Nevada Introduces Legislation Authorizing Fee-Shifting Provisions

Earlier today, Senator Cancela introduced Senate Bill 304 in Nevada.  Although the bill's text is not yet available on the website, the digest reveals that the legislation will explicitly authorize fee-shifting provisions under Nevada corporate law.  (Update--the text of the draft legislation is now available.)

The digest indicates that it will also do a few other interesting things if it passes:

• Preserve and transfer any internal corporate claims to a Nevada corporation acquiring some other entity;
• Authorize the application of fee-shifting provisions to claims arising from a prior entity (so long as the transaction was approved by a majority of disinterested stockholders);
• Prohibit any provision that would forbid a shareholder from suing in Nevada courts;
• Authorize Nevada-specific forum-selection provisions;
• Authorize the Nevada Secretary of State to issue rules allowing lawyers to indemnify stockholders for any possible fee-shifting;
• Provide that Nevada will have personal jurisdiction over any shareholder that sues outside of Nevada; and
• Require the Secretary of State to study fee-shifting's impact on the business environment and report back to the legislature in three years.

Despite the problems with shareholder litigation, Delaware opted to ban fee-shifting right as a mass of public companies began to adopt it. This, of course, didn't stop corporations chartered in Nevada and other states from adopting fee-shifting provisions anyway.  By my count, seven publicly-traded Nevada corporations already have fee-shifting charter or by-law provisions. (Disclosure:  I consulted with legislative counsel on the initial draft. Nobody paid me any money.)

Nevada may want legislation on this issue to reduce uncertainty.  Unlike Delaware, Nevada does not have as deep a body of corporate law decisions.  Corporations interested in fee-shifting's benefits might not want to foot the bill for early test cases here without explicit legislative support.  Plus, introduction of the bill alone also highlights Nevada as the leading alternative to Delaware corporate law.  At least one study has found that Nevada corporate law may enhance value for some firms.

The legislation seems targeted to address major problems in shareholder litigation that Delaware has yet to solve.  Delaware and its vaunted judiciary now struggle to control shareholder litigation which has expanded "beyond the realm of reason."  Even when Delaware's judiciary tried to rein the suits and disclosure-only settlements in, shareholder plaintiffs simply shifted many of their filings to other forums or advanced other types of claims.  

Delaware's decision to ban fee-shifting was and remains controversial.  Despite Delaware's decision to go the other way, fee-shifting has been widely discussed and proposed by many informed commentators as a way to address the issue. Stephen Bainbridge even noted that Delaware's position on fee-shifting was a "self-inflicted wound" and "contrary to sound public policy and adverse to Delaware’s own interests."  His short piece on the controversy argued that jurisdictions where "the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws."  Nevada may fit that description.

The legislation also seems to recognize reality--that the real party in interest in much shareholder litigation is the attorney advancing the claim.  To offset over-deterrence risks, the legislation would authorize the Secretary of State to put rules in place allowing shareholder attorneys to indemnify their clients for fee awards.   This might cover some of the concerns that these provisions would simply spook any shareholder away from suing. 

This will be interesting to watch develop as more information becomes available.  If it passes, Nevada may generate some evidence to resolve debates around fee-shifting provisions.  The digest describes a requirement for the Secretary of State to study the issue and report back after three years.  Presumably, if this passes and fee-shifting does unleash some parade of horribles as detractors of the idea fear, Nevada could simply repeal it.