Void or Voidable?—Curing Defects in Stock Issuances Under Delaware Law

It is not unusual for a Delaware corporation's stock records to have omissions or procedural defects raising questions as to the valid authorization of some of the outstanding stock. Confronted with such irregularities, most corporate lawyers would likely attempt to cure the defect through boar...

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Bibliographic Details
Published in:The Business Lawyer 2008-08, Vol.63 (4), p.1109-1151
Main Authors: Bigler, C. Stephen, Tillman, Seth Barrett
Format: Article
Language:English
Subjects:
Attorneys
Boards of directors
Capital structure
Chancery courts
Charters
Commercial law
Common stock
Compliance
Corporate governance
Corporate regulation
Corporations
Defects
Issued capital
Laws, regulations and rules
Preferred stock
Securities offerings
Shareholder voting
Shareholders
State court decisions
State laws
Statutory law
Stock offerings
Stock shares
Stockholders
Uniform Commercial Code-US
Validity
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Summary:It is not unusual for a Delaware corporation's stock records to have omissions or procedural defects raising questions as to the valid authorization of some of the outstanding stock. Confronted with such irregularities, most corporate lawyers would likely attempt to cure the defect through board and, if necessary, stockholder ratification. However, in a number of leading cases, the Delaware Supreme Court has treated the statutory formalities for the issuance of stock as substantive prerequisites to the validity of the stock being issued, and the court has determined that failure to comply with such formalities renders the stock in question void, i.e., not curable by ratification. Unfortunately, the decisions issued by the Delaware courts have not afforded the necessary certainty to allow practitioners to decide whether a particular defect in stock issuance is a substantive defect that renders stock void or a mere technical defect that renders stock voidable. This Article analyzes the cases giving rise to this lack of clarity and proposes that the Delaware courts apply the policy underlying Article 8 of the Delaware Uniform Commercial Code to validate stock in the hands of innocent purchasers f or value in determining whether stock is void or voidable.
ISSN:0007-6899
2164-1838