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CALIFORNIA CORPORATE & SECURITIES LAW

Suing The CEO For Social Activism Is Likely To Be Challenging Under Nevada Law

Yesterday’s post concerned asked the question whether shareholders can sue CEOs for social activism.  The answer is of course, yes.  The more interesting question is whether shareholders will win the suit.  To answer that question, one must first decide on what law applies.  Although many may assume that the law of the state of incorporation should govern, I have questioned that assumption.  See Officers And The Business Judgment Rule.

In Nevada, there is no question that a CEO generally enjoys the protection of the business judgment rule because NRS 78.138(3) provides that 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”.  However, a shareholder challenging a CEO decision may argue that a decision motivated entirely by social concerns is not making a decision “upon matters of business”.  If that is the case, then the statutory predicate is not satisfied and the statutory presumption does not inure to the officer.

A shareholder who gets past the business judgment rule will also have to contend with NRS 78.138(4) which provides that directors and officers may consider other constituencies and interests.  Currently, these include, without limitation, the interests of “the community and of society”.  Nevada does not stop at authorizing consideration of these matters.  NRS 78.138(6) immunizes their decision by providing that NRS 78.138(4) does not “create or authorize any causes of action against the corporation or its directors or officers”.

Note to readers:  This spring, the Nevada legislature amended NRS 78.138. These amendments take effect on October 1, 2017.  I’ll have more to say about those amendments in a future post.

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