Sections 205 and 225 of the Delaware General Corporation Law facilitate prompt determinations of the validity of corporate actions. The former permits the Delaware Court of Chancery to validate defective corporate acts under certain circumstances, thereby upholding actions taken in reliance upon the validity of those acts. Section 225 provides a prompt determination of who rightfully serve as the managers of a Delaware corporation, thereby allowing the company and third parties to act with confidence that corporate officers and directors have the authority to act. In TS Falcon I v. Golden Mountain Financial Holdings, C.A. No. 2023-1247-LWW (Del. Ch. Aug. 27, 2024), the Court of Chancery declined under Section 205 to validate board action to set a record date for a stockholders' meeting to elect directors that did not comply with Section 213(a) of the DGCL. As a result, the court in a Section 225 action invalidated the election of directors at that meeting and reinstated the prior board. This case illustrates that the court generally will not use Section 205 to validate a deliberate, intentional violation of a statute to set the record date for a meeting, at least when a short period of time passes between the defective action and the court proceeding.

Background

This case arose out of two board factions disagreeing as to a possible merger transaction. While that dispute was ongoing, one faction chose on Oct. 26, 2023, to notify the company of its intent to exercise an option to increase its stake in the company from 35% to 44.9%. Thereafter, on Oct. 29, 2024, at an executive session of the company's board called by the other faction and excluding the observers from the faction that had announced its intent to exercise its option, the other directors voted to re-schedule the company's annual meeting to Dec. 1, 2023, with a record date of Oct. 25, 2023. At that annual meeting for the company and its operating subsidiary, the stockholders elected a slate of directors. Plaintiffs filed this action on Jan. 31, 2024, seeking a declaration that the record date, annual meeting and election results were invalid and restoring the prior board. One defendant counterclaimed for validation of the company's actions under Section 205. Because no party disputed that the record date, which preceded the date upon which the board determined the record date, violated the plain language of Section 213(a), the court determined that the election results would be set aside and rejected the defendants' petition to validate the election under Section 205.