Delaware to Permit Ratification of Defective Corporate Actions

On April 1, a new Delaware law, codified into Section 204 and 205 of the Delaware General Corporation Law, will come into effect that will provide Delaware corporations with the ability to ratify defective corporate acts, either by vote of the board of directors and shareholders, or through a proceeding in the Delaware Court of Chancery (the court with jurisdiction over corporations). Although counsel to companies previously had boards attempt to ratify prior defective acts, there was no statutory authorization for such a move. If the board ratifies the defective act, the law deems the act retroactively effective and valid as of the date of the original defective act. Although even large corporations sometimes make mistakes with defective corporate acts, they are more commonly made by smaller companies and startups that, for cost and efficiency reasons, are often run more informally than a Fortune 500 company. Common defective corporate acts include issuing stock in excess of the authorized number, taking shareholder votes before stock is issued, or issuing resolutions before the board is set in place. Problems such as these can cause serious issues when startups move toward a Series A round; before, defective acts could lead to legal or tax consequences that might scuttle a venture capital deal. But with the new statute, startups will be able to easily clean up formation and governance mistakes. This new convenience makes Delaware an even more attractive jurisdiction for startups to form in.

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