In an opinion issued June 6, Nguyen v. View, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery ruled that Section 204 of the Delaware General Corporation Law, which allows a “defective corporate act” to be ratified, cannot be used to validate an “unauthorized” corporate act. In a case of first impression, the plaintiff, Paul Nguyen, held a majority of the corporation’s common stock and was entitled to a class vote when the company sought to issue new rounds of preferred stock. Although Nguyen vetoed the first new round, the company issued that round and several more anyway, to the tune of over $500 million. Years later, when the transactions were invalidated, the company’s initial preferred stockholders converted their shares to common stock and voted as a majority of the common to ratify the transactions under Section 204.
Nguyen brought an action in the Court of Chancery under Section 205 of the DGCL, which allows the court to “determine the validity and effectiveness of any defective corporate act ratified pursuant to Section 204 of this title.” Although the court recognized that rejecting the ratifications would be “problematic if not potentially devastating for View”—because it would turn the company’s capital structure “upside down”—the court concluded that Section 204 may not be used to alter the outcome of a stockholder vote. View Inc. “placed itself in this bind by aggressively pursuing multiple rounds of financing” despite questions about their validity.
