In a matter of first impression, the Court of Chancery considered whether an “unauthorized” act–one that the majority of stockholders entitled to vote deliberately declined to authorize–but that 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 via Section 205 of the DGCL. Vice Chancellor Slights addressed this issue in the opinion of Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. June 6, 2017).
In considering this question, the Court provided a helpful roadmap of opinions analyzing Sections 204 and 205 since the enactment of those statutes in 2014. [For an earlier post discussing Sections 204 and 205, click here.] Vice Chancellor Slights denied relief because the “unratified” corporate acts were unauthorized and rejected by the majority stockholder, as opposed to simply being defective.
The Court noted the difference between “failure of authorization” and “rejection” by stockholders. Neither the text of the statutes nor their legislative history lent support to usage of the statutes to ratify a corporate act that had been denied by the majority of a corporation’s stockholders.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.