SB1872 102ND GENERAL ASSEMBLY

LRB102 13519 JLS 18866 b

102ND GENERAL ASSEMBLY
State of Illinois
2021 and 2022
SB1872

Introduced 2/26/2021, by Sen. Jason A. Barickman

SYNOPSIS AS INTRODUCED:

805 ILCS 5/Art. 1A heading new
805 ILCS 5/1A.05 new
805 ILCS 5/1A.10 new
805 ILCS 5/1A.15 new
805 ILCS 5/1A.20 new
805 ILCS 5/1A.25 new
805 ILCS 5/1A.30 new
805 ILCS 5/1A.35 new
805 ILCS 5/1A.40 new

Amends the Business Corporation Act of 1983. Adds an Article to the Act to provide for the ratification and validation of defective corporate actions. Authorizes corporations to correct actions taken without proper documentation or the overissuance of shares. Provides that such actions are not void if ratified as provided. Defines terms.

A BILL FOR

AN ACT concerning business.

Be it enacted by the People of the State of Illinois, represented in the General Assembly:

Section 5. The Business Corporation Act of 1983 is amended by adding Article 1A as follows:

(805 ILCS 5/Art. 1A heading new)

ARTICLE 1A. RATIFICATION AND VALIDATION

OF DEFECTIVE CORPORATE ACTIONS

(805 ILCS 5/1A.05 new)

Sec. 1A.05. Definitions. In this Article:

"Board" means the board of directors.

"Corporate action" means any action taken by:

(1) or on behalf of a corporation;

(2) the incorporators;

(3) the board;

(4) a committee of the board;

(5) an officer or agent of the corporation; or

(6) the shareholders.

"Date of the defective corporate action" means the date (or the approximate date, if the exact date is unknown) the potentially defective corporate action was purported to have been taken.

"Defective corporate action" means:

(1) any corporate action taken or purportedly taken that is, and at the time such corporate action was taken or purportedly taken would have been, within the power of the corporation without regard to the failure of authorization identified in item (3) of subsection (a) of Section 1A.15, but with respect to which proper documentation is not presently available, or that is or may be shown to have been void or voidable due to a failure or possible failure of authorization or of the documentation thereof; or

(2) an overissue.

"Failure of authorization" means the failure to authorize, approve, or otherwise effect a corporate action in compliance with this Act, the articles of incorporation or by-laws, a corporate resolution or any plan or agreement to which the corporation is a party, or the disclosure set forth in any proxy or consent solicitation statement, if and to the extent such failure would render such corporate action void or voidable.

"Overissue" means the purported issuance of:

(1) shares of a class or series in excess of the number of shares of a class or series the corporation has the power to issue under Section 6.05 at the time of such issuance; or

(2) shares of any class or series that is not then authorized for issuance by the articles of incorporation.

"Putative shares" means the shares of any class or series (including shares issued upon exercise of rights, options, warrants, or other securities convertible into shares of the corporation, or interests with respect to such shares) that were created or issued as a result of a defective corporate action that:

(1) but for any failure of authorization would constitute valid shares; or

(2) cannot be determined by the board to be valid shares.

"Valid shares" means the shares of any class or series that have been duly authorized and validly issued in accordance with this Act, including as a result of ratification or validation under this Article.

"Validation effective time" with respect to any defective corporate action ratified or validated under this Article means the latest of:

(1) the time at which the ratification of the defective corporate action is approved by the shareholders or, if approval of shareholders is not required, the time at which the notice required by Section 1A.25 becomes effective;

(2) the time at which any articles of validation filed in accordance with Section 1A.35 become effective; and

(3) if the corporation or any successor entity to the corporation brings an application for validation under subsection (a) of Section 1A.40, the time at which the circuit court determines such validity or at such other time as the circuit court may determine in accordance with subsection (b) of Section 1A.40. The validation effective time shall not be affected by the filing or pendency of a judicial proceeding under Section 1A.40 or otherwise unless the corporation or any successor entity to the corporation initiates the application for validation under subsection (a) of Section 1A.40 or unless otherwise ordered by the circuit court.

(805 ILCS 5/1A.10 new)

Sec. 1A.10. Defective corporate actions.

(a) A defective corporate action shall not be void or voidable if ratified in accordance with Section 1A.15 or validated in accordance with Section 1A.40.

(b) Ratification under Section 1A.15 or validation under Section 1A.40 shall not be deemed to be the exclusive means of ratifying or validating any defective corporate action and the absence or failure of ratification or validation in accordance with this Article shall not, of itself, affect the validity or effectiveness of any corporate action that was or may be shown to have been properly taken or ratified under common law or otherwise, nor shall it create a presumption that any such corporate action is or was a defective corporate action or void or voidable.

