Benjamin Edwards reports:
Earlier today, Senator Cancela introduced Senate Bill 304 in Nevada. Although the bill's text is not yet available on the website, the digest reveals that the legislation will explicitly authorize fee-shifting provisions under Nevada corporate law. (Update--the text of the draft legislation is now available.)
The digest indicates that it will also do a few other interesting things if it passes:
- Preserve and transfer any internal corporate claims to a Nevada corporation acquiring some other entity;
- Authorize the application of fee-shifting provisions to claims arising from a prior entity (so long as the transaction was approved by a majority of disinterested stockholders);
- Prohibit any provision that would forbid a shareholder from suing in Nevada courts;
- Authorize Nevada-specific forum-selection provisions;
- Authorize the Nevada Secretary of State to issue rules allowing lawyers to indemnify stockholders for any possible fee-shifting;
- Provide that Nevada will have personal jurisdiction over any shareholder that sues outside of Nevada; and
- Require the Secretary of State to study fee-shifting's impact on the business environment and report back to the legislature in three years.
Despite the problems with shareholder litigation, Delaware opted to ban fee-shifting right as a mass of public companies began to adopt it. This, of course, didn't stop corporations chartered in Nevada and other states from adopting fee-shifting provisions anyway. By my count, seven publicly-traded Nevada corporations already have fee-shifting charter or by-law provisions. (Disclosure: I consulted with legislative counsel on the initial draft. Nobody paid me any money.) ...
Delaware's decision to ban fee-shifting was and remains controversial. Despite Delaware's decision to go the other way, fee-shifting has been widely discussed and proposed by many informed commentators as a way to address the issue. Stephen Bainbridge even noted that Delaware's position on fee-shifting was a "self-inflicted wound" and "contrary to sound public policy and adverse to Delaware’s own interests." His short piece on the controversy argued that jurisdictions where "the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws." Nevada may fit that description.
My guess is that the Nevada statute will have an effect on incorporation decisions at the margins, but not a major effect. Cremers and Sepe’s analysis of reincorporation decisions found that between 1996 and 2011 356 companies reincorporated into Delaware. During the same time period Nevada picked up only 19. https://finance.eller.arizona.edu/sites/finance/files/ssepe.cs_delaware.02-15.pdf During the same period Delaware’s overall percentage of firms incorporated in it rose from 52% to 65%. There’s basically no evidence that Nevada poses a viable threat to Delaware’s dominance. Fee shifting alone may affect some decisions at the margin, but Delaware’s dominance will require not just Nevada adding stuff like fee shifting but Delaware making serious errors. It’s like a race in which the winner is so far ahead that 2nd place can only catch up if the winner stumbles.
Update: Kevin LaCroix observes:
Nevada’s legislature is not the first state legislature to take up proposed legislation authorizing fee-shifting in connection with shareholder litigation. As I discussed in a post at the time, in 2014 the Oklahoma legislature adopted a bill providing that in a shareholder initiated derivative action against a domestic or foreign corporation, the court “shall require the non-prevailing party or parties to pay the prevailing party or parties the reasonable expenses including attorneys’ fees, taxable as costs, incurred as a result of such action.” A copy of the Oklahoma legislation can be found here. The Oklahoma legislation is noteworthy in a number of respects, including the fact that it makes the fee-shifting to the unsuccessful litigant mandatory and does not even require the company involved to have a fee-shifting charter provision.
While Oklahoma has gone before, Nevada’s move may be more significant if for no other reason that, as Professor Edwards notes (citing to this article), “Nevada is the leading alternative to Delaware corporate law.” Other states did not follow after Oklahoma’s lead, but if the Nevada legislation were to pass, other states might well follow the lead, as a part of the time-honored “race to the bottom” competition between states when it comes to corporate law provisions.
Point well taken.