Delaware General Assembly

Signed 6/30/13

The General Assembly has ended, the current status is the final status.

5/9/13

Walker

Rep. M. Smith
Sen. Henry, Townsend

Reps. Brady, J. Johnson, Mitchell, Paradee, Potter, Smyk, Wilson
Sen. Lavelle, McDowell, F Simpson

AN ACT TO AMEND TITLE 8 OF THE DELAWARE CODE RELATING TO THE GENERAL CORPORATION LAW.

Sections 1 and 2 amend § 114 to reflect the amendments to § 312(b) and § 502(a) in Sections 14 and 19. Section 3 amends § 152 of the DGCL. The added language in § 152 clarifies that a board may determine the price or prices for which stock will be issued by approving a formula by which such price or prices will be determined. Section 4 amends the DGCL to add a new § 204, which provides a safe harbor procedure for ratifying corporate acts or transactions and stock that, due to a "failure of authorization", would be void or voidable. The safe harbor procedure is available only if there is a valid board of directors to adopt the ratifying resolution. If there is no valid board of directors, relief would need to be sought under § 205 or, if available, § 225. If such ratification would require stockholder approval and the board of directors determines that some or all of the outstanding shares are putative shares, and thus not entitled to vote on the ratification pursuant to § 204, the board of directors or the holders of putative stock could seek a determination of the validity of such putative shares and the rights, if any, of the holders thereof in a proceeding under § 205 or, if available, §§ 225 and 227. § 204(a) provides that "defective corporate acts" and "putative stock" shall not be void or voidable solely due to a "failure of authorization", if ratified as provided in § 204 or if validated by the Court of Chancery in a proceeding pursuant to new § 205. § 204 is intended to overturn the holdings in case law, such as STAAR Surgical Co. v. Waggoner, 588 A.2d 1130 (Del. 1991) and Blades v. Wisehart, 2010 WL 4638603 (Del. Ch. Nov. 17, 2010), that corporate acts or transactions and stock found to be “void” due to a failure to comply with the applicable provisions of the General Corporation Law or the corporation's organizational documents may not be ratified or otherwise validated on equitable grounds. The term “defective corporate act” is intended to include all corporate acts and transactions, including elections or appointments of directors, purportedly taken that were within the power granted to a corporation under this title but are subsequently determined not to have been effected in accordance with the applicable provisions of the General Corporation Law, the corporation’s certificate of incorporation or bylaws, or any plan or other agreement to which the corporation is a party, where the failure to comply with such provisions, documents or instruments would render such act void or voidable. The term “defective corporate act” includes an “overissue” of stock and other defects in stock issuances that could cause stock to be treated as void or voidable. § 204 thus provides a means of cure, as contemplated by Section 8-210 of the Delaware Uniform Commercial Code, for stock issued in excess of the number of shares the corporation is authorized to issue. § 204 also provides a means to give effect to the provisions of Section 8-202(b) of the Delaware Uniform Commercial Code, which provides, inter alia, that stock in the hands of a purchaser for value without notice of the defect is generally valid in the hands of such purchaser even if issued with a defect going to its validity, to address the suggestion of the Court of Chancery in Noe v. Kropf, C.A. No. 4050-CC (Del. Ch. Jan. 15, 2009) (Transcript), that the provisions of the Delaware Uniform Commercial Code cannot validate stock that under the General Corporation Law is void. For purposes of § 204 and also new § 205, overissued shares are those issued in excess of the number permitted by § 161 at the time the shares in question are issued, and "putative stock" is shares of stock that but for a failure of authorization would have been validly issued and any other shares that the board of directors cannot determine to be valid stock. For purposes of determining which shares are overissued or putative shares, in the case of an overissue, it is intended that only those shares issued in excess of the number of shares permitted to be issued under § 161 would be deemed overissued shares, unless it cannot be determined from the records of the corporation which of such shares were issued prior to others, in which case all shares included in the issuance resulting in an overissue would be deemed to be overissued shares. Similarly, where a single issuance includes both valid stock and putative stock, or where trading in valid stock and putative stock precludes tracing of specific shares as valid stock or putative stock, and it therefore cannot be determined from the records of the corporation which of the shares so issued are valid stock and which are putative stock, all the shares issued in such issuance would be deemed to be putative stock. Ratification of a defective corporate act under § 204 is designed to remedy the technical validity of the act or transaction; it is not intended to modify the fiduciary duties applicable to either the approval or effectuation of a defective corporate act or transaction or any ratification of such act or transaction. Defective corporate acts, even if ratified under this section, are subject to traditional fiduciary and equitable review. Subsections (b)-(d) set forth the procedures for ratification of defective corporate acts by the board of directors and, if required, the stockholders. In general, ratification requires approval of a resolution to ratify the defective corporate act by the board of directors. The resolution must contain the information set forth in subsection (b). Stockholders must ratify the defective corporate act if a stockholder vote would have been required to authorize the defective corporate act at either the time of the defective corporate act or at the time of ratification. In addition, any defective corporate act resulting from a failure to comply with § 203 must be submitted to stockholders for ratification, regardless of whether a stockholder vote would have been required at the time of the defective corporate act. The quorum and voting requirements applicable to the adoption of