Those who work in corporate legal practice areas of law firms or departments in-house generally understand the benefits of forming a business entity in Delaware. There are more than one million business entities formed in Delaware due to modern and flexible corporate laws, highly respected judiciary, business-friendly government and customer service-oriented efficiencies.1
The Delaware Secretary of State is so efficient that you can frequently obtain required supporting documents for due diligence checklists, legal opinions and opening bank accounts on a same day basis — often within an hour.
Delaware Certificates of Good Standing
One of the most frequently requested documents from the State of Delaware is the Certificate of Good Standing. This certificate provides evidence that a Delaware company (meaning corporations, limited liability companies, limited partnerships, etc.) is duly formed, in existence, and has paid all franchise taxes due. Meeting these conditions, the company is considered in good standing in the State of Delaware, as of the date the certificate is issued.
A Certificate of Good Standing may be required by certain banks to open an account, as a supporting document for entering into a lease or any number of other time-sensitive matters that are important to operating a business. For financial closings, a Certificate of Good Standing is often a required condition that, if not obtained on a specific date, can cause a delay in the closing.
Not So Fast (Literally)
Considering how entity-friendly and efficient Delaware can be, it may come as a surprise when you cannot get a Certificate of Good Standing on the same day for a Delaware company that you know has paid its franchise taxes to date and for a corporation, has filed the required annual report.
As law firms and legal departments prepare for the year-end flurry of filings, we wanted to share some pointers from recent experience to ensure you avoid any delay in obtaining a Delaware Certificate of Good Standing, especially when timing is critical.
One Filing at a Time
A key point to keep in mind is that when you request a Certificate of Good Standing, if there is another filing pending with the Delaware Secretary of State for the company, the Secretary of State can effectively place a “block” on the release of a Certificate of Good Standing (or charter document, like a Certificate of Incorporation or Formation) until the pending filing is approved.
For example, if there is a Certificate of Amendment, Merger, or Conversion pending that has not been approved for filing yet, it can delay turnaround on a requested Certificate of Good Standing.
The good news (in most cases) is that if you urgently need the Certificate of Good Standing, there is an option to expedite the review and approval of the pending filing at an additional cost. Delaware offers four tiers of expedite fees as noted below ranging from $50 to $1,000:
- 24-hour expedite is an additional $50, 7:30 PM ET filing cutoff.
- Same day expedite is an additional $100, 1:45 PM ET filing cutoff.
- 2-hour expedite is an additional $500, 5:45 PM ET filing cutoff.
- 1-hour expedite is an additional $1,000, 6:45 PM ET filing cutoff.
As noted above, this is good news in most cases. There is one scenario when upgraded expedite options for a pending filing are not available and can cause a delay in a closing or finalizing a business matter.
If a corporation has a Certificate of Validation pending approval, there is no option to expedite the filing review.
Why? Certificates of Validation are reviewed by a special designated team at the Delaware Secretary of State’s office. Under Section 204 of the Delaware General Corporation Law (DGCL), corporations have the means to ratify defective corporate acts, including “administrative errors”, that may have resulted in stock not being validly issued. Depending on the complexities of these “administrative errors”, the time needed for the Secretary of State to complete the review can vary greatly.
Learning the Hard Way
We recently worked with a client that had requested a Certificate of Good Standing on a same-day basis to support a closing scheduled for the next day. We were unable to obtain it due to a block on any documents being released for the corporation in question, pending review of a Certificate of Validation that was submitted one month prior to our Certificate of Good Standing request. Unfortunately for the client, this block in obtaining the Certificate of Good Standing caused a delay in their transaction.
While the number of Certificates of Validation filed is small compared to other types of certificates (amendments, mergers, conversions as mentioned above), it is worth pausing to double-check whether there are pending filings, franchise taxes or annual reports owed by an entity that may cause a delay in obtaining a Certificate of Good Standing from Delaware — especially when maneuvering around tight deadlines.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.