How Nevada Surpasses Delaware In Limiting The Liability Of Directors And Officers

It is hard to believe that it has been more than a quarter century since the Delaware Supreme Court dropped the bombshell of Smith v. Gorkom, 488 A.2d 858 (Del. 1985).  Suddenly, incorporation in Delaware no longer looked like a good idea (at least from the perspective of a director).  At the time, Chicago Law School Professor Daniel Fischel panned the decision as “one of the worst decisions in the history of corporate law.”  Daniel Fischel, The Business Judgment Rule and the Trans Union Case, 40 Bus. Law. 1437, 1455 (1985).  That same year, Bayless Manning accused the Delaware Supreme court of exploding a bomb.  Bayless Manning, Reflections and Practical Tips of Life in the Boardroom After Van Gorkom, 41 Bus. Law. 1, 1 (1985).

As discussed by Professor Stephen Bainbridge in this essay, the Delaware legislature responded quickly by enacting Section 102(b)(7) of the Delaware General Corporation Law.  Section 102(b)(7) authorizes a Delaware corporation to include in its certificate of incorporation a provision that eliminates or limits the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.  Directors, like Achilles, could not be bathed in complete immunity, for the Delaware legislature included a number of key exceptions in Section 102(b)(7).

Nevada’s exculpatory statute, NRS 78.138, goes far beyond Delaware’s.  If Thetis plunged Achilles up to his ankle, Nevada has immersed directors up to their toes (the Nevada legislature did include a few, narrow exceptions).

Below is a summary of some of the key differences between NRS 78.138 and Section 102(b)(7):

 

Nevada

Delaware

Automatic (i.e., not required to be included in articles/certificate)

YES

NO

Liability to Creditors Eliminated

YES

NO

Liability of Officers Eliminated

YES

NO

Liability Eliminated for Breach of Duty of Loyalty

YES

NO

In addition, Nevada provides that a director or officer is not liable unless “it is proven” that (i) the act or failure to act was a breach of fiduciary duty; and (ii) the breach involved intentional misconduct, fraud or a knowing violation of the law.  The requirement that these two elements be proven suggests another significant departure from Delaware whose Supreme Court has held that the liability shield of Section 102(b)(7) is in the nature of an affirmative defense.  Emerald Partners v. Berlin, 726 A. 2d 1215, 1223 (1999).

For more on director exculpation in Nevada, see Bishop & Zucker on Nevada Law of Corporations and Limited Liability Companies.

 

Published In: Business Organization Updates, Business Torts Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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