Page 25 - Delaware Lawyer - Winter 2020

and use stock and options to compensate their employees, they often found that, by the time they were seeking to raise outside financing from venture capital- ists or pursuing an initial public offering, their stockholder base had become fairly large and disaggregated, often including former (sometimes disaffected and un- friendly) employees.
A Cure for the Defective Corporate Act
Section 204 alleviated the problems associated with obtaining unanimity by providing corporations with a “self-help” mechanism to correct corporate acts, re- quiring board approval and in some cases stockholder approval.5 Based on expe- rience, Section 204 has clearly accom- plished its key objectives. As one metric of Section 204’s widespread use, as of Oc- tober 2019, more than 1,200 certificates of validation have been filed with the Delaware Secretary of State. Of course, that number grossly undercounts the ac- tual use of Section 204, as certificates of validation are required to be filed only in instances in which the underlying defec- tive corporate act involved the filing of an instrument with the Secretary of State.6 While initial skeptics of the statutes might have argued that they would give corporations and practitioners a disincen- tive to comply with the strictures of cor- porate law (given that a fix would always be at their disposal), the statutes seem to have actually raised the level of sensitivity around technical compliance with cor- porate formalities. Indeed, many equity finance providers now insist, prior to con- summating a financing transaction, that corporations use Section 204 to remedy any defective corporate acts discovered during the due diligence process.
Likewise, Section 205 has restored the Court of Chancery’s traditional equitable power to do that which ought to be done in circumstances where technical defects would produce inequitable results.7 Most of the pre-Section 205 cases involving “void” or “voidable” acts were initiated as control disputes under Section 225 of the DGCL.8 In some of those cases, the “right” outcome, from an equitable standpoint, was not necessarily the out- come that resulted from an analysis of
With nearly six years of experience with Sections 204 and 205, there is little doubt that the statutes are among the most innovative and useful additions to the DGCL in recent years.
whether the corporation had complied with all formal technical requirements. In Blades v. Wisehart, the Court acknowl- edged as much, stating, “what is more critical is that STAAR and other binding precedent make clear that I cannot ignore the statutory infirmity of the stock split because my equitable heartstrings have been plucked. That is, in the sensitive and important area of the capital structure of the firm, law trumps equity.”9
The Court of Chancery’s Judicious Application of Section 205
Since its enactment, the Court of Chancery has deftly navigated Section 205, rejecting claims that would invali- date corporate acts on the basis of foot- faults or mere sloppiness, while declining to validate acts in circumstances where the challenged acts were not taken at all or were deliberately taken in violation of clear proscriptions of the certificate of incorporation or the DGCL. In Almond v. Glenhill Advisors LLC,10 for example, the Court used its equitable powers to validate a series of corporate acts that the corporation had ratified under Section 204 but that remained subject to chal- lenge. After assessing all of the factors un- der Section 205 to determine whether to validate stock, the Court ultimately con- cluded that sustaining the ratification was clearly the appropriate outcome from an
equitable standpoint, given that the fail- ure to ratify the acts would have produced a “windfall” benefit to the plaintiffs.11
Likewise, in Cirillo Family Trust v. Moezinia, the Court declined the invita- tion to invalidate a merger that had been approved by all of the defendant’s stock- holders other than the plaintiff, which held approximately 0.27% of the outstanding stock, on the basis that the stockholder consents approving the merger were not individually dated.12 In reaching its deci- sion to validate the merger, the Cirillo Court stated: “The failure to properly date the Written Consents is the epitome of a technical shortcoming that the Delaware General Assembly sought to address when it promulgated Section 205.”13
By contrast, in Nguyen v. View, Inc.,14 the Court declined to validate a series of acts that it found were improperly ratified in the face of a stockholder’s deliberate decision to withhold its consent to a cor- porate act.
A Welcome Cure for a Debilitating Ailment
With nearly six years of experience with Sections 204 and 205, there is little doubt that the statutes are among the most innovative and useful additions to the DGCL in recent years. While the language of those statutes is somewhat daunting, the basic concepts are easy to grasp. Under Section 204, corporations have the power to ensure that acts that would otherwise be void or voidable will be valid from the time they were origi- nally taken so long as they are once again approved by the parties who are now en- titled to authorize them (by reference to the voting standards in place at the time of the original act and at the time of rati- fication). Under Section 205, the Court of Chancery may validate any number of acts that otherwise would be void or void- able, focusing principally on whether it is equitable to do so. To that end, the stat- utes enable corporations to consummate financing transactions that might not have otherwise been available to them, and they allow corporate control and other disputes to be decided on the equities — and not on the basis of whether, for ex-
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