Delaware Certificate of Validation Now Available to Remedy Defective Corporate Acts

A new law passed in Delaware that went into effect August 1, 2013 provides for, among other provisions, a never before seen “Certificate of Validation,” which can now be obtained from the Delaware Division of Corporations.

This law provides a “safe harbor” provision for ratifying defective corporate acts by resolution of either the board or stockholders (if the act would have required stockholder approval). Defective corporate acts are anything that is within the corporation’s power, but is either void or voidable due to not agreeing with the law, bylaws, or any other agreement, including over and under authorization of stock. If this happens and a defective act is ratified and the Act required a filing, the corporation must file a Certificate of Validation with the resolution that authorized the decision and other information. The filing fee that accompanies this is $2,500. Additionally, the corporation must inform all stockholders of the ratification of any defective corporate act. However, if the corporation overpaid tax due to a defective corporate act that is later remedied, there will be no tax refund. Validation acts are in the jurisdiction of the Court of Chancery.

Given the expensive filing fee and limited application, we suspect that this new law will mostly be used on rare occasions by large corporations which realized certain past actions may have been without proper authority and that need to be “blessed” retroactively.