Richards Layton & Finger
 

Restoring Equity: Delaware's Legislative Cure for Defects in Stock Issuances and Other Corporate Acts

February 2014

In 2008, this journal published an article noting the difficulty under Delaware law in determining whether defects in stock issuances would render the stock void, and thus incapable of being validated or ratified, or merely voidable, and thus susceptible to cure by ratification. The Delaware legislature has adopted amendments to the General Corporation Law 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 acts be found void. The amendments expressly provide that defects in stock issuances and other acts render such stock and acts voidable and not void, if ratified or validated in accordance with the new ratification statutes. The amendments provide Delaware corporations with two 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 acts that, due to a defect in authorization, might under prior law have been void and incapable of ratification. In this article, we summarize the reasons why the ratification statutes were necessary, provide an overview of the new Delaware ratification statutes, and discuss examples of circumstances where the ratification statutes could be utilized, specific types of defects that could be validated, which alternative path (self-help or court-assisted) might be appropriate in various circumstances, and the effect of validation.