Thursday, May 13, 2021

Nevada's Business Judgment Rule Limits Entire Fairness Review

Nevada's Supreme Court recently released a new business law decision.  It arose out of AMC's acquisition of RLJ Entertainment (RLJE), a Nevada corporation.  Back in 2016, AMC  loaned RLJE $65 million in exchange for the option to become a controlling stockholder by acquiring 50.01 percent of RLJE's stock.  That deal prohibited RLJE from shopping any acquisition proposal and also let AMC designate two directors on RLJE's board.  Later, in 2018, AMC offered to purchase RLJ's outstanding shares at a price of $4.25 a share.  RLJE formed a special committee to negotiate.  The special committee negotiated over about 50 days and eventually secured an offer at a a price of $6.25 a share.  The merger was approved at a stockholder meeting held on Halloween.  

Shareholder plaintiffs sued, pointing out that certain directors were interested parties in the transaction.  Notably, they also conceded that "the two members of the Special Committee, Laszlo and Royster, 'had no commercial, financial or business affiliations or relationships with any of AMC, [ ] Johnson or any of their respective affiliates.'"  

Under Delaware law, this sort of controlling shareholder acquisition would likely have been subject to entire fairness review without both approval by independent directors and a majority vote of minority stockholders.

Nevada did not follow Delaware here.  The trial court dismissed the suit under Nevada's statutory business judgment rule, explaining that establishing liability under Nevada law "plainly requires the plaintiff to both rebut the business judgment rule’s presumption of good faith and show a breach of fiduciary duty involving intentional misconduct, fraud, or a knowing violation of the law."  

Sullivan and Cromwell's John Hardiman appeared in the case and explained Nevada's relevance for corporate law, writing:

With Guzman, the Nevada Supreme Court has affirmed that its statutory business judgment rule, not the “inherent fairness” standard, is the sole standard for any analysis involving fiduciary duty claims against corporate directors and officers in Nevada. As such, plaintiffs seeking to survive a motion to dismiss must allege that directors and officers breached their fiduciary duties and engaged in intentional misconduct, fraud, or a knowing violation of law. The Court also has made clear that these standards are not automatically satisfied simply because a transaction was done with a controlling stockholder. Instead, a case can be dismissed against the board and the controller where the board’s statutory presumption of good faith has not been overcome and the controller has not actively exercised its control. Thus, this decision departs significantly from current Delaware law, which imposes an entire fairness burden on both the board and controller accused of self-dealing and only applies the business judgment rule in transactions with controlling stockholders when the transaction at issue is (1) negotiated by a properly functioning and empowered independent committee of the board and (2) subject to a free of coercion and fully informed majority-of-the-minority vote.

Nevada has positioned itself to rival Delaware in new corporate registrations, and Nevada courts therefore may continue to develop into an increasingly significant forum for corporate governance disputes. To that end, the Guzman Court stated that its decision affirming the statutory business judgment rule sought to give effect to the “straightforward” language in NRS 78.138 and to adhere to the “purpose of NRS Chapter 78, which is ‘for the laws governing domestic corporations to be clear and comprehensible.’”


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