Google is a high-flying stock and darling of Wall Street, but a minor error in a recent stock split could have undermined confidence in this blue chip company. These errors are more common than you would like to believe. To fix such filing errors retroactively with corporations, Delaware has enacted a “Certificate of Validation” law to mitigate such embarrassing and potentially devastating mistakes in failing to file one Amendment to a Certificate of Incorporation. This applies to corporations small and large.
In January of 2014, Google announced a stock split that had been in the works since 2012 and was scheduled to take effect on April 3, 2014. Rather than executing a traditional two-for-one split for example, the Google stock split created separate voting and non-voting classes of stock. Google would now be traded under the tickers GOOG and GOOGL, with GOOG representing Class C shares with no voting rights and GOOGL representing Class A shares, which have one vote each. If you owned 100 shares of Google stock before the split, you would receive 50 shares of the voting Class A (GOOGL) stock and 50 shares of the non-voting Class C (GOOG) stock.
Now imagine that after receiving the new Google stock you were notified by Google that they had issued your shares in error and would have to undo the deal. How would this affect your opinion of Google as a company?
Before the stock split was unveiled, a few preparations had to be made in the boardroom and with their corporate legal counsel. Google’s attorneys had to file an Amendment to its Certificate of Incorporation with the state of Delaware changing the number of shares it was authorized to issue. (See image below of the original certificate without the 99 Amendments and mergers that followed, although Google, Inc. has only been incorporate since October 22, 2002.)
Had Google not filed this amendment with the state of Delaware, their only practical course of action would be to completely unwind the transaction and notify stockholders that they had been issued invalid stock, which would have been embarrassing for management and the attorneys involved. Stock issued in error would be recalled and the entire transaction would have to start over. Last year, a new law passed in Delaware that provided for the “Certificate of Validation” provision that allows the Delaware Court of Chancery to ratify “defective corporate acts” retroactively. Alternatively, this Certificate of Validation can be fixed without the court’s involvement to file directly with the Delaware Secretary of State to cure a defective filing or allow for retroactive filing. Errors that can be cured by the Certificate of Validation must have been duly approved at the time of the error or oversight. Notice of this Validation must be provided to stockholders. Since April 1, 2014 (3 days before the Google stock split), corporations have had the Certificate of Validation provision in their back pocket for these types of errors and omissions. If Google had issued unauthorized stock, they would be able to file the Certificate of Validation with the state of Delaware for a filing fee of $2,500 and retroactively split the stock.
Small corporations can also benefit from the Certificate of Validation and are more likely to need it. Often small corporations do not have sophisticated Delaware counsel to assist with corporate transactions. As a result, it is not unusual to fail to file a document that was otherwise approved by the corporate board. This Certificate of Validation can be helpful to fix these problems and allow for deals to proceed when they would have been killed because of small administrative oversight.
The best advice is to do filings correctly the first time, but if there is a problem of an administrative filing oversight, it is good to know there is an answer for Delaware corporations. The Certificate of Validation does not apply to Delaware LLCs, but there is talk among the Delaware bar to propose legislation to extend this Certificate of Validation to other unincorporated entity types. Let a Delaware corporate law attorney shepherd you through administrative filings and fixes thereto. Do not let lawyers and filing agents in other states overlook certain unusual Delaware mechanics (or plumbing) of an administrative filing. Get a Delaware expert to assist you both with the initial filing of a Certificate of Amendment and a later a Certificate of Validation in the event of an error or omission.