Thursday, March 19, 2020

Nevada Director and Officer Liability

Nevada's Supreme Court recently released an advance opinion providing guidance on when the directors and officers of Nevada corporations may face liability.  This marks the first instance where the Nevada Supreme Court has directly considered Nevada's unique statute.

Nevada differs from other states because our statute exculpates directors and officers as a default and includes a requirement that the misconduct must involve: "intentional misconduct, fraud or a knowing violation of law."  This is the relevant portion of the statute:

7.  Except as otherwise provided in NRS 35.230, 90.660, 91.250, 452.200, 452.270, 668.045 and 694A.030, or unless the articles of incorporation or an amendment thereto, in each case filed on or after October 1, 2003, provide for greater individual liability, a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless:

      (a) The presumption established by subsection 3 has been rebutted; and

      (b) It is proven that:

             (1) The director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and

             (2) Such breach involved intentional misconduct, fraud or a knowing violation of law.

The Nevada Supreme Court used the opportunity to walk back language from Shoen, a much earlier decision.  That decision had said that "[w]ith regard to the duty of care, the business judgment rule does not protect the gross negligence of uninformed directors and officers."  In Chur, the Nevada Supreme Court explained that it was concerned that "language in Shoen has misled lower courts about the law surrounding individual liability for directors and officers."  It went on to disavow Shoen's language about different processes for duty of loyalty and duty of care claims.  

Instead, Nevada has one standard for liability, a director or officer must know that "alleged conduct was wrongful in order to show a 'knowing violation of law' or 'intentional misconduct'" under the Nevada statute.  Interestingly, although "knowing violation of law" and "intentional misconduct" are two different terms, the Nevada Supreme Court now uses the same definition for them.  (Thanks to Stefan Padfield for that point!)

How much does it take for a court to find that the director of a Nevada corporation knew he acted wrongfully or engaged in intentional misconduct?  This isn't entirely clear.  At the least, the decision seems to require more than gross negligence, which, drawing on Black's Law Dictionary, the Nevada Supreme Court defined as "reckless disregard of a legal duty." 

If you're like me, you may be wondering where does this leave oversight liability claims under Nevada law?  Would the Nevada Supreme Court view a board of directors consciously disregarding their duties as more significant than merely recklessly disregarding them?  The issue appears open for now.

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Thanks, Ben. I think there's at least an argument to be made that defining those phrases independently should leave room for some type of bad faith liability (i.e., "reckless disregard of a legal duty") as "intentional misconduct."

Posted by: Stefan Padfield | Mar 20, 2020 10:31:05 AM

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