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CALIFORNIA CORPORATE & SECURITIES LAW

Officers: Got Business Judgment Rule? Nevada Says Yes, Delaware Maybe Not

Francis Pileggi writes about a recent ruling by U.S. District Judge Sue L. Robinson in which she refused to consider whether the business judgment rule applied to officers of a Delaware corporation:

Defendants have cited to no cases where a Delaware court has held that the business judgment rule applies to corporate officers; therefore, the court will not address the business judgment rule or the pleading standard articulated by In re Tower Air, 416 F.3d 229 (3d Cir. 2005).

Palmer v. Reali, 2016 U.S. Dist. LEXIS 134005, n. 8 (D. Del. Sept. 29, 2016).

In its quest to “out Delaware” Delaware, Nevada has statutorily enshrined the business judgment rule for both directors and officers:

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).  Nevada further exculpates directors and officers from individual liability 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: (i) 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 (ii) the breach of those duties involved intentional misconduct, fraud or a knowing violation of law.  NRS 78.138(7).  In contrast, Francis Pileggi points out “officers do not enjoy the exculpatory provisions of DGCL Section 102(b)(7)”.  Nevada’s exculpation of officers and directors is not absolute.  It is subject to certain statutory liabilities and the articles of incorporation may provide otherwise.

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