Delaware Chancery Court Exercises New DGCL Powers to Validate Corporate Acts

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By Michael Greene

Feb. 4 — The Delaware Chancery Court Jan. 30 explained the implication of its newly conferred powers under §§ 204 and 205 of the Delaware General Corporation Law.

Vice Chancellor John W. Noble explained that under proper circumstances, the statutory sections grant the court substantial discretion to validate corporate acts that would be void or voidable acts. However, he warned that the court must exercise its powers carefully when determining whether a “corporate act” has occurred.

“Even an ultra vires act can be a corporate act. However, there must be a difference between corporate acts and informal intentions or discussions,” he wrote. “Our law would fall into disarray if it recognized, for example, every conversational agreement of two of three directors as a corporate act.”

In this case, the court used its equitable powers under § 205 to retroactively validate the issuance of stock only when the moving parties presented sufficient evidence of a corporate act.

Informal Actions

After an earlier court decision rendered several stock issuances invalid, a dispute arose about the capital structure of two corporations, Numoda Corporation and Numoda Technologies Inc.

In the earlier decision, the court refused to recognize several purported stock issuances due to non-compliance with corporate formalities.

Because the parties had a default policy of not issuing stock certificates and using informal processes, in the instant matter, the court turned to the recently enacted DGCL sections to determine whether it could retroactively validate the granting of shares.

Explaining Statutory Powers

Vice Chancellor Noble noted that when DGCL §§ 204 and 205 became effective in April 2014, they expanded a board's and the court's ability to validate void and voidable corporate acts.

He explained that § 204 provides a roadmap for a board to remedy void and voidable corporate acts, and § 205 empowers the court to grant an equitable remedy for such acts.

Looking at the legislative synopsis, Vice Chancellor Noble found that the Delaware General Assembly drafted the sections “in hopes of creating an adaptable, practical framework for corporations and their counsel.”

Although the statutory language of § 205 provides the court with substantial discretion to validate defective corporate acts, it does not license the court “to cure just any defect,” he continued.

He noted that before the court could determine whether to use its equitable powers under § 205, there must be an underlying “corporate act” to analyze.

Accordingly, he explained that a court must look for “evidence of a bona fide effort bearing resemblance to a corporate act but for some defect that made it void or voidable.”

Contrasting Examples

Here, the court only granted the requested retroactive stock grants where the parties presented sufficient evidence of corporate acts.

In one instance, the court validated the grant of contested stock even though the directors of the corporations did not hold formal meetings, take minutes or issue certificates. That is because Noble found “this was not ‘a case of a passing conversation at the water cooler'”; the directors had met with the intent of discussing board business, including the granting of ownership interest.

The court also found that the factors listed in § 205(d) supported validating the issuance of the stock, including that the parties relied on representations, the granting of the stock would put the parties closer to their intended capital structure and the fact that one party would lose the substantial benefits of his bargain without some remedy.

The court, however, declined to exercise its power under § 205 in another instance when the record only reflected that the board vaguely agreed to the issuance of stock and the § 205(d) factors did not support the equitable remedy.

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