Wednesday, September 02, 2015

Validation of Defective Stock Warranted, but Final Judgment Premature

By Amy Leisinger, J.D.

The Delaware Chancery Court granted a motion for partial judgment on the pleadings, finding that shares of putative stock of the CertiSign Holding, Inc. are valid despite being issued before the certificate authorizing the shares was filed. The court declined, however, to enter a final judgment as to its determination, finding that the petitioners did not establish any hardship or injustice sufficient to justify entry of a final order (In re Certisign Holding, Inc., August 31, 2015, Noble, J.).

Background. CertiSign was incorporated to serve as a holding company, and, in March 2005, the company’s incorporator named three directors who approved an amendment to, and restatement of, the company’s initial certificate of incorporation to authorize several classes and series of stock. Later that month, CertiSign purported to issue shares, but the amended certificate authorizing the issuance of the shares was not filed with the Delaware Secretary of State until April 1, 2005, rendering the stock issuances invalid. This technical defect was not discovered until 2012.

CertiSign attempted to remedy the defects without judicial intervention, but one of the original directors refused to participate in the process. The company then filed a petition seeking court ratification of its capital structure, including validation of the stock issuances and approval of a stock ledger reflecting the shares, with the support of its stockholders. The former director intervened in the action and filed a counter-petition seeking judicial validation of certain stock options and a debt owed to one of his companies, contending that all components of the company’s capital structure, including the issues addressed in the counter-petition, should be considered together. The petitioners moved for a final order entering judgment on the pleadings.

Judgment for petitioners warranted. In determining whether to validate a defective corporate act, a court must consider whether any person has been or will be harmed by the court’s validation, excluding any harm that would have resulted if the act had been initially valid. The former director contends that validating the stock without validating CertiSign’s full capital structure would “substantially prejudice” his rights, the court stated, but, if the stock issuances had been valid in 2005, the former director would face the same theoretical harm. All of CertiSign’s stockholders agree that the problem arose from a ministerial error and have consented to the relief requested, the court found, and judgment in favor of the petitioners is warranted.

No partial final judgment. However, the court continued, to enter a partial final judgment, the court must be satisfied that the matter at hand is an “infrequent harsh case” that will “justify departure from the policy against piecemeal appeals,” The company has operated for years despite the technical defects, the court found, and this is not a case where a party might benefit from an immediate appeal. The petitioners have not shown a sufficient danger of hardship or injustice to justify entry of a final order, the court concluded.

The case is No. 9989-VCN.