Proposed 2023 Amendments to Section 204 of the Delaware General Corporation Law

The Delaware Senate recently passed a bill proposing significant amendments to the Delaware General Corporation Law (DGCL), including revisions to Section 204 aimed at streamlining the ratification process for defective corporate acts. If approved by the Delaware House of Representatives and signed into law by the Governor, these amendments will take effect on August 1, 2023.

Under the current DGCL, companies may choose to use the self-help ratification process under Section 204 to cure defective corporate acts, including invalid stock issuances. As currently written, Section 204 requires companies to file a certificate of validation to ratify a defective corporate act, regardless of whether a certificate has already been filed under other provisions of the DGCL.

The proposed amendments, if adopted, would significantly reduce the circumstances under which a certificate of validation must be filed. Specifically, a certificate of validation would only be required if: (1) a certificate previously filed under the relevant provisions of the DGCL needs to be amended to make the defective corporate act valid (including changes to the effective date and time of the certificate), or (2) a certificate that should have been filed under the relevant provisions of the DGCL has not yet been filed.

Additionally, the amendments simplify the content requirements for certificates of validation, eliminating the need to describe the defective corporate act and the nature of the failure of authorization. The amendments also clarify that the time of the board resolution ratifying the defective corporate act will determine which shares constitute valid shares and which shares constitute putative shares entitled to vote on the ratification.

By streamlining the process and eliminating complexities, the proposed amendments are expected to encourage more companies to use the Section 204 self-help ratification process to cure defective corporate acts, rather than opting for judicial validation.