such resolution by the board of directors are the quorum and voting requirements applicable at the time of such adoption for the type of defective corporate act proposed to be ratified, unless the certificate of incorporation or bylaws of the corporation, any plan or agreement to which the corporation was a party or any provision of this title in effect as of the time of the defective corporate act to be ratified would have required a larger number or portion of directors or of specified directors for a quorum to be present or to approve the defective corporate act, in which case the presence or approval of such larger number or portion of such directors or of such specified directors is required, unless such director was elected, appointed or nominated by holders of any class or series of stock that is no longer outstanding or by any person that is no longer a stockholder. In the event stockholder approval is required, notice must be given to all current holders of the corporation’s valid stock and putative stock, whether voting or nonvoting, and also to the holders of valid stock and putative stock, whether voting or nonvoting, as of the time of the defective corporate act, unless such holders cannot be determined from the corporation's records. The notice must contain a copy of the ratifying resolution and a statement that any claim that the defective corporate act or putative stock to be ratified is void or voidable due to the identified failure of authorization, or that the Court of Chancery should declare in its discretion that a ratification in accordance with § 204 not be effective or be effective only on certain conditions, must be brought within 120 days from the validation effective time. Except in the case of the ratification of an election of directors, and except in the case of a defective corporate act resulting from a failure to comply with § 203, the quorum and voting requirements applicable to the adoption of such resolution by the stockholders are the quorum and voting requirements applicable at the time of such adoption for the type of defective corporate act to be ratified, unless the certificate of incorporation or bylaws of the corporation, any plan or agreement to which the corporation was a party or any provision of this title in effect as of the time of the defective corporate act would have required a larger number or portion of stockholders or of a class or series of stock or of specified stockholders for a quorum to be present or to approve the defective corporate act to be ratified, in which case the presence or approval of such larger number or portion of stockholders or of such class or series or of the specified stockholders is required, unless such class or series of stock is no longer outstanding or a specified stockholder is no longer a stockholder. Ratification of the election of a director requires the affirmative vote of the majority of shares present at the meeting and entitled to vote on the election of the director, except that if the certificate of incorporation or bylaws of the corporation then in effect or in effect at the time of the defective election require or required a larger number or portion of stock to elect the director, the affirmative vote of such larger number or portion of stock is required. Ratification of a failure to comply with § 203 requires the vote required under § 203(a)(3). Subsection (e) provides that if the act being ratified pursuant to § 204 would have required a filing with the Delaware Secretary of State, the corporation is required to file a certificate of validation that sets forth a copy of the ratifying resolution, the date of its adoption by the board of directors and, if applicable, the stockholders, the information that would have been specified in the filing that would otherwise be required, and if a certificate was previously filed with respect to the defective corporate act being ratified, the title and the date of the filing of such previously filed certificate and any certificate of correction thereto. Subsection (f) provides that unless otherwise determined by the Court of Chancery in an action pursuant to new § 205, each defective corporate act ratified pursuant to § 204 shall no longer be deemed void or voidable as a result of a failure of authorization identified in the ratification resolution and that such effect shall be retroactive to the time of the defective corporate act, and each share or fraction of a share of putative stock issued or purportedly issued pursuant to such defective corporate act and identified in the ratification resolution shall no longer be deemed void or voidable as a result of a failure of authorization identified in such resolution and, unless void or voidable due to some other failure of authorization not identified in the ratification resolution, shall be deemed to be an identical share or fraction of a share of outstanding stock as of the time it was purportedly issued. Unless notice has previously been given to stockholders pursuant to subsection (d), subsection (g) requires the corporation to provide notice of the adoption of the ratifying resolution by the board of directors to all current holders of the corporation’s valid stock and putative stock, whether voting or nonvoting, and also to all holders of the corporation's valid stock and putative stock, whether voting or nonvoting, as of the time of the defective corporate act to be ratified, unless such holders cannot be determined from the corporation's records. The notice must contain a copy of the ratifying resolution and a statement that no judicial proceeding challenging the validity of any defective corporate act ratified pursuant to such resolution, the validity of the ratification of such defective corporate act or the validity of any stock issued pursuant to such defective corporate act may be brought after the expiration of 120 days from the validation effective time. Subsection (g) also provides, for the avoidance of doubt, that notices given to holders of putative stock or to holders of valid stock as of the time of a defective corporate act, if given in accordance with the provisions of the General Corporation Law applicable to notice to stockholders, will be entitled to the same presumptions and have the same effects as if such holders were holders of valid stock. Subsection (i) provides that the procedures in §§ 204 and 205 are not intended to preempt