Page 9 - Delaware Lawyer - Issue 3 - 2024

JASON MINTO
To summarize my main findings.
First, Nevada’s corporate law was shaped
by a dominant guiding principle: offer-
ing stronger liability protections to attract
incorporations from Delaware. That is,
rather than aiming at a particular balance
of protections and accountability, Nevada
law was shaped by what Delaware doesn’t
provide. Accordingly, Nevada seized each
of Delaware’s judicial scrutiny standards as
an opportunity to differentiate.
Where Delaware imposes rigorous ac-
countability, the Nevada legislature has en-
tered to provide more protection from li-
ability. As a result, the differences between
the states’ laws cover all the areas in which
Delaware applies judicial scrutiny — self-
dealing, board oversight and takeovers.
Second, Nevada law deprives shareholders
of a right provided to them in all states —
inspection of books and records. Third,
Nevada replaced Delaware Unocal and
Revlon duties with the business judgment
rule. Fourth, Nevada has marketed itself as
a lax corporate law regime.
Directors’ and Officers’
Exculpation in Nevada
Delaware enacted its exculpation stat-
ute, Section 102(b)(7), in response to the
Smith v. Van Gorkom decision. This stat-
ute permits exculpation from liability for
breaches of the duty of care but expressly
bars exculpation for violations of the duty
of loyalty and duty of good faith.
In contrast, Nevada’s exculpation
statute, N.R.S. 78.138(7), introduced
in 1987, was explicitly designed to be
broader than Delaware’s. Nevada’s stat-
ute allows for exculpation from liability
for breaches of both the duty of loyalty
and duty of good faith, so long as the
actions do not amount to intentional
misconduct, fraud or a knowing violation
of law. Legislative records indicate that
these broad protections were meant to
make Nevada more appealing to corpora-
tions. For example, bill sponsors argued:
“[the proposed bill] broadens the im-
munity of directors to include the ‘breach
of duty of loyalty to the corporation or its
shareholders, … this matter is ...essential for
the State of Nevada if it continues to be a
leading state for incorporation.’” 3
Further reinforcing this approach, Ne-
vada made its exculpation statute man-
datory in 2001 and the default for all
corporations in 2003. Unlike Delaware
and other states that require shareholder
approval, thus, Nevada’s exculpation ap-
plies automatically, reflecting the state’s
emphasis on appealing to corporate man-
agement.
The 2001 amendment was presented
as leverage to facilitate another amend-
ment — one that increased Nevada’s
incorporation tax fees. Bill promoters
emphasized that these legal protections
would serve as a quid pro quo to attract
incorporations despite the increased tax
rates. The Assembly committee had a let-
ter from S. Craig Tompkins, a director of
a number of public companies, stating
his belief that the amendment “would
increase the attractiveness of Nevada as
a state of incorporation for major pub-
lic companies” and would “mitigate the
negative impact of increasing the fees as-
sessed against companies choosing to in-
corporate in Nevada.”4 Senator Mark A.
James noted that “[d]irectors are the ones
who decide where to incorporate” and ar-
gued that allowing exculpation for direc-
tors and officers in the charter, even with-
out a shareholder vote, “will be a major
incentive.”5 Attorney Michael J. Bonner
emphasized that Nevada must offer more
favorable conditions than Delaware due
to Delaware’s longstanding corporate law
framework and judicial expertise.
N.R.S. 78.138(7) Exculpates from
Violations of Duty of Loyalty and
Good Faith
In Nevada, thus, liability is limited to
intentional misconduct, fraud or know-
ing violation of the law. How narrow is
this basis for liability?
In his amicus to the Delaware Su-
preme Court, the Secretary of State of
Nevada opined that Nevada’s exculpa-
tion statute does not exculpate most of
the breaches of duty of loyalty, includ-
ing self-dealing transactions. Others
have argued that the statute does not
exculpate bad faith acts.
Yet, Nevada courts have deter-
mined otherwise. In a line of decisions,
Nevada courts decided that by adopt-
ing 78.138(7), the Nevada legislature
rejected the “entire fairness” standard
that applies to self-dealing transactions in
Delaware.6 For example, in McFarland
v. Long, the CEO and the CFO of Pay-
ment Data Systems were given latitude
by the only independent director, who
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