The recent amendments to 8 Del. C. §§ 204, 205 are prime examples of how the Delaware legislature facilitates the development of corporate law by enhancing flexibility in corporate affairs.
Sections 204 and 205 first became part of the DGCL in 2014 and were enacted in response to several decisions from the Delaware Supreme Court and Court of Chancery that held corporate acts, such as stock issuance, are void unless they strictly comply with formalities prescribed by the DGCL or other authority. The judiciary took the approach that once an act is void it cannot be saved by subsequent measures “regardless of the equities.” In an effort to alleviate the potentially harsh consequences created by this approach, the legislature enacted Sections 204 and 205. Section 204, the “‘self-help’ provision,” specifically empowers corporations to cure defective acts. Section 205 is the “court-assisted” validation provision, which permits the Court of Chancery to validate (or invalidate) a defective act upon petition.
Since these statutes are in their infancy, it is not surprising that Sections 204 and 205 have only been cited in three and five Delaware decisions respectively. All of these decisions were from the Court of Chancery.
Short shelf life has not prevented the legislature from amending 204 and 205 to create clarity and even greater flexibility. The following is a list of the recent amendments:
(1) Clarification that Section 204 permits directors to cure multiple defective acts in a “single set of resolutions”;
(2) Creation of section 204(b)(2), which allows “de facto” initial directors who are unnamed in the articles of incorporation or unelected (or whose election cannot be sufficiently established) to pass a resolution ratifying their election;
(3) Clarification of section 204(d), which provides that “only stockholders entitled to vote on the ratification of a defective corporate act, or be counted for purposes of a quorum for such vote, are the holders of record of valid stock as of the record date for determining stockholders entitled to vote thereon”;
(4) Clarification and streamlining of section 204(e) to create uniformity among certificates of validation;
(5) Clarification of notice requirements under section 204(g) related to stockholder ratification of defective corporate acts by written consent;
(6) Clarification of the “validation effective time” under section 204(h)(6), which was “intended to obviate logistical issues that may arise in connection with the delivery of notices in situations where multiple defective corporate acts are being ratified at the same time”; and
(7) Structuring the 120-day challenge period under section 205(f) to reflect the amendments to Sections 204(g) and 204(h)(6) “to provide that no such action may be brought after the expiration of 120 days from the later of the validation effective time and the time that notice of the ratification is given under Section 204(g).”
The common theme among these amendments, and the original statutes themselves, is practicality. While strict compliance with formal requirements is most desirable, it is a fact of life that mistakes happen. There is no reason that relatively minor errors in formalities should have “disproportionately disruptive consequences” impeding a company’s ability to conduct business. This is especially true when the parties are under the belief that the acts in question were valid and the corporation is ready and willing to ratify those acts. The efficiency created by 204 and 205 shows the legislature’s approach to enacting these statutes was more like that of a board of directors than a group of politicians.
It is also noteworthy that these statutes will not permit corporations to ratify “acts” that never really occurred. The Court of Chancery has made clear that not “every conversational agreement of two of three directors” is a corporate act. The court stated in Numoda that it “looks to organizational documents, official minutes, duly adopted resolutions, and a stock ledger, for example, for evidence of corporate acts.”
In describing the reasons why Delaware is the favored state for incorporation, Lewis Black noted, “the legislature has developed a philosophy that emphasizes the stability of Delaware corporation law.” Sections 204 and 205 are just another example of how the legislature maintains stability by enacting laws that foster an environment conducive to efficient business administration.
Jacob Fedechko is the Editor-in-Chief of the Delaware Journal of Corporate Law, Volume 41. He is also a Judicial Intern to the Honorable James T. Vaughn, Jr., Justice of the Supreme Court of Delaware.
Suggested Citation: Jacob Fedechko, Amendments to DGCL Sections 204 and 205: Another Example of How Delaware Does Corporate Law Best, Del. J. Corp. L. (Aug. 17, 2015), www.djcl.org/blog.