Nevada corporate law is quite protective of directors and officers. Following the Delaware Supreme Court decision in Smith vs. Van Gorkum, 488 A.2d 858 (1985), the Nevada Legislature amended the law to allow exoneration of directors and officers. In 2001, the Nevada legislature went further by making exoneration automatic. Statistics from Nev. 2001, c. 601, § 3. Three authors (Zhihong Chen, Ningzhong Li, and Jianghua Shen) have hypothesized that the Nevada change in 2001 exacerbates conflicts between corporate borrowers and their lenders. They conclude that lenders have responded to this increased stress by imposing more unfavorable loan terms, such as higher interest rates and more restrictive covenants. Their article, which appears in the Journal of Law and Economics, is available here.
While it is beyond my ability to question their methodology, I question their central premise that “everything has changed, completely changed”1 in 2001. Prior to the 2001 Amendments, Nevada law allowed corporations to join a low liability regime by passing a charter amendment exonerating directors and officers. Presumably, many companies have taken advantage of this option. Further, I do not agree with the authors’ statement that “Prior to the June 2001 legislative change, Nevada corporate law was similar to Delaware corporate law.” Prior to 2001, Nevada law permitted exoneration of officers as well as directors. This remains a significant difference between Nevada and Delaware. Old Nevada law also did not include the Delaware exception for breaches of duty of loyalty.
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1. William Butler Yeats, Easter 1916.
© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP Revue nationale de droit, volume XI, number 216
