Corporate governance mistakes in Delaware companies can often by fixed by using the self-help remedy provided under Delaware General Corporation Law Section 204.
Many companies are formed in Delaware, although they do business elsewhere in the US, to take advantage of Delaware’s management-friendly and forward-thinking corporate law. One such advantage is the ability to use a self-help remedy under Delaware law to fix corporate mistakes that few other states offer. Mistakes often arise inadvertently, particularly in private companies that may not have inhouse lawyers on staff. These mistakes can become a major thorn in the side of the company when it is trying to raise funds or get a loan, since lawyers for the investors and lenders will thoroughly examine the company’s records before approving a loan or investment.
Prior to the enactment of Section 204, certain corporate mistakes could still be fixed later – so called “ratification” by the board or shareholders, but certain types of mistakes, for example issuing stock that the company did not have authority to issue (known as “putative stock”), could not be fixed after the fact by the board of directors and shareholders. Section 204 effectively overrules these cases and provides a fix.
The Company should carefully follow the steps laid out in Section 204 to fix the mistakes, which are referred to in the statute as “defective corporate acts”.
Please contact Edward Grenville at Inspire Business Law Group, PC (firstname.lastname@example.org; +415 279 0779) if you would like further information.