Case Examines Ratification of Corporate Acts Under New Delaware Statute
The Delaware Court of Chancery explained the operation of recently adopted Sections 204 and 205 of the Delaware General Corporation Law, or DGCL, in a case captioned In Re Numoda Corporation. DGCL Sections 204 and 205 provide that no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified or validated pursuant to the statute, and that the Court of Chancery may determine the validity of any corporate act or transaction and any stock, rights or options to acquire stock.
The Court noted the statutory language appears to confer substantial discretion on the Court and, absent obvious procedural requirements, does not set a rigid outer boundary on the Court’s power to validate defective corporate acts. In analyzing the operation of the provisions, the Court cited an article which stated “[e]mbedded within the definition of defective corporate act is the premise that an act, albeit defective, had occurred. Thus, Section 204 implicitly preserves the common law rule that ratification operates to give original authority to an act that was taken without proper authorization, but may not be used to authorize retroactively an act that was never taken but that the corporation now wishes had occurred, or to “backdate” an act that did occur but that the corporation wishes had occurred as of an earlier date.”
The facts of In Re Numoda are extremely complex. In the case, the Court refused to validate one issuance of stock because the evidence of the requested share issuance consisted only of testimony and sundry documents. The court stated none of the evidence replaced official stock ledgers or effective resolutions. The proponent was unable to establish when any board approved the issuance.
The Court did validate other issuances of stock, however. In validating an issuance the Court noted that the evidence supported the conclusion that there was a board meeting attended by two persons in their capacity as directors where the issuance was approved. Although the directors did not hold formal meetings, take minutes, or issue certificates, the court found this was not “a case of a passing conversation at the water cooler.” The directors met with an intent to discuss board business. All of the representations made prior to the litigation show the parties accepted (and did not question the validity of) the capital structure reflecting the share issuance. The Court noted the share recipient would be hurt significantly if the issuance was not validated. Further, the contesting parties would be put in a position consistent with the ownership levels long represented by such parties. According to the Court, the equities will not permit the parties contesting the issuance to renege on a prior commitment in order to enhance their personal interests.
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