Website Heading

CALIFORNIA CORPORATE & SECURITIES LAW

10th Circuit Highlights Difference Between Delaware And Nevada Exculpatory Statutes

Because the power to manage a corporation’s affairs rests with the board of directors, it is normally up to the board to decide whether the corporation will pursue a claim.  A shareholder who believes that the corporation should sue must therefore make a demand on the board.  If the board decides against suing, then the shareholder is out of luck unless the board’s decision was wrongful.  In some cases, however, the board may be disabled from making the decision to sue or not to sue.  In those cases, demand is said to be futile.

Nevada follows the Delaware Supreme Court’s jurisprudence on demand futility as established in Aronson v. Lewis, 473 A.2d 805 (1984) and Rales v. Blasband, 634 A.2d 927.  See Shoen v. SAC Holding Corp., 137 P.3d 1171, 1184 (2006).  In rare cases, a director may have a disabling interest because he or she faces a substantial risk of liability.  It is here, however, that Nevada parts company with Delaware, as explained by the Tenth Circuit Court of Appeals on Monday:

To begin with, the burden of persuasion is assigned differently by the Delaware and Nevada exculpatory statutes. In Delaware the statute [8 Del. Code § 102(b)] says nothing about which party bears the burden of persuasion;n3 and, as just noted, the state’s highest court has said that the director has the burden of proving the facts that provide exculpation. See id. [Emerald Partners v. Berlin, 726 A.2d 1215 (Del. 1999)] In contrast, the Nevada statute explicitly states that the director is not liable to the corporation or its stockholders or creditors “unless it is proven that: (a) 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 (b) The breach of those duties involved intentional misconduct, fraud or a knowing violation of law.” Nev. Rev. Stat. § 78.138(7) (emphasis added). This is a clear allocation of the burden of persuasion to the plaintiff. Because allocation of the burden of persuasion is a matter of substantive law, see Dick v. New York Life Ins. Co., 359 U.S. 437, 446 (1959) (“Under the Erie rule, presumptions (and their effects) and burden of proof are ‘substantive’ . . . .” (footnote omitted)), we apply Nevada’s assignment of the burden in assessing the futility issue here, see Kamen, 500 U.S. at 108. Thus, Plaintiffs have the burden of showing a substantial likelihood that the Director Defendants will be held liable despite Nevada’s exculpatory statute.

In re Zagg Inc., 2016 U.S. App. LEXIS 11095, 17-18 (10th Cir. 2016) (footnote omitted).

Another important difference between the two states is that exculpation is automatic in Nevada unless the articles provide otherwise.  In Delaware, there is no exculpation unless the certificate of incorporation so provides.

Share on:

ANY QUESTIONS REGARDING CALIFORNIA CORPORATE AND SECURITIES LAW? CONTACT US DIRECTLY

We offer expert advice with the intricacies of California law.

Our years of experience and expertise allow us to help clients navigate the business laws in California.

CONTACT US

Get the latest news and analysis about California Corporate & Securities law. Subscribe to our newsletter today!