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For years Delaware and Nevada’s corporations have had a legal mechanism to ratify and validate past corporate acts, for example, a corporation or the company’s attorney forgot to have the company Board approve of stock issuances, stock options, partnerships, or other acts that required Board approval.
However, California Corporation did not have any legal authority to fix a non-compliance corporation.
In September 2020, California Governor “Gavin Newsom” signed Assembly Bill No. 3075 into law, which added a new Section 119 to the California Corporations Code.
This new section provides a mechanism for corporations to ratify and validate non-compliant corporate actions that may have been invalid due to a failure to comply with specific legal requirements.
This new section is significant because it provides corporations with a way to cure certain defects in corporate actions, which could have otherwise had serious legal consequences.
Background
Prior to the enactment of Section 119, California law provided limited options for corporations to cure non-compliant corporate actions.
The only available options were to either (1) obtain a court order that validated the action, or (2) seek relief under the equitable doctrine of ratification.
Obtaining a court order can be a time-consuming and expensive process, particularly for small corporations that may not have the financial resources to litigate.
Seeking relief under the doctrine of ratification is also not an ideal option, as it requires the corporation’s board of directors to make a formal decision to ratify the noncompliant action, which could expose the directors to liability if the action is later found to be invalid.
Section 119 seeks to address these limitations by providing a streamlined process for corporations to ratify and validate non-compliant corporate actions.
Overview of Section 119
Section 119 applies to any non-compliant corporate action that may have been invalid due to a failure to comply with any provision of the California Corporations Code, the corporation’s articles of incorporation, or the corporation’s bylaws.
Under Section 119, a corporation may ratify and validate the noncompliant action by taking the following steps:
- Board Approval: The corporation’s board of directors must approve the ratification and validation of the non-compliant action. The board may do so by adopting a resolution at a meeting or by unanimous written consent.
- Shareholder Notice: The corporation must provide its shareholders with written notice of the ratification and validation. The notice must include a description of the noncompliant action, the reason why it was noncompliant, and the board’s decision to ratify and validate the action. The notice must be sent to shareholders no later than 60 days after the board’s approval.
- Shareholder Approval: The corporation’s shareholders must approve the ratification and validation of the non-compliant action. The approval may be obtained at a meeting or by written consent. The approval must be obtained no later than 90 days after the board’s approval.
- Filing: The corporation must file a certificate of validation with the California Secretary of State within 30 days after the shareholder’s approval. The certificate must include a statement that the non-compliant action has been ratified and validated in accordance with Section 119.
Implications for California Corporations
Section 119 provides a valuable tool for California corporations to cure certain defects in corporate actions.
By providing a streamlined process for ratification and validation, Section 119 can save corporations time and money that would otherwise be spent on legal fees and litigation.
However, it is important to note that Section 119 is not a cure-all for all non-compliant corporate actions.
There are certain limitations and exceptions to the applicability of Section 119, including actions that are prohibited by law or that could result in harm to the corporation or its shareholders.
Moreover, Section 119 does not provide immunity from liability for directors or officers who may have breached their fiduciary duties in connection with the non-compliant action.
Directors and officers must still act in the best interests of the corporation and its shareholders when considering whether to ratify and validate a non-compliant action.
Conclusion
Section 119 of the California Corporations Code provides a new mechanism for corporations to ratify and validate non-compliant corporate actions.
By providing a streamlined process for curing defects in corporate actions, Section 119 can save corporations time and money that would otherwise be spent on legal fees and litigation.
However, it is important for corporations to understand the limitations and exceptions to the applicability of Section 119, and for directors and officers to act in the best interests of the corporation and its shareholders when considering whether to ratify and validate a non-compliant action.
If you have any questions about this new law or need an experienced corporation attorney to help your corporation validate corporate acts, please reach out to one of our attorneys at Sutter Law.
