Keith Paul Bishop posted on a recent Nevada case holding that the inherent fairness standard cannot be used to rebut the business judgment rule:
In Guzman v. Johnson, ... the Court concluded that the inherent fairness standard cannot be used to rebut the business judgment rule and shift the burden to individual directors. The Court found that to do so would contravene NRS 78.138(7) which insulates (with certain exceptions) directors and officers from individual liability in their capacities as such unless the plaintiff (i) rebuts the business judgment rule; and (ii) proves that 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 the breach involved intentional misconduct, fraud or a knowing violation of law.
So how can a plaintiff rebut the business judgment rule? The Nevada Supreme Court states that a plaintiff may do so by showing that the director or officer had a personal interest in the transaction. However, the Court found that the plaintiff's complaint failed to plead facts that if true would rebut the business judgment rule.
In a February 2020 post, Bishop explained that:
NRS 78.138(7)(b) provides that, with certain specific statutory exceptions, a director or officer of Nevada corporation is not individually liable 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:
- 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
- The breach involved intentional misconduct, fraud or a knowing violation of law.
While the statute makes no mention of gross negligence, some federal district courts in Nevada have applied a bifurcated analysis, requiring a showing of at least gross negligence to state a duty-of-care claim or "intentional misconduct, fraud or a knowing violation of the law" to state a duty-of-loyalty claim. ...
Yesterday, the Nevada Supreme Court declared this statement to be dicta and expressly disavowed a bifurcated approach to duty-of-care and duty-of-loyalty claims. Chur v. Eighth Jud. Dist. Ct., 136 Nev. Adv. Op. 7