Dear clients and friends,

In this issue of the Corporate Communicator we bring you information about recent important legislative changes to Nevada corporate law concerning director and officer fiduciary duties and related liability.

Very truly yours,

Snell & Wilmer
Corporate & Securities Group

Introduction

Recent changes to Nevada corporate law reaffirm Nevada’s commitment to providing directors and officers with maximum deference in the exercise of their fiduciary duties on behalf of Nevada corporations. Specifically, Nevada Senate Bill No. 203 (SB 203), which took effect on October 1, 2017, amends Chapter 78 of the Nevada Revised Statutes (NRS 78) in three important ways: (1) plaintiffs are now expressly required to rebut the presumption established by Nevada’s business judgement rule in order to hold a corporate director or officer individually liable for damages; (2) the right of corporate directors and officers to consider and assign weight to a wide range of factors in exercising their powers has been broadened; and (3) NRS 78 now includes an express declaration of the Nevada Legislature’s intent that Nevada law (especially the plain meaning of NRS 78) must govern the internal affairs of Nevada corporations, including the fiduciary duties and liability of corporate directors and officers. These changes are explained in more detail below.

Director and Officer Liability

Prior to SB 203, corporate directors and officers were, under Section 78.138(3) of the Nevada Revised Statutes (NRS) (commonly referred to as Nevada’s business judgment rule), presumed to act in good faith, on an informed basis, and with a view to the interests of the corporation. Separately, NRS 78.138(7) provided that, with certain exceptions, a corporate director or officer could not be held individually liable to the corporation or its shareholders or creditors for damages unless: (i) an act or omission of the director or officer was a breach of his or her fiduciary duties; and (ii) such breach involved intentional misconduct, fraud, or a knowing violation of law. Because this standard for individual liability did not expressly reference the presumption established by Nevada’s business judgment rule, however, plaintiffs argued (incorrectly) that they needed only establish the two elements listed in NRS 78.138(7) in order for a director or officer to be held individually liable.

SB 203 amends NRS 78.138(7) to clarify that directors and officers are not subject to individual liability unless “[t]he trier of fact determines that the presumption established by [Nevada’s business judgment rule] has been rebutted.” Accordingly, under revised NRS 78.138(7), a director or officer of a Nevada corporation will not be individually liable to the corporation or its shareholders or creditors for damages unless:

Director and Officer Decision-Making

Prior to SB 203, NRS 78.138(4) already permitted directors and officers, in exercising their powers, to consider a range of factors. While these factors were broad (including the “economy of the State and Nation” and the “interests of the community and of society”), they were not limitless. NRS 78.138(4) listed the factors that directors and officers were permitted to consider, and consideration of other factors was not expressly authorized. SB 203 gives directors and officers even greater latitude in their decision-making by amending NRS 78.138(4) to permit the consideration of “all relevant facts, circumstances, contingencies or constituencies, including, without limitation: [the factors previously listed in NRS 78.138(4)]” and to allow directors and officers to “[c]onsider or assign weight to the interests of any . . . person or group, or to any other relevant facts, circumstances, contingencies or constituencies.” Additionally, SB 203 expressly applies NRS 78.138 to all matters, including any change or potential change in control of the corporation. Thus, in addition to granting directors and officers greater latitude in their decision-making, by expressly applying this greater latitude to the change-in-control context, SB 203 evidences and reaffirms the Nevada Legislature’s rejection of Delaware’s Revlon Doctrine (enhanced scrutiny).

Declaration of Legislative Intent

SB 203 amends NRS 78 by adding four express statements of legislative intent. Through these statements, the Nevada Legislature makes clear that (i) Nevada law must govern the internal affairs of a Nevada corporation and the rights, privileges, powers, duties, and liabilities (if any) of its directors, officers, and shareholders; (ii) the plain meaning of NRS 78 and the other chapters of NRS Title 7 (which governs business associations, securities, and commodities) must not be supplanted or modified by statutory or case law from any other jurisdiction; and (iii) although the directors and officers of a Nevada corporation may be informed by the laws or business practices of other jurisdictions, the failure or refusal of a director or officer to consider or conform to the laws or practices of another jurisdiction is not a breach of fiduciary duty. In light of these statements, directors and officers should be more comfortable relying on the plain meaning of NRS 78 (especially NRS 78.138 and 78.139), and litigants should consider carefully before citing the laws and business practices of other jurisdictions in cases relating to the internal affairs of a Nevada corporation or the rights, privileges, powers, duties, and liabilities (if any) of its directors, officers, or shareholders.