DGCL Amendments Altering Availability of Statutory Appraisal Rights and Ratification of Defective Corporate Acts Take Effect

Several amendments to the DGCL became effective on August 1, 2018. One amendment, to Section 262, extends the application of the “market out exception” to appraisal rights for Section 251(h) intermediate-form mergers and effectively treats both long- and intermediate-form mergers consistently with respect to appraisal rights. Another amendment, to Section 204, clarifies when corporations can ratify defective corporate acts—corporate acts that are void or voidable because they have not been properly authorized.As amended, the DGCL allows companies to use Section 204 when there is no valid stock outstanding, even if ratification would have otherwise required shareholder approval. The amendment also states that notice of a shareholder vote for a ratification of a defective corporate act must be sent to all holders of valid or putative stock as of the record date for the defective corporate act. This notice can be given through documents publicly filed with the SEC or through disclosure in a proxy statement. The Delaware Court of Chancery provided further insight in Almond v. Glenhill Advisors LLC (August 17, 2018), where the court allowed the defendants to ratify certain defective corporate acts under Section 204. The case arose when Design Within Reach, Inc. executed a reverse stock split in 2010. Glenhill, its majority shareholder, then converted Design Within Reach’s preferred stock into common stock in 2013, and the company was acquired through a short-form merger in 2014. Two former shareholders of Design Within Reach challenged the acquisition, stating that there were technical flaws in the reverse stock split and the merger was therefore invalid, but the company’s board ratified the reverse stock split under Section 204. The court found the acts defective but validated them nonetheless.