A recent Delaware Court of Chancery decision addressed an issue of first impression in connection with the types of “defective” corporate actions that initially were not approved properly, for example, due to lack of stockholder approval, but in some instances can still be ratified. Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. June 6, 2017). In this recent decision, the court denied relief because the “unratified” corporate acts were not simply defective, they also were unauthorized and rejected by the majority stockholder at the relevant time. The parties relied on Section 205, which allows a party to seek ratification from the Court of Chancery, but in this opinion the Court focuses on Section 204 which applies to those situations for which self-help and a safe harbor may be available.
Key Issue Presented: Whether an act that the majority stockholder entitled to vote at the relevant time deliberately declined to authorize, but the corporation nevertheless determined to pursue, may be deemed “a defective corporate act” under Section 204 that is subject to later validation by ratification of the stockholders. The short answer is no.
Key Legal Principles: A few years ago, Sections 204 and 205 of the Delaware General Corporation Law (DGCL) were passed to address situations somewhat similar to those presented by this case. Section 204 is essentially a self-help provision that allows a company in some situations to “go back and fix”, for example, a stock issuance that could have received proper authorization–but the requisite consents were not properly obtained. DGCL Section 204 reversed the decisions in STAAR Surgical and Blades that “interfered” with the ability to retroactively make such corrections, and now provide a clear procedure for correction of defective corporate acts that were not properly approved initially. Section 205 provides corporations with an option to petition the Court of Chancery to validate corporate acts that would otherwise be void or voidable. See footnote 22, 28 and 32 (regarding legislative history).
At the time the defective corporate acts at issue in this case were taken, however, the company did not have the power to take the actions because its majority stockholder had declined to approve them. Thus, the court describes the difference between “failure of authorization” and “rejection by stockholders.” Nothing in the text of the statutes or their legislative history suggest that the General Assembly intended to facilitate the ratification of a corporate act that had been expressly rejected by the stockholders. See footnote 46.
Notwithstanding the capacious remedial powers of a court of equity, “rewriting history” is not one of the available remedies that is available in Chancery. Section 204 is not a license to cure any defect. Based on the facts of this case, neither Section 204 nor Section 205 were available to backdate a corporate act that was expressly rejected by a majority stockholder. Nor could the remedial statutes be used to retroactively approve a transaction that converted preferred stock into common stock, which would have diluted the majority stockholder who opposed the transaction at issue, especially in light of the many intervening years during which preferred stockholders had enjoyed the benefits that attached to their stock.