Restoring Equity: Delaware’s Legislative Cure for Defects in Stock Issuances and Other Corporate Acts
Publication| Corporate Transactions| Corporate & Chancery Litigation
In 2008, this journal published an article noting the difficulty under Delaware law indetermining whether defects in stock issuances would render the stock void, and thus incapableof being validated or ratified, or merely voidable, and thus susceptible to cure byratification. The Delaware legislature has adopted amendments to the General CorporationLaw of the State of Delaware, which amendments will become effective on April 1, 2014,that are designed to overrule the existing precedents requiring that defective stock and actsbe found void. The amendments expressly provide that defects in stock issuances and otheracts render such stock and acts voidable and not void, if ratified or validated in accordancewith the new ratification statutes. The amendments provide Delaware corporations withtwo alternative paths—one involving remedial action taken at the corporation’s initiative,the other involving a court proceeding—to ratify or validate stock and other corporate actsthat, due to a defect in authorization, might under prior law have been void and incapableof ratification. In this article, we summarize the reasons why the ratification statutes werenecessary, provide an overview of the new Delaware ratification statutes, and discuss examplesof circumstances where the ratification statutes could be utilized, specific types ofdefects that could be validated, which alternative path (self-help or court-assisted) might beappropriate in various circumstances, and the effect of validation.