Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post was prepared with the assistance and insights of Amy Simmerman, Ryan Greecher, James Griffin-Stanco, and Brian Currie. This post is part of the Delaware law series; links to other posts in the series are available here.
Over the past five years, a growing number of states have adopted statutes authorizing ratification and validation of void or voidable corporate acts. These statutes have become important tools for the corporate technician and corporations pursuing financing, significant transactions, and greater certainty in the capital structure. Delaware provided the first model for ratification and validation statutes, and two other statutory models have since been promulgated by Nevada and the American Bar Association, with other states largely conforming to one of those models. The differences in legislative choices for these statutes are noteworthy for practitioners and states considering adoption of their own version of a ratification and validation statutory scheme. This post is not a comprehensive overview of any statute but rather a comparison of key elements of analogous statutes adopted in several jurisdictions, including the background, provisions, and application of these statutes.
Background of Ratification and Validation Statutes
In 2013, the Delaware General Assembly amended the Delaware General Corporation Law (the “DGCL”) to include new Sections 204 and 205 (together, the “Delaware Statutes”) which permit a Delaware corporation to restore certainty to the corporate foundation and capital structure as they were understood to have already existed. Section 204 provides for self-help in the form of corporate ratification, while Section 205 provides for judicial recourse, particularly when the corporation cannot take advantage of Section 204 or Section 204 is alleged to have been improperly used. Under the Delaware Statutes, corporate acts and shares of stock may be ratified, while certificates filed (or that should have been filed) with the Office of the Secretary of State (the “Delaware State Office”) may be validated.
Amendments to the Accelerated Filer and Large Filer Definitions
More from: Daniel Taylor, Joseph Schroeder, Mary Barth, Wayne Landsman
Daniel Taylor is Associate Professor of Accounting at The Wharton School at the University of Pennsylvania. This post is based on a comment letter to the SEC’s Amendments to the SOX 404(b) Accelerated Filer Definition from Professor Taylor; Mary Barth, the Joan E. Horngren Professor of Accounting, Emerita at the Stanford University Graduate School of Business; Wayne Landsman, the KPMG Distinguished Professor of Accounting at the Kenan-Flagler Intranet at the University of North Carolina; and Joe Schroeder, Associate Professor at the Indiana University Kelley School of Business.
We appreciate the opportunity to comment on the Securities and Exchange Commission’s (the “Commission”) proposed Amendments to the Accelerated Filer and Large Accelerated Filer Definitions. Herein we provide comments and analysis relating primarily to the Request for Comments in Sections II.E and III.D of the proposed Amendments (“Proposal”). Our comments relate to the provisions of the Proposal that would eliminate internal control audits required under Section 404(b) of the Sarbanes-Oxley Act for companies with annual revenue less than $100 million.
Part I of this letter provides comment on the central premise of the Proposal. The Commission’s total estimated benefit to companies—$210,000 in cost savings from foregoing internal control audits—is economically small and amounts to less than 0.1% of the average affected company’s equity market value. In contrast, we interpret the evidence in the Proposal as suggesting that the elimination of internal control audits is likely to result in significantly weaker internal controls over the financial reporting system and significantly greater levels of accounting restatements (i.e., poorer financial reporting quality). Thus, the $210,000 cost savings needs to be weighed against the potentially large social costs created by weaker internal controls and elevated levels of accounting restatements.
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