or restrict other valid means of ratifying any corporate act or transaction, including any defective corporate act, that would otherwise be voidable but not void. Thus, for example, the general doctrine of ratification, as recognized by the Court of Chancery in Klig v. Deloitte LLP, 36 A.3d 785 (Del. Ch. 2011), and Kalegeorgi v. Victor Kamkin, Inc., 750 A.2d 531(Del. Ch. 1999), aff’d 748 A.2d 913 (Del. 2000) (unpublished table decision), and applied to a board’s adoption of acts taken by officers who may not have had the actual authority to take such acts, would continue to be an effective mode of ratification and there is no obligation to follow the procedures set forth in § 204 to ratify such matters. Likewise, the doctrine of “shareholder ratification” described in Gantler v. Stephens, 965 A.2d 695 (Del. 2009), i.e., a fully informed vote of stockholders to approve director action that does not legally require stockholder approval to become effective, would continue to be an effective mode of ratification and there is no obligation to follow the procedures set forth in § 204 to ratify such matters. Accordingly, the corporation's decision to ratify an act or transaction or any stock that is voidable but not void using common law methods of ratification rather than under § 204 will not, standing alone, affect the validity of the act or transaction or of such stock or imply that the act or transaction is not valid or that such stock is void or voidable. Section 5 amends the DGCL to add a new § 205 which confers jurisdiction on the Court of Chancery to hear and determine the validity of any ratification effected pursuant to § 204, the validity of any corporate act or transaction and any stock or rights or options to acquire stock, and to modify or waive any of the procedures set forth in § 204. § 205 also confers jurisdiction on the Court of Chancery to hear and determine the validity of any defective corporate act that has not been ratified or ratified effectively pursuant to § 204, regardless of whether such defective corporate act would have been capable of ratification pursuant to § 204. If a defective corporate act or putative stock is ratified in accordance with § 204, then no person to whom notice of the ratification was given may assert any claim that the defective corporate act or putative stock is void or voidable due to the failure of authorization identified in the ratifying resolution, or that the Court of Chancery should determine that the ratification should not be effective or should be effective only on certain conditions, unless that claim is brought within 120 days from the validation effective time of the defective corporate act or putative stock in question. After such time a defective corporate act ratified pursuant to § 204 may not be invalidated or subject to the imposition of conditions in an action under § 205, a ratification pursuant to § 204 may not be invalidated or subject to the imposition of conditions in an action under § 205, and any putative stock validated under § 204 may not be invalidated or subject to the imposition of conditions in an action under § 205. The factors enumerated in subsection (d) are not mandatory and need not be considered in every instance. Section 6 amends § 251(h) to permit a merger agreement to include a provision eliminating the requirement of a stockholder vote to approve certain mergers if a statutorily defined minimum number of shares is tendered in a tender or exchange offer consummated by an arms’-length third-party acquiror. The subsection does not change the fiduciary duties of directors in connection with such mergers or the level of judicial scrutiny that will apply to the decision to enter into such a merger agreement, each of which will be determined based on the common law of fiduciary duty, including the duty of loyalty. Sections 7, 8, 9, 12 and 13 amend § 252(e), § 254(e), § 257(d), § 263(c) and § 264(e), respectively to delete the reference to the second sentence of § 251(c) in order to reflect the 2003 amendments to the DGCL which (i) deleted the second sentence of § 251(c), and (ii) added § 146 to the DGCL. Section 7 also includes an amendment to reflect new § 251(h). Sections 10 and 11 amend § 262 to reflect new § 251(h). Sections 14 and 19 amend § 312(b) and § 502(a) to deter the practice of forming “shelf” corporations with no stockholders or directors with the intent of renewing or “aging” the entity for use several years in the future. The amendments confirm the limited powers of the incorporator by clarifying that only a corporation’s directors or stockholders may authorize a renewal or revival, prohibiting an incorporator from signing an annual report after the initial report, and prohibiting annual reports from listing “no directors” except in the case of an initial report or certain reports filed in conjunction with a dissolution. Section 15 amends §382(a) to provide a means of service of process on a foreign corporation that consents in writing to be subject to the jurisdiction of any state or federal court in this State for purposes of a civil action, but does not specify a manner of service of legal process in the writing expressing such consent. Sections 16 through 18 amend § 391 of the DGCL. The addition of subsection (a)(28) to § 391 and amendments to subsections § 391(b)(1) and (2) provide the applicable fees in connection with filings under new § 204. Section 20 amends § 503(e) of the DGCL. The addition of the second sentence of § 503(e) clarifies that the filing of a certificate of validation pursuant to new § 204 will not reduce the amount of franchise taxes due for any period prior to the filing of such certificate of validation or serve as the basis for a refund of franchise taxes paid or due for prior calendar years. Section 21 extends the effective date of certain changes to 8 Del. C. § 377 from August 1, 2013 to April 1, 2014. Section 22 provides that the effective date of Sections 4, 5, 16, 17, 18 and 20 of this Act shall become effective April 1, 2014, and the other sections shall become effective August 1, 2013, except that the changes to Section 262 are effective only with respect to merger agreements adopted (or board resolutions approved, in the case of a merger authorized under Section 253) after August 1, 2013, and appraisal proceedings arising out of such transactions.

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