(c) In the case of an overissue, putative shares shall be valid shares effective as of the date originally issued or purportedly issued upon:

(1) the effectiveness under this Article 1A and under Article 10 of an amendment to the articles of incorporation authorizing, designating or creating such shares; or

(2) the effectiveness of any other corporate action under this Article 1A ratifying or validating the authorization, designation or creation of such shares.

(805 ILCS 5/1A.15 new)

Sec. 1A.15. Ratification of defective corporate actions.

(a) To ratify a defective corporate action under this Section (other than the ratification of an election or designation of the initial directors under subsection (b)), the board shall take action ratifying the action in accordance with Section 1A.20, stating:

(1) the defective corporate action to be ratified and, if the defective corporate action involved the issuance of putative shares, the number and type of putative shares purportedly issued;

(2) the date of the defective corporate action;

(3) the nature of the failure of authorization with respect to the defective corporate action to be ratified, and

(4) that the board approves the ratification of the defective corporate action.

(b) If a defective corporate action to be ratified relates to the election or designation of the initial directors of the corporation, regardless of whether the initial directors are set forth in the articles of incorporation pursuant to item (1) of subsection (b) of Section 2.10, a majority of the persons who, at the time of the ratification, are exercising the powers of directors may take an action stating:

(1) the name of the person or persons who first took action in the name of the corporation as the initial directors of the corporation;

(2) the earlier of the date on which such person or persons first took such action or were purported to have been elected as the initial directors; and

(3) that the ratification of the election of such person or persons as the initial directors is approved.

(c) If:

(1) any provision of this Act, the articles of incorporation or by-laws, any corporate resolution or any plan or agreement to which the corporation is a party in effect at the time action under subsection (a) is taken requires shareholder approval or would have required shareholder approval at the date of the occurrence of the defective corporate action or

(2) the action under subsection (a) is to ratify a defective corporate action due to a failure to comply with either or both of Sections 7.85 and 11.75, then the ratification of the defective corporate action approved in the action taken by the board under subsection (a) shall be submitted to the shareholders for approval unless, as of the record date for determining the shareholders entitled to vote on the ratification of such defective corporate action, there are no valid shares outstanding and entitled to vote thereon, regardless of whether there then exist any putative shares.

(d) Unless otherwise provided in the action taken by the board under subsection (a), after the action by the board has been taken and, if required, approved by the shareholders, the board may abandon the ratification at any time before the validation effective time without further action of the shareholders.

(805 ILCS 5/1A.20 new)

Sec. 1A.20. Action on ratification.

(a) The quorum and voting requirements applicable to a ratifying action by the board under subsection (a) of Section 1A.15 shall be the quorum and voting requirements applicable to the corporate action proposed to be ratified at the time such ratifying action is taken; provided, however, that if the articles of incorporation or by-laws of the corporation, any plan or agreement to which the corporation was a party, or any provision of this Act, in each case as in effect as of the time of the defective corporate act, would have required a larger number or portion of directors or of specified directors for a quorum to be present or to approve the defective corporate act, such larger number or portion of such directors or such specified directors shall be required for a quorum to be present or to adopt the resolutions to ratify the defective corporate act, as applicable, except that the presence or approval of any director elected, appointed, or nominated by holders of any class or series of which no shares are then outstanding, or by any person who is no longer a shareholder, shall not be required.

(b) If the ratification of the defective corporate action requires approval by the shareholders under subsection (c) Section 1A.15, and if the approval is to be given at a meeting, the corporation shall notify each holder of valid and putative shares, regardless of whether entitled to vote as of:

(1) the record date for notice of the meeting and

(2) the date of the occurrence of the defective corporate action (or, in the case of any defective corporate action that involved the establishment of a record date for notice of or voting at any meeting of shareholders, for informal action by shareholders in lieu of a meeting, or for any other purpose, the record date for notice of or voting at such meeting, the record date for informal action by written consent, or the record date for such other action, as the case may be), provided that in each case notice shall not be required to be given to holders of valid or putative shares whose identities or addresses for notice cannot be determined from the records of the corporation. The notice must state that the purpose, or one of the purposes, of the meeting, is to consider ratification of a defective corporate action and must be accompanied by:

(A) either a copy of the action taken by the board in accordance with subsection (a) of Section 1A.15 or the information required by items (1) through (4) of subsection (a) of Section 1A.15 and

(B) a statement that any claim that the ratification of such defective corporate action and any putative shares issued as a result of such defective corporate action should not be effective, or should be effective only on certain conditions, shall be brought within 120 days from the applicable validation effective time.

