What this is: Over-issuing shares or failing to submit required filings with a state filing office are just two examples of invalid corporate acts. But soon California will allow for ratification or validation of certain otherwise lawful noncompliant corporate acts.
What this means: Senate Bill 218 allows for a remedy for otherwise lawful corporate actions not in compliance with the corporations code or the articles, bylaws, or other corporate governance documents, with some exceptions.
Leaders of corporations, whether large or small, established or start-up, occasionally take actions that they later discover are invalid due to failure to follow corporate governance rules. Examples of these invalid corporate acts include over-issuing shares or failing to submit required filings with a state filing office.
Some states, including Delaware and Nevada, allow for validation of certain noncompliant corporate actions. And, effective January 1, 2023, California, through Senate Bill 218, also provides for ratifying or validating noncompliant corporate actions. The following summarizes several key provisions of SB 218, codified in the California Corporations Code Section 119:
Senate Bill 218 allows for a remedy for otherwise lawful corporate actions not in compliance with the corporations code or the articles, bylaws, or other corporate governance documents. In the absence of fraud, breach of fiduciary duty, and certain other limitations, an invalid corporate action may be ratified by the corporation (either via the board, or the board and the shareholders, depending on the circumstances), or validated by the superior court. Importantly, the ratification or validation is generally retroactive to the date the noncompliant corporate act was taken. However, no ratification or validation is available to a dissolved corporation or a foreign corporation.
Standards are generally set for ratification of a corporate action by the board, and as applicable, by the shareholders, as included in the law or articles, bylaws, or a relevant plan of agreement. To approve a ratification of a corporate action, the board or shareholders must adopt resolutions containing specified information about the corporate action to be ratified. Notice of ratification of any corporate action must be given to each shareholder at the time of ratification, regardless of whether shareholder approval is required.
Senate Bill 218 includes requirements for filing a certificate of ratification with the Secretary of State if the corporate action ratified would have required a filing with the Secretary of State, or if the ratification would cause any previously filed document to be inaccurate or incomplete in any material way. The certificate of ratification consists of an officers’ certificate containing certain required provisions. The Secretary of State can reject any certificate of ratification if the filing would render prior filings inaccurate, ambiguous, or unintelligible. Upon the Secretary of State’s rejection, an option to seek judicial validation is provided.
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To initiate court action to determine the validity of an unauthorized corporate act, an “authorized person” must file a petition with the superior court. “Authorized person” includes the corporation, its successor entity, director, shareholder, or any other person with a claim to be substantially and adversely affected.
If a corporate action validated by the superior court would have required a filing with the Secretary of State, or the validation would cause any previously filed document to be inaccurate or incomplete in any material way, the corporation must file a certificate of validation to make, amend, or correct each filing. The certificate must be filed with the Secretary of State. The certificate of validation must consist of an officers’ certificate and include certain required provisions.
For additional information about the bill, please click on this link.
For more information on validation of defective corporate acts generally, read our article How to Assess and Correct Defective Corporate Acts.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.