Ratification of Defective Corporate Actions Under the Virginia Stock Corporation Act

In 2019, the Commonwealth of Virginia adopted a variety of amendments to the Virginia Stock Corporation Act (VSCA). While many of those amendments are already effective, some of the amendments will go into effect on July 1, 2021, including those addressing how a corporation may ratify defective corporation actions. These new provisions provide corporations with vital tools to ensure that actions taken by the corporation, which might otherwise be found to be void or voidable under Virginia law, are valid and have appropriate legal effect. This article will provide an overview of the new ratification provisions under the VSCA and how they apply.

  1. What is a “Defective Corporate Act”?: The VSCA provisions focus on “defective corporation actions,” which require that the corporation has taken some “corporate action.” A “corporate action” includes any actions taken by or on behalf of the corporation, including actions taken by the incorporator, board or directors, officers, or shareholders of the corporation. A corporate action is defective if (i), when the corporate action was taken, it was within the power of the corporation but is void or voidable due to failure of authorization, or (ii) the action involves an over-issuance of shares of stock of the corporation.
  2. What is a “Failure of Authorization”?: The VSCA and a corporation’s articles of incorporation and bylaws require that certain actions of the corporation be approved by the board of directors, the shareholders, or both, and, depending on the particular action, this approval may require majority, supermajority, or unanimous consent. A failure of authorization occurs when a corporate action is not approved by the board of directors or shareholders in compliance with any of these requirements, and as a result, the failure would render such corporate action voidable.
  3. What is an “Over-Issuance of Shares”?: The articles of incorporation of a corporation set forth both the classes of stock and number of shares in each class of stock that the corporation may issue. An over-issuance occurs when the corporation either issues (i) shares of a class of stock that it is not authorized by the articles of incorporation to issue or (ii) a number of shares of a class stock that exceeds the maximum number of shares of that class of stock that it is authorized by the articles of incorporation to issue.
  4. How does a corporation fix a defective corporate action?: Except for ratification of the election of members of the board of directors, the board of directors of a corporation may ratify a defective corporate action by adopting resolutions stating (i) the defective corporate action and, if necessary, the number of shares of stock that were improperly issued, (ii) when the defective corporate action occurred, (iii) the nature of the defective corporate action, and (iv) that the board of directors ratifies the defective corporate action. If the VSCA or the corporation’s articles of incorporation or bylaws would have required shareholder approval to approve the defective corporate action, the shareholders must also approve ratification of the defective corporate action. In addition, the corporation should provide notice to its shareholders of the ratification and follow all procedural rules, including meeting and quorum requirements, that were necessary to approve the defective corporate action.
  5. Does the corporation have an obligation to make any filings with the Virginia State Corporation Commission?: The VSCA requires a corporation to file certain documents, including articles of amendment and articles of correction, with the State Corporation Commission to effectuate certain corporate actions. If the defective corporate action requires a filing with the State Corporation Commission, the corporation must file the documentation required by the VSCA to properly ratify the defective corporate action. If the corporation previously made a filing with respect to the defective corporate action, it should file articles of ratification to amend or substitute the prior filing.
  6. What are the effects of proper ratification?: If the corporation properly ratifies a defective corporation under the VSCA, the defective corporate action (i) will not be void or voidable and (ii) will be deemed a valid corporate action as of the date it occurred. In the event of an over-issuance, each putative share of stock in the corporation will be deemed a valid share as of the time it was purportedly issued.

If you have questions regarding ratification of corporate actions under the VSCA, please contact Francis Massaro, the author of this blog, or a member of PilieroMazza’s Business & Transactions or Corporate and Organizational Governance practice groups.

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