(c) The quorum and voting requirements applicable to the approval by the shareholders required by subsection (c) of Section 1A.15 shall be the quorum and voting requirements applicable to the corporate action proposed to be ratified at the time of such shareholder approval; provided, however, that:

(1) If the articles of incorporation or by-laws of the corporation, any plan or agreement to which the corporation was a party, or any provision of this Act in effect as of the time of the defective corporate act would have required a larger number or portion of stock or of any class or series thereof or of specified shareholders for a quorum to be present or to approve the defective corporate act, the presence or approval of such larger number or portion of stock or of such class or series thereof or of such specified shareholders shall be required for a quorum to be present or to approve the ratification of the defective corporate act, as applicable, except that the presence or approval of shares of any class or series of which no shares are then outstanding, or of any person that is no longer a shareholder, shall not be required.

(2) The approval by shareholders to ratify the election of a director requires the affirmative vote of the majority of the votes of the shares which are represented at a meeting at which a quorum is present and entitled to vote on the matter, except that if the articles of incorporation or by-laws of the corporation then in effect or in effect at the time of the defective election require or required a larger number or portion of stock or of any class or series thereof or of specified shareholders to elect such director, the affirmative vote of such larger number or portion of stock or of any class or series thereof or of such specified shareholders shall be required to ratify the election of such director, except that the presence or approval of shares of any class or series of which no shares are then outstanding, or of any person that is no longer a shareholder, shall not be required.

(3) In the event of a failure of authorization resulting from a failure to comply with the provisions of Section 7.85, the ratification of the defective corporate act shall require the vote of shareholders set forth in subsection B of Section 7.85, regardless of whether such vote would have otherwise been required. In the event of a failure of authorization resulting from a failure to comply with Section 11.75, the ratification of the defective corporate act shall require the vote of shareholders set forth in clause (3) of subsection (a) of Section 11.75, regardless of whether such vote would have otherwise been required.

(d) Putative shares on the record date for determining the shareholders entitled to vote on any matter submitted to shareholders under subsection (c) of Section 1A.15 (and without giving effect to any ratification of putative shares that becomes effective as a result of such vote) shall neither be entitled to vote nor counted for quorum purposes in any vote to approve the ratification of any defective corporate action.

(e) If the approval under this Section of putative shares would result in an overissue, in addition to the approval required by Section 1A.15, approval of an amendment to the articles of incorporation under Article 10 to increase the number of shares of an authorized class or series or to authorize the creation of a class or series of shares so there would be no overissue shall also be required.

(805 ILCS 5/1A.25 new)

Sec. 1A.25. Notice requirements.

(a) Unless (1) shareholder approval is required under subsection (c) of Section 1A.15 and (2) shareholder approval is to be given at a meeting of shareholders in accordance with subsection (b) of Section 1A.20, rather than by informal action of shareholders pursuant to Section 7.10, prompt notice of an action taken under Section 1A.15 shall be given to each holder of valid and putative shares, regardless of whether entitled to vote, as of:

(A) the date of such action by the board; and

(B) the date of the defective corporate action ratified (or, in the case of any defective corporate action that involved the establishment of a record date for notice of or voting at any meeting of shareholders, for informal action by shareholders in lieu of a meeting, or for any other purpose, the record date for notice of or voting at such meeting, the record date for informal action by written consent, or the record date for such other action, as the case may be); provided that in each case notice shall not be required to be given to holders of valid and putative shares whose identities or addresses for notice cannot be determined from the records of the corporation.

(b) The notice must contain:

(1) either a copy of the action taken by the board in accordance with subsection (a) or (b) of Section 1A.15 or the information required by items (1) through (4) of subsection (a) or items (1) through (3) of subsection (b) of Section 1A.15, as applicable, and

(2) a statement that any claim that the ratification of the defective corporate action and any putative shares issued as a result of such defective corporate action should not be effective, or should be effective only on certain conditions, shall be brought within 120 days from the applicable validation effective time.

(c) No notice under this Section is required with respect to any action required to be submitted to shareholders for approval under subsection (c) of Section 1A.15 if notice is given in accordance with subsection (b) of Section 1A.20.

(d) A notice required by this Section may be given in any manner permitted by the by-laws of the corporation or, if the by-laws are silent, this Act. In addition, for any corporation subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, or the corresponding provisions of any subsequent federal securities laws, rules, or regulations, a notice required by this Section or by subsection (b) of Section 1A.20 may be given by means of a filing or furnishing of such notice with the United States Securities and Exchange Commission.

