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Nevada Supreme Court: Inherent Fairness Standard Cannot Be Used To Rebut The Business Judgment Rule

Nevada has codified the business judgment rule as follows: "directors and officers, 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).  The statute only makes an exception for an action to "resist a change or potential change in control of a corporation, which action impedes the exercise of the right of stockholders to vote for or remove directors".  NRS 78.139(1).  The presumption is rebuttable, the statute does not state how.  

In Guzman v. Johnson, 137 Nev. Adv. Op. 13 (2021), the plaintiff sued the directors in connection with the approval of a merger transaction.  In response to the defendants' motion to dismiss, the plaintiff contended that she had rebutted the business judgment rule by alleging in the complaint that the directors were interested parties.  In support, she cited the "inherent fairness doctrine" adopted by the Nevada Supreme Court in Foster v. Arata, 74 Nev. 143, 155 (1958):

"A director is a fiduciary . . . .  Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein."

(quoting Pepper v. Litton, 308 U.S. 295, 306 (1939). 

Although the Nevada Supreme Court has not overruled Foster, the Court concluded that the inherent fairness standard cannot be used to rebut the business judgment rule and shift the burden to individual directors.  The Court found that to do so would contravene NRS 78.138(7) which insulates (with certain exceptions) directors and officers from individual liability in their capacities as such unless the plaintiff (i) rebuts the business judgment rule; and (ii) proves that 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 the breach involved intentional misconduct, fraud or a knowing violation of law.  

So how can a plaintiff rebut the business judgment rule?  The Nevada Supreme Court states that a plaintiff may do so by showing that the director or officer had a personal interest in the transaction.  However, the Court found that the plaintiff's complaint failed to plead facts that if true would rebut the business judgment rule.

© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 85
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About this Author

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