On October 22, 2015, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s ruling in the action Boris v. Schaheen, No. 121, 2015 (Del. Oct. 22, 2015). As described by the High Court, this action was a “factually complicated case involv[ing] one of the first uses by litigants of new provisions of the Delaware General Corporation Law (“DGCL”) that authorize the Court of Chancery to issue final orders cleaning up important issues involving the governance of a Delaware corporation that were dealt with in a manner that did not meet the statutory requirements for validity.” See Delaware Court of Chancery’s opinion here.
In its recent opinion, the Supreme Court stated:
Sections 204 and 205 were adopted in part to address situations that had arisen in prior cases, which are analogous to this one, where parties who are complicit in failing to comply with the DGCL’s requirements refuse to participate in the validation of their own past intended actions because they have come to have personal reasons to wish to disclaim their prior promises and actions. Because John and Ann are themselves responsible for not adhering to corporate formalities and because they acquiesced in the stock grants they now dispute, they are poorly positioned here to argue that past informal grants and returns of Numoda Corp.‘s stock were invalid. The Court of Chancery thoroughly explained the basis for its conclusions as to Numoda Corp.‘s capital structure in its detailed opinion. Given that reality, there is no basis for us to overturn its judgment.
Accordingly, Sections 204 and 205, along with the Delaware Supreme Court’s ruling in this opinion, make clear that parties will be unable to disclaim their prior promises and actions pertaining to the issuance of stock which did not adhere to corporate formalities when they stand to benefit from the invalidation of such grants of stock.