Ratifying Defective Corporate Acts in Delaware
Defective corporate acts can be ratified under Section 204 of the Delaware General Corporation Law (“DGCL”). A defective corporate act is any act or transaction that would have been within the power of the corporation at the time taken but which is “void or voidable” due to a failure of authorization. DGCL § 204(a). A defective corporate act also includes any other action within the corporation’s powers that was not properly authorized in accordance with the corporation’s organizational documents. § 204(h)
In order for a corporation to ratify a defective corporate act under Section 204, the board of directors must adopt resolutions stating:
- The defective corporate act or acts to be ratified,
- The date of each defective corporate act or acts,
- If such defective corporate act or acts involved the issuance of shares of putative stock, the number and type of shares of putative stock issued and the date or dates upon which such putative shares were purported to have been issued,
- The nature of the failure of authorization in respect of each defective corporate act to be ratified, and
- That the board of directors approves the ratification of the defective corporate act or acts. § 204(b)(1)
Each defective corporate act that is ratified must be submitted to stockholders for approval unless (1) no other provision of the DGCL, the corporation’s certificate of incorporation or bylaws or any plan or agreement to which the corporation is a party would have required stockholder approval of the defective corporate act at the time of the act or at the time the board of directors adopts the resolutions ratifying the defective corporate act and (2) the defective corporate act did not result from a failure to comply with DGCL § 203. Stockholder consent is also not required if there are no shares of stock outstanding and entitled to vote. DGCL § 204(c).
If the defective corporate act in question would have required a filing with the Delaware Secretary of State (e.g., a certificate of amendment, certificate of designation, certificate of merger, or other instrument), then the corporation must file a certificate of validation with the Delaware Secretary of State. DGCL § 204(e). If the corporation is not required to submit the ratifying resolution to a vote of its stockholders, it must send prompt notice of the adoption of the ratifying resolution to all then-current holders of valid stock and putative stock, as well as all holders of valid stock and putative stock at the time of the defective corporate act unless their identities or addresses cannot be determined from the corporation’s records. DGCL § 204(g). That notice must include a statement that any claim that the defective corporate act is void or voidable due to the identified failure of authorization must be brought within 120 days from the “validation effective time”. DGCL § 204(g). The “validation effective time” is the later of (a) if the corporation is required to submit the ratifying resolution to a vote of the stockholders , the time at which the resolution is approved by the stockholders, or if the corporation is not required to submit the ratifying resolution to a vote of the stockholders , the time at which notice is given to the stockholders, and (b) the time at which any certificate of validation filed becomes effective. DGCL § 204(h)(6).