(805 ILCS 5/1A.30 new)

Sec. 1A.30. Effect of ratification and validation. From and after the validation effective time, and without regard to the 120-day period during which a claim may be brought under Section 1A.40:

(1) each defective corporate action ratified in accordance with Section 1A.15 shall not be void or voidable as a result of the failure of authorization identified in the action taken under subsection (a) or (b) of Section 1A.15 and shall be deemed a valid corporate action effective as of the date of the defective corporate action;

(2) the issuance of each putative share or fraction of a putative share purportedly issued pursuant to a defective corporate action identified in the action taken under Section 1A.15 shall not be void or voidable and each such putative share or fraction of a putative share shall be deemed to be an identical share or fraction of a share that was duly authorized and validly issued as of the time it was purportedly issued; and

(3) any corporate action taken subsequent to and in direct or indirect reliance on any defective corporate action that is ratified or validated in accordance with this Article and all corporate actions, including any subsequent defective corporate action, resulting directly or indirectly therefrom shall be valid as of the time taken.

(805 ILCS 5/1A.35 new)

Sec. 1A.35. Filings.

(a) If the defective corporate action ratified under this Article would have required under any other Section of this Act a filing in accordance with this Act, then, regardless of whether a filing was previously made in respect of such defective corporate action and in lieu of a filing otherwise required by this Act, the corporation shall file articles of validation in accordance with this Section, and such articles of validation shall serve to amend or substitute for any other filing with respect to such defective corporate action required by this Act.

(b) The articles of validation must set forth:

(1) the defective corporate action that is the subject of the articles of validation (including, in the case of any defective corporate action involving the issuance of putative shares, the number and type of putative shares issued and the date or dates upon which such putative shares were purported to have been issued);

(2) the date of the defective corporate action;

(3) the nature of the failure of authorization in respect of the defective corporate action;

(4) a statement that the defective corporate action was ratified in accordance with Section 1A.15, including the date on which the board ratified such defective corporate action and the date, if any, on which the shareholders approved the ratification of such defective corporate action; and

(5) the information required by subsection (c).

(c) The articles of validation must also contain the following information:

(1) if a filing was previously made in respect of the defective corporate action and no changes to such filing are required to give effect to the ratification of such defective corporate action in accordance with Section 1A.15, the articles of validation must set forth (i) the name, title, and filing date of the filing previously made and any articles of correction to that filing and (ii) a statement that a copy of the filing previously made, together with any statement of correction to that filing, is attached as an exhibit to the articles of validation;

(2) if a filing was previously made in respect of the defective corporate action and such filing requires any change to give effect to the ratification of such defective corporate action in accordance with Section 1A.15, the articles of validation must set forth (i) the name, title and filing date of the filing previously made and any statement of correction to that filing, (ii) a statement that a filing containing all of the information required to be included under the applicable Section or Sections of this Act to give effect to such defective corporate action is attached as an exhibit to the articles of validation, and (iii) the date and time that such filing is deemed to have become effective; or

(3) if a filing was not previously made in respect of the defective corporate action and the defective corporate action ratified under Section 1A.15 would have required a filing under any other Section of this Act, the articles of validation must set forth (i) a statement that a filing containing all of the information required to be included under the applicable Section or Sections of this Act to give effect to such defective corporate action is attached as an exhibit to the articles of validation, and (ii) the date and time that such filing is deemed to have become effective.

(805 ILCS 5/1A.40 new)

Sec. 1A.40. Judicial proceedings regarding validity of corporate actions.

(a) Upon application to the circuit court of the county in which either the registered office or principal office of the corporation is located by the corporation, any successor entity to the corporation, a director of the corporation, any shareholder, beneficial shareholder or unrestricted voting trust beneficial owner of the corporation, including any such shareholder, beneficial shareholder or unrestricted voting trust beneficial owner as of the date of the defective corporate action ratified under Section 1A.15, or any other person claiming to be substantially and adversely affected by a ratification under Section 1A.15, the circuit court may:

(1) determine the validity and effectiveness of any corporate action or defective corporate action;

(2) determine the validity and effectiveness of any ratification under Section 1A.15;

(3) determine the validity of any putative shares; and

(4) modify or waive any of the procedures specified in Section 1A.15 or Section 1A.20 to ratify a defective corporate action.

(b) In connection with an action under this Section, the circuit court may make such findings or orders, and take into account any factors or considerations, regarding such matters as it deems proper under the circumstances.

(c) Service of process of the application under subsection (a) on the corporation may be made in any manner provided by statute of this State or by rule of the applicable court for service on the corporation, and no other party need be joined in order for the court to adjudicate the matter. In an action filed by the corporation, the court may require notice of the action be provided to other persons specified by the court and permit such other persons to intervene in the action.

(d) Notwithstanding any other provision of this Section or otherwise under applicable law, any action asserting that the ratification of any defective corporate action, including any putative shares issued as a result of such defective corporate action, should not be effective, or should be effective only on certain conditions, shall be brought within 120 days of the validation effective time.