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Looking For Stiffer Loan Terms? Nevada May Be Able To Help

Nevada's corporation law is quite protective of directors and officers.  Following the Delaware Supreme Court's decision in Smith v. Van Gorkum, 488 A.2d 858 (1985), the Nevada legislature amended the law to allow for exculpation of directors and officers.   In 2001, the Nevada legislature took matters a large step further by making exculpation automatic.  Nev. Stats. 2001, ch. 601, § 3.  Three authors (Zhihong Chen, Ningzhong Li and Jianghua Shen) have hypothesized that Nevada's 2001 change exacerbates conflicts between corporate borrowers and their lenders.  They conclude that lenders have reacted to this heightened tension by imposing more unfavorable loan loan terms, such as higher interest rates and more restrictive covenants.   Their paper, which is forthcoming in the Journal of Law and Economics, is available here.

While it is beyond my abilities to question their methodology, I do question their central premise that "all changed, changed utterly"1 in 2001.  Before the 2001 amendments, Nevada law allowed corporations to opt-in to a low liability scheme by adopting a charter amendment exculpating directors and officers.  Presumably, many corporations took advantage of this option.  Further, I disagree with the authors' statement that "Before the legislative change in June 2001, the Nevada corporate law was similar to the Delaware corporate law."  Before 2001,  Nevada's statute permitted the exculpation of officers as well as directors.  This remains a significant difference between Nevada and Delaware.  Nevada's former statute also did not included Delaware's exception for breaches of the duty of loyalty.  

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1.  William Butler Yeats, Easter 1916.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 216
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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