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As Silicon Valley Business attorneys we are constantly asked “Are shareholder meetings really necessary?” This question comes up a lot, especially with solo startup funds. The founders will ask, “Why should I have a meeting for my startup if I’m the only founder?”.
The Delaware corporate code does not make a distinction between multiple shareholders or solo shareholders, either way, you are required to have annual meetings.
So what do you do if you miss an annual shareholder meeting?
In 2014, Delaware enacted Section 204 of the Delaware General Corporation Law to allow corporations to fix prior defective corporate acts.
Before 2014, Delaware corporations could not ratify such defective acts.
These types of mistakes led to potentially embarrassing conversations with a corporation’s investors or potential suitors for a merger.
Section 204 is critical for startups and large corporations alike because companies often need to clean up their corporate history prior to closing financing or acquisition.
Company Board and Shareholders:
Section 204 shows a company’s board of directors and stockholders how to fix past defective corporate acts that would otherwise be void or voidable.
For instance, if a CEO issues shares to an employee without proper approval from the board of directors, the board of directors can retroactively ratify that issuance via Section 204.
Furthermore, Section 204 can ratify the appointment of a director who was not correctly appointed and can ratify appropriate actions that the director made.
Can’t Rewrite History:
Yet, Section 204 cannot be used to alter the past.
For example, had the CEO not actually issued shares in the past, the board of directors cannot use Section 204 to go back in time and issue the shares to an employee at a prior date.
Moreover, Section 204 cannot be used to ratify a corporate act that was rejected by a previous board of directors and/or a past set of stockholders.
Why Clean Up?
Cleaning up prior defective corporate acts usually occurs during financing or acquisition because that is when due diligence is being performed.
It should be noted that the cleanup process can cost significant time and money which can delay or kill a financing or acquisition.
For example, the filing fee alone for the required certificate of validation is approximately $2,500 and cannot be expedited.
You may also want to read: Don’t Fear the M&A Disclosures, They Are Your Friend
Conclusion:
To stay ahead of the curve, the Attorneys at Sutter Law highly recommend performing a corporate cleanup in anticipation of a financing or exit transaction.
This is especially true in Silicon Valley or the San Francisco Bay Area, where competition for financing or an exit is prevalent.
Contact the experienced Attorneys at Sutter Law today to stay ahead of the game and perform a corporate cleanup as soon as possible.
That way, you can finance or sell your company with greater ease and accomplish your entrepreneurial goals.
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