August 10, 2020

Volume X, Number 223

August 10, 2020

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Nevada’s Duty Of Care Standard Fails To Win Summary Judgment For Director

NRS 78.138(1) imposes two explicit duties on directors in the exercise of their powers: they must act in good faith and with a view to the interests of the corporation.  This contrasts with Delaware case law which speaks of a triad of duties comprised of care, loyalty and good faith, with good faith standing a bit below the duties of care and loyalty.  Stone v. Ritter, 911 A.2d 362, 269-70 (Del. 2006).  It also contrasts with California statute which requires that a director perform her duties in a manner that she believes to be in the best interests of the corporation and its shareholders and “with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”  Cal. Corp. Code § 309.

Can it be that Nevada has embraced a dyad of duties (good faith and loyalty) and completely abandoned the duty of care?  The Nevada Supreme Court has held otherwise.  In Shoen v. SAC Holding Corp., 122 Nev. 621, 632 (Nev. 2006), it held that directors’ fiduciary relationship to the corporation “imparts upon the directors duties of care and loyalty”.  According to the Court, “In essence, the duty of care consists of an obligation to act on an informed basis; the duty of loyalty requires the board and its directors to maintain, in good faith, the corporation’s and its shareholders’ best interests over anyone else’s interests.” Id.(footnote omitted).  Notably, Nevada presumes that directors “in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the interests of the corporation.”  NRS 78.138(3).

Directors of Nevada corporations therefore appear to possess a powerful alexin against personal liability.  Yet it is not always the case that directors will escape a trial.  In FDIC v. Jacobs, 2014 U.S. Dist. LEXIS 157449 (D. Nev. Nov. 5, 2014), Judge Robert C. Jones declined to grant a former bank director’s motion for summary judgment on the FDIC’s claim of breach of fiduciary duty.  Citing an earlier version of my book and Shoen, Judge Jones found that the FDIC had adduced evidence that the director had ignored a borrower’s insolvency and declining profitability, the insufficient funds of the guarantors, the fact that the original lender refused to refinance the loan, the declining real estate market, and other “warning signs”.  He found that this and other evidence was “sufficient for a jury to find that Jacobs [the director defendant] did not act ‘in good faith and with a view to the interests of the [Bank],’ as required by Nevada’s statutory definition of the business judgment rule.”

Interestingly, Judge Jones disagreed with the FDIC that Nevada applies a “reasonably prudent person” standard in the context of the business judgment rule.  Referring to Horowitz v. Sw. Forest Indus., Inc., 604 F. Supp. 1130 (D. Nev. 1985), he found that Nevada’s later enacted statute controls.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IV, Number 316

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About this Author

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

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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