One reason that Delaware law is attractive to corporations as a jurisdiction to incorporate in, is the fact that Delaware law is constantly evolving to make corporate governance matters as well as transactions easier from a corporate law perspective. In that regard, the 2014 amendments to the Delaware General Corporation Law did not disappoint. What follows is a summary of several of the more important recent changes.
Section 204 – Ratification of Defective Corporate Acts and Stock.
Effective April 1, 2014, certain defective corporate acts and stock issuances that were improperly authorized or not authorized at all, and previously would have been either "void" or "voidable" under Delaware law, can now be ratified (i.e., retroactively validated) by a corporation's board of directors, in some cases following stockholder approval. Previously, Delaware case law had prohibited the ratification of certain defective acts which, depending on the circumstances, could have serious ramifications for corporations and their stockholders.
Defective corporate acts and stock issuances that can now be ratified include:
- The issuance of shares of stock in excess of the number of shares authorized to be issued, or the issuance of a share of a class of stock not authorized to be issued.
- An election or appointment of directors that had not been authorized.
- Any act or transaction taken by the corporation that would have been proper at the time it was effected had it been authorized.
Under all such scenarios, failure of authorization means the failure to authorize or effect an act or transaction in compliance with the Delaware General Corporation Law, the corporation's certificate of incorporation or bylaws, or any plan or agreement to which the corporation is a party.
Under Section 204, the board now can adopt a resolution ratifying the act or issuance (the resolution must provide certain details as required by Section 204) and submit the resolution to the corporation's stockholders for adoption. Stock approval is not required if neither the Delaware General Corporation Law nor the corporation's certificate of incorporation or bylaws would have required stockholder approval either at the time of the defective corporate act or when the board resolution is adopted, and the defective act did not result from a failure to comply with Delaware General Corporation Law Section 203 ("Business Combinations with Interested Stockholders"). In any case, however, whether or not stockholder approval is required, the corporation must notify stockholders of the adoption of the resolution ratifying the act or stock issuance.
Section 141(f) – Written Consents of Directors to be Placed in Escrow.
Section 141(f) has historically provided that board or board committee actions or votes can be taken without a meeting if all members of the board or committee sign a written consent in favor of such action or vote. This provision allows boards and board committees to act outside of actual board or committee meetings, which is important for time-sensitive matters that arise between regularly scheduled meetings. Effective July 1, 2014, Section 141(f) was amended to allow director consents to be signed but become effective at a future time or upon the happening of a future event (no later than 60 days after the consent is given). The amended section even allows the signing of such a consent by someone who is not a director at the time the consent is given but who will be a director at the time the consent is later effective. Any such consent must be revocable by the person signing it, however. Amended Section 141(f) makes it easier to document and complete complicated corporate transactions that involve multiple corporate votes/actions taking place in a particular sequence and/or at specific times.
Section 228(c) – Written Consent of Stockholders to be Placed in Escrow.
Similar to board consents under Section 141(f), Section 228 allows stockholders to take action outside of a stockholder meeting if the requisite number of stockholders required to approve the action sign a written consent to such action. Effective July 1, 2014, Section 228(c) was amended to allow stockholder consents to be signed but become effective at a future time or upon the happening of a future event (no later than 60 days after the consent is given). Unlike director consents, however, a stockholder consent can be made irrevocable by the person signing it. Amended Section 228(c) works hand in hand with amended Section 141(f) (as discussed above) in facilitating multi-step corporate transactions.
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