Newly enacted California SB 218 adds Section 119 to the California Corporations Code that provides for corporate ratification and judicial validation of non-compliant corporate actions. 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 Corporation Code, the Articles, Bylaws, or a plan or agreement to which the corporation is a party in effect at the time of the corporate action.

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. 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 ratification must be given promptly after ratification to all shareholders as of the time of ratification. 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.

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 may 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.

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 Corporations Code 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 under Section 119 where the Superior Court may consider all legal and equitable facts, circumstances, and remedies as it deems appropriate.

Section 119 requires that corporations retain records related to a ratification or validation in accordance with Section 1500 of the Corporations Code. The Section also contains notice requirements with respect to legal proceedings where the validity, ratification, or validation of a corporate action would have a meaningful impact.

Section 119 provides corporations and their shareholders a remedy to resolve void and voidable corporate issues that was not previously available to California corporations. If in the past your corporation failed to properly follow the Corporations
Code, or its own articles, bylaws, plans or agreements, consult with your corporate counsel. There now might just be a remedy to avoid issues before they arise as shareholder and creditor claims.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.