In Re Numoda Corporation Consol., C.A. No. 9163-VCN (October 22, 2015)
The Delaware Supreme Court recently upheld an order of the Court of Chancery that clarified the capital structure of the corporation at issue. The decision is the result of “one of the first uses by litigants of new” Sections 204 and 205 adopted in 2014 and amended in 2015. These sections provide viable options to ratify defective acts. Section 204 authorizes ratification by the board of directors and, if applicable, the stockholders of a corporation. Section 205 authorizes the court to consider the validity of corporate acts of questionable validity. However, as illustrated in In Re Numoda Corporation, proceedings in the Court of Chancery with respect to ratification can be time consuming and expensive.
Bottom Line: Although Sections 204 and 205 are tremendous tools, it would be wise to avoid having to rely on ratification in lieu of adhering to corporate formalities through the life of the company. If a court is asked to act under Section 205, there will be more at issue than whether the “defective act” was meant to be taken.