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Delaware Legislative Update 12/09/2013

Posted by Morse Barnes-Brown Pendleton in Corporate, Public Companies.
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Corporate Attorney Josh FrenchBy: Joshua French

Many times prior to an institutional financing, acquisition or an IPO, a company will review its corporate records and notice that there may be a couple of loose ends to tie up with ratifying board resolutions. While this works for many corporate actions, certain actions are not permissible to be retroactively approved under Delaware law and are void. Among these actions include the issuance of stock that was not authorized under a company certificate of incorporation filed with the Delaware Secretary of State. This means that if shares of stock were issued to stockholders before there were enough shares authorized, that those shares are void and any action taken by those stockholders (for example, electing board members) would also be void. This, obviously, could be very problematic, particularly if the board is no longer controlled by the original stockholders.

Beginning in April 2014, the Delaware General Corporation Law (the DGCL) will allow these types of mistakes to be rectified and will allow for corporations to remedy any actions taken that would otherwise have been deemed void. In order to remedy a defective corporate act, the following steps will need to be taken:

  • The board of directors must pass a resolution ratifying the defective corporate act and stating in detail the defect seeking to be cured.
  • If the resolution would have needed to have been approved by the stockholders, the stockholders must also approve the resolution and the company must provide at least twenty days prior notice of the meeting at which the resolution is to be adopted. The notice must also state that any challenge to the ratification must be brought within 120 days of the date on which the resolution is adopted.
  • If the action being remedied would have required a filing with the Secretary of State of Delaware, then a “Certificate of Validation” must be filed with the Secretary of State. The form of this certificate is currently being prepared by the Secretary of State’s office.
  • If the resolution did not require stockholder approval, the corporation must provide notice of the adoption of the ratification resolution to the stockholders within 60 days of approval. The notice must also that any challenge to the ratification must be brought within 120 days of the date on which the resolution is adopted.

This procedure will not be effective until April 1, 2014, but it may be worthwhile for corporations to consider if there are any actions which may not have been approved properly when completed and contact your law firm to determine whether those actions need to be approved under this new section of the DGCL or if there are steps that can be taken now to ensure that proper corporate approvals had been obtained.

For more information on this topic, please feel free to contact Josh.

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