NEW SECTION 119 ADDED TO THE CALIFORNIA CORPORATIONS CODE FOR RATIFICATION AND VALIDATION OF NONCOMPLIANT CORPORATE ACTIONS

August 30, 2022

Governor Gavin Newsom has signed SB 218 (sponsored by Senator Jones), which was proposed by the California Lawyers Association’s Business Law Section Corporations Committee and adds an important new Section 119 to the California Corporations Code (CCC) providing for corporate ratification and judicial validation of noncompliant corporate actions.  Similar laws for ratification and validation of corporate actions have been adopted in Delaware, Nevada, and other states.  We anticipate that the lessons learned in other states will provide valuable guidance for practitioners and courts when applying Section 119. 

Pursuant to Section 119, a California corporation may ratify or a California Superior Court may validate otherwise lawful corporate actions not in compliance, or purportedly not in compliance, with the CCC, the articles, bylaws, or a plan or agreement to which the corporation is a party in effect at the time of the corporate action. 

A ratification generally requires the board of directors to adopt resolutions setting forth the corporate action to be ratified, the nature of the noncompliance, and related information.  Shareholders must also approve the ratification if their approval would have been required at the time of the ratification to take the type of corporate action proposed to be ratified.  The ratification is also subject to any higher approvals that were required for such a corporate action at the time of the original taking of the corporate action.  Notice of the ratification must be given promptly after the ratification to all shareholders as of the time of the ratification.  Unlike the analogous Delaware law, notice of the ratification is not required to be given to the shareholders as of the time of the defective act who are no longer shareholders as of the ratification.  The ratification of any corporate action that would have required the filing of an instrument with the California Secretary of State also requires the corporation to file a certificate of ratification to make, amend, or correct any such instrument. 

As a counterpart to the corporate self-help component of the statute, Section 119 also allows the corporation, any successor entity, directors, shareholders, and any other person who claims to be substantially and adversely affected by the ratification to petition the California Superior Court to determine or declare the validity or effectiveness of any corporate action (including a ratification or a ratified corporate action) or security of the corporation, and to declare the date of such validity or effectiveness.  The Superior Court has significant latitude to consider facts, circumstances, and remedies appropriate for such a proceeding.  If the Superior Court were to order the validation of a corporate action that would have required the filing of an instrument with the Secretary of State, then the corporation must file a certificate of validation making, amending, or correcting any such instrument.

A few additional notes regarding SB 218:

• Section 119 expressly does not limit the authority of the board, the shareholders, or the corporation to effect any other lawful means of ratification or validation of a corporate action or correction.
• Unless otherwise stated in the applicable ratification resolutions or determined by the Superior Court ordering validation, a corporate action or security ratified or validated under Section 119 relates back to the date of the original corporate action.
• Certain corporate actions are excluded from the scope of Section 119.  Dissolved and foreign corporations may not ratify corporate actions, nor may a judicial petition be filed under Section 119 in respect of a corporate action or security of such a corporation.  Section 119 also provides, in subdivision (a)(5), that no corporate action may be ratified or validated under that statute “in respect of” noncompliance with CCC provisions for statutory fiduciary duties, void or voidable interested transactions, and prohibited distributions, repurchases, redemptions, and loans.  A ratification or validation petition is also subject to judicial scrutiny pursuant to a proceeding brought under Section 119 where the Superior Court may consider all legal and equitable facts, circumstances, and remedies as it deems appropriate.
• Section 119 expressly acknowledges that a corporation must retain records related to a ratification or validation in accordance with Section 1500 of the CCC.
• Section 119 contains notice requirements with respect to legal proceedings where the validity, ratification, or validation of a corporate action would have a meaningful impact.
• Section 110 has also been amended by SB 218 to provide that certificates of ratification and validation may not contain future effective times.

In practice, Section 119 provides corporations and their shareholders with a remedy to resolve void and voidable corporate issues that was not previously available to California corporations.   Significant uncertainty surrounded historical approaches such as common law ratification, actions to quiet title or a forward merger. As a result, one defective act discovered after years of other corporate actions could cause a “domino effect” whereby subsequent actions authorized by the shareholders (and potentially the board of directors) in reliance on the defective act are also invalid.   In that situation, the corporation and shareholders may not be able to realize value through significant transactions and the potential for legitimate and opportunistic argument could ensue over the corporate and capital structures, despite shareholders, directors and officers having acted in good faith.  Ratification and validation statutes, such as Section 119, have stepped into that gap in the corporate law of many states, and Section 119 now provides California corporations with a similar remedial mechanism that confers certainty and retroactivity to properly ratified and validated corporate actions, while allowing the defective corporate “dominos” to stand back up. 

This e-Bulletin was prepared by Julia Reigel of Wilson Sonsini Goodrich & Rosati, P.C. and Nate Emeritz of Greenberg Traurig, LLP. The authors are members of the SB 218 subcommittee of the Corporations Committee of the Business Law Section of the California Lawyers Association. The views expressed herein are those of the authors and do not necessarily reflect the views of their firms or their clients.