Fee Shifting Bylaw Provisions May Face Constitutional Limitation
The corporate governance world has been disquieted by Delaware Supreme Court Justice Carolyn Berger’s recent opinion that upheld the validity of a fee-shifting bylaw provision in the bylaws of a Delaware non-stock corporation. ATP Tours, Inc. v. Deutscher Tennis Bund (No. 534, 2013, May 8, 2014). Even though the ink has barely dried on the opinion, the Delaware legislature is considering several amendments to the Delaware General Corporation law to “overturn” the result. See Fee-Shifting Bylaws: Delaware Might Change Statute In Wake of Court Decision.
NRS 78.225 would seem to permit a fee shifting provisions in the articles of incorporation of a Nevada corporation: “Unless otherwise provided in the articles of incorporation, no stockholder of any corporation formed under the laws of this state is individually liable for the debts or liabilities of the corporation.” However, this provision must be considered in light of Article 8, Section 3 of the Nevada Constitution which provides:
“Dues from corporations shall be secured by such means as may be prescribed by law; Provided that corporators in corporations formed under the laws of this State shall not be individually liable for the debts or liabilities of such corporation.”
If you’re wondering what on earth is a “corporator”, the Nevada Supreme Court provides an answer in Seaborn v. Wingfield, 56 Nev. 260, 48 P.2d 881 (Nev. 1935):
“The word ‘corporators’ appearing in the Constitution must be taken in its general or usual sense to mean members of the corporation, one of the stockholders or constituents of the body corporate.”
While it is doubtful that the authors of Nevada’s constitution had fee shifting charter provisions in mind when they penned Article 8, Section 3, the section bears a remarkable resemblance to Delaware’s proposed new Section 331.
Nevada’s One-Time King
The Seaborn case mentioned above involved one of the most powerful Nevadans in the early twentieth century – George Wingfield. Here’s my brief biography of the former “King of Nevada” from my book Bishop & Zucker on Nevada Corporations and Limited Liability Companies:
George Wingfield was a leading figure in Nevada politics and finance who earned the sobriquet “King of Nevada.” Mr. Wingfield made his fortune in the Tonopah-Goldfield strikes at the early part of the 20th century. He was known both for his opposition to women’s suffrage and for the fact that he invested his mining profits in Nevada. In 1932, he had a chain of twelve banks. Following a banking holiday declared in November of that year, Mr. Wingfield’s banks failed to reopen, and they were placed in receivership. Despite this victory in the Nevada Supreme Court, George Wingfield was not able to avoid stockholder liability entirely. He was stockholder and director of two national banks. Although he had considered conversion to state charter, he never did. Receivers for these two banks which were part of the collapse of the Wingfield chain obtained judgments against George Wingfield for over $2.7 million. See E. Edwards,200 Years Nevada 331, 341, 343 (1978); R. Laxalt, Nevada: A History 97 (1977); R. Lingenfelter, Death Valley and the Amargosa, A Land of Illusion, 232 (1992), andHistory of Nevada, supra n. 209 at 1265-1266. For an earlier Supreme Court decision involving Mr. Wingfield and his mining interests, see Indiana Nevada Mining Co. v. Gold Hills Mining & Milling Co., 35 Nev. 156, 126 P. 965 (Nev. 1912)