section 205 confers upon the Court of Chancery exclusive jurisdiction to (a) determine the validity and effectiveness of any defective corporate act ratified under Section 204, (b) determine the validity and effectiveness of any defective corporate act not ratified or not ratified effectively under Section 204, (c) determine the validity of any corporate act or transaction and any stock, rights or options to acquire stock and (d) modify or waive any of the procedures set forth in Section 204.  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.

In the event a defective corporate act is ratified under section 204 and not later declared ineffective by the Court of Chancery in a proceeding brought under section 205, then the act ratified will “no longer be deemed void or voidable as a result of a failure of authorization.”  Additionally, the ratification applies retroactively as of the time of the “defective corporate act.”  In the case of a putative stock issuance, each share of putative stock cured under section 204 will be deemed to be an identical share or fractional share as of the time it was purportedly issued.