Corporations are operated by humans, at least until the rise of Skynet (infamous as a primary antagonist in the Terminator movie franchise). As humans are prone to err, corporate acts may also be executed in error. In 2014, Delaware's legislature amended its General Corporation Law to include new Sections 204 and 205 that provide Delaware corporations the ability to cure certain defective corporate acts. Among other things, the new sections allow the Court of Chancery to determine the validity of any corporate act or transaction and any stock, rights or options to acquire stock. To date, only a handful of cases have generated written decisions concerning Sections 204 and 205. The Court of Chancery's Aug. 31 decision in In re Certisign Holding, C.A. No. 9989-VCN (Aug. 31, 2015), is one of the select cases dealing with the new sections.
In Certisign, Certisign Holding Inc. filed a petition pursuant to Section 205 of the DGCL seeking an order (1) declaring that shares of putative stock of the company are shares of valid stock and (2) approving a corresponding stock ledger. The origin of Certisign's claims arose in 2005 when the company's board of directors approved an amendment to the company's certificate of incorporation. The amendment authorized several classes and series of stock. Only several days later, the company purported to issue by unanimous written consent of the board of directors certain shares of the newly authorized classes and series of stock. While the new share issuance occurred after the company amended its charter, the amended and restated certificate of incorporation was not filed with the Delaware secretary of state until several days after the new share issuance. This technical defect was not discovered until 2012 when the company was performing due diligence for another potential transaction.
When the company discovered the defect in the second half of 2012, the composition of Certisign's board of directors was different than when the share issuances were approved in March 2005. Nevertheless, the company attempted to cure the capitalization defects without judicial intervention. The company asked its present directors to approve corrective actions validating the 2005 capitalization. Moreover, the company sought approval of two of the three directors sitting on Certisign's board in 2005 that are no longer directors. The company was unable to get one of the 2005 directors, Sergio Kulikovsky, to participate in the curative action. Since the company was unable to gather the support of the necessary directors to cure the 2005 capitalization defects without judicial action, the company filed the underlying petition in the Court of Chancery seeking the court's ratification of Certisign's capital structure pursuant to DGCL Section 205. Along with filing the petition, the company provided notice of its filing to Certisign's stockholders and certain former directors of the company, including Kulikovsky.
After learning of the petition, Kulikovsky expressed concern that the company's proposal did not "seek to regularize the company's entire capital structure." Kulikovsky indicated that he would consent to the relief sought in the petition only if the company also sought ratification of, among other things, certain issuances of warrants and options, including options held by Kulikovsky. The company refused to amend its petition to include the issues raised by Kulikovsky. The court granted Kulikovsky permission to intervene in the action, after which Kulikovsky filed a response to the company's petition while submitting his own counter-petition for relief seeking, among other things, judicial validation of the aforementioned warrants and options. Approximately two months later, the company moved for a final order entering judgment on the pleadings in favor of Certisign's petition.
The court noted at the outset of its analysis that this case was "tailor-made for Section 205 relief." The court noted that all of Certisign's stockholders agree that it was a ministerial error that led to the subject shares being issued before the filing of the amended and restated certificate of incorporation with the Delaware secretary of state. The company operated for years under the belief that the shares were effectively issued. Notably, all Certisign's stockholders signed acknowledgments consenting to the relief sought in the company's petition. The court noted that even Kulikovsky acknowledged that the company will ultimately obtain the relief it seeks. However, Kulikovsky argued that it would be inequitable for the court to grant the company's petition without considering the company's entire capital structure. Kulikovsky argued that "validating some corporate acts without determining the validity of the company's full capital structure would substantially prejudice [his] and other interested parties' rights." The court noted that in determining whether to validate a defective corporate act, it must consider whether any person will be harmed by the validation, excluding any harm that would have resulted if the corporate act had been initially valid. The court held that Kulikovsky would have faced the same theoretical harm in 2005 had the shares been validly issued as he allegedly faces now. The court was not persuaded by Kulikovsky's other arguments, indicating that Kulikovsky's interpretation of Section 205 rendered certain provisions of the statute surplusage, contrary to established Delaware law. Accordingly, the court granted the company's motion for judgment on the pleadings. However, the court did not issue a final order to the company noting that the company had not demonstrated a sufficient threat of hardship to justify the issuance of a final order pursuant to Court of Chancery Rule 54(b). Noting that the company had operated for a decade without hardship, there was no substantial need for an immediate right of appeal.
Not only is this action notable for being one of only a handful to deal with Section 205, it has the distinction of being dubbed "tailor-made" for Section 205 consideration. Nevertheless, practitioners should note the court's proviso that judgment on the pleadings will not always be appropriate in a Section 205 context. While the facts in this case did not justify delaying judgment in favor of the company, the court mentions that the relief requested by the company would not change who controlled the company. Had change of control of the company been at issue, it is possible that the court would not have been satisfied with a paper record and would have required a more developed record before ruling.