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CALIFORNIA CORPORATE & SECURITIES LAW

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Nevada’s Secretary of State Concatenates Veil Piercing, Indemnification And Exculpation

The Nevada Secretary of State’s website unabashedly proclaims “Nevada is the second most popular commercial filing jurisdiction in the country, due largely to our favorable business laws and low-tax environment.”  The website then continues with a list of “legal advantages”, including the following:

Piercing the corporate veil in Nevada requires the presence of “fraud” or “manifest injustice.” This is the highest standard for personal indemnification available. NRS 78.138(7)

It is hard to know what to make these assertions.  First, “piercing the corporate veil” is not a “standard for personal indemnification”.  Second, NRS 78.138(7) does not deal with either piercing the corporate veil or personal indemnification.  Here’s my take on cutting through this weird concatenation of subjects.

Nevada, unlike California, has a statute that specifically addresses when the corporate veil may be pierced to make stockholders answerable for corporate liabilities.  That statute is NRS 78.747(c), not NRS 78.138(7).  NRS 78.747(c) reads as follows:

 A stockholder, director or officer acts as the alter ego of a corporation if:

      (a) The corporation is influenced and governed by the stockholder, director or officer;

      (b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and

      (c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice.

Thus, the Nevada Secretary of State is correct in asserting that one of the conditions to alter ego liability in Nevada is the sanctioning of fraud or the promotion of a manifest injustice.

Indemnification is derived from three Latin words – in, meaning not; damnum, meaning injury or loss; and facere, meaning to make.  Putting these three words together, indemnification means to make someone or something not injured, i.e., save them from the consequences of a some action or activity.  Indemnification is not related to the alter ego doctrine which imposes liability on someone for the actions of another.

NRS 78.747(7) addresses when corporate officers and directors may be liable.  It provides that subject to certain exceptions a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven 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 of those duties involved intentional misconduct, fraud or a knowing violation of law.

This is indeed the a very high standard.  However, it is a standard of exculpation, not indemnification.

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