Page 10 - Delaware Lawyer - Issue 3 - 2024

FEATURE | NEVADA VS. DELAWARE
relinquished his duties, to set their
compensation.7 Each wrote his com-
pensation contract for himself. Nevada
District Court decided that 78.138(7)
governs these compensation contracts.
Second, the plaintiff alleged with
particularized facts that Kirby, the in-
dependent director, and the only com-
pensation committee member, “utterly
relinquished his duties.” In Delaware,
that would be, by definition, a breach
of duty of good faith. Yet, the McFar-
land court decided these facts were in-
sufficient to claim “intentional miscon-
duct” since they do not demonstrate
knowledge of wrongfulness.
8 It didn’t
matter that Kirby told the executives
they could set their compensation or
that Kirby received a large stock award.
Showing knowledge of wrongfulness,
however, is rarely a viable option due to
the pre-discovery stage of demand futil-
ity. It is close to a non-existent option
in Nevada for another reason — Nevada
harshly restricts shareholder inspection
rights.
No Shareholder Inspection
Rights for Public Companies in
Nevada
particularized facts that amount to in-
tentional misconduct, fraud or a know-
ing violation of the law — creates a for-
midable barrier for shareholders seeking
accountability.
Consequently, derivative lawsuits in
Nevada typically succeed only under
unusual circumstances, such as when
internal conflicts expose a board’s
knowledge of issues and failure to act.
For instance, in the Wynn Resorts case,
an internal dispute revealed that board
members were aware of misconduct al-
legations and their duty to report them.
Without this internal conflict, share-
holders would likely have been unable
to advance their claims.
Absence of Intermediate
Standards for Defensive Tactics
Nevada also diverges from Delaware
in how it treats defensive tactics by cor-
porate management. Whereas Delaware
employs intermediate standards, such as
Unocal and Revlon, to assess manage-
ment’s actions in takeover situations,
Nevada applies the Business Judgment
Rule (BJR). Nevada’s legislature ex-
plicitly rejected intermediate standards
in 1999, promulgating that directors
would not face heightened duties in
takeover scenarios unless their actions
restricted stockholders’ voting rights.
In 2017, Nevada further amended its
takeover laws to clarify that Delaware
case law and its doctrines imposing en-
hanced duties on management should
not be applied by Nevada courts.
Marketing Nevada
Nevada law distinguishes itself by
restricting shareholder rights to inspect
corporate records. In corporate law dis-
putes, shareholders initiating derivative
lawsuits must typically provide specific,
detailed facts at the motion-to-dismiss
stage to demonstrate demand futility.
Since many lawsuits are dismissed be-
fore reaching discovery, Delaware and
other states permit shareholders limited
access to certain books and records.
This access may include board minutes
and, in some instances, emails and elec-
tronic messages.
Unlike Delaware and most other
states, NRS 78.257(7) does not grant
shareholders of publicly traded firms the
right to inspect corporate records. This
restriction, combined with Nevada’s
high burden of proof — requiring
plaintiffs in derivative suits to allege
8 DELAWARE LAWYER ISSUE 3 2024
For decades, Nevada has actively
marketed itself to corporations as a pro-
vider of lax corporate law. This competi-
tive positioning is prominently featured
on the Nevada Secretary of State’s web-
site, highlighting incentives under the
heading “Why Nevada?” Among the
advantages listed are:9
• “Director Immunity from Lawsuits”
• “Stronger Personal Liability Pro-
tection for Officers and Directors:
Directors and officers in Nevada
corporations are generally not held
personally liable for damages to the
corporation, shareholders, or credi-
tors unless their conduct involves
‘intentional misconduct, fraud, or a
knowing violation of the law.’”
• “More Flexibility for Directors’ Deci-
sions (Including Takeovers): Nevada
law grants directors the benefit of
the BJR for actions taken in response
to control changes, provided these
actions do not disenfranchise stock-
holders.”
These descriptions, summarized on
the Secretary of State’s website since
2012, provide an accurate picture of
Nevada’s positioning. Since then, Ne-
vada has only reinforced its differentia-
tion from Delaware, notably by codify-
ing the internal affairs doctrine to se-
cure its competitive stance further.
An Outlier Among States
Nevada’s corporate law represents
a unique approach. It is important to
note that most other states follow Dela-
ware’s lead, with some variations in spe-
cific provisions. For example, Texas’s
exculpation statute is similar to Dela-
ware’s. Delaware’s balance between ac-
countability and protection has set the
standard for corporate governance, with
other states adopting similar frame-
works. Indeed, no other state has po-
sitioned itself as a producer of lax law.
Thus, reincorporation to Nevada is
not like reincorporation to any other
state. For all other states, the legal dif-
ferences are insufficient to treat reincor-
poration as a self-dealing transaction.
Nevada law is an outlier.
Different Approaches?
Some argue that Nevada represents
a distinct policy approach compared to
Delaware. However, Nevada’s corpo-
rate law was primarily crafted not from
a vision of balancing costs and benefits
but rather as a deliberate contrast to
Delaware’s, seizing each of Delaware’s