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CALIFORNIA CORPORATE & SECURITIES LAW

Want To File A Derivative Suit? You May Soon Be Required To Read Statutes

I have been writing recently about SB 203, a bill that is now pending in the Nevada legislature.  As introduced, the bill would, among other things, require the following:

In an action involving or relating to a domestic corporation that is subject to the provisions of NRS 41.520 or alleges a breach of a fiduciary duty by a director or officer of a domestic corporation, the complaint must be verified by oath and must aver that each plaintiff named in the action has read the provisions of NRS 78.138 and 78.139 and section 2 of this act in their entirety.

For those not on intimate terms with Nevada law, NRS 41.520 is concerned with the pleading requirements in derivative suits, NRS 78.138 establishes the standards for directors and officers and for exculpation from individual liability, and NRS 78.139 establishes various presumptions and standards applicable to directors and officers in connection with a change or potential change in control of the corporation.  Although other statutes and rules require verification of complaints (e.g., Rule 23.1(b) of the Federal Rules of Civil Procedure), I can’t think of another rule or statute that requires that a complaint be verified and aver that the plaintiff has read specific statutes.

As I’ve explained in prior posts, the Nevada legislative session is short.  This year’s session began on February 6 and will end on June 5.  Thus, there are as of today only 74 days left in the 79th Session.  SB 203 has been referred to the Judiciary Committee but no hearing has yet been scheduled.  When the bill is heard, it may be amended to provide that counsel (rather than the plaintiff) must verify that he or she has read the specified statutes.  This change, if made, would address the concern that it may be impracticable to have “each plaintiff named in the action” verify that he, she or it has read the specified statutes (note that the requirement is not limited to derivative suits, but includes suits alleging breaches of fiduciary duty by a director or officer).

What’s behind this requirement?  The problem appears to be that some plaintiffs and lawyers simply assume that Nevada follows Delaware and they simply overlook or ignore Nevada statutes that prescribe in some detail the duties of directors and officers, the presumptions that apply to them, and the circumstances under which they may be held individually liable.  SB 203’s statement of legislative intent explicitly adopting the internal affairs doctrine and rejecting Delaware precedents by name (as discussed in prior posts) may not be so much a change in a law as an expression of the legislature’s frustration with courts not following the law that is already on the books.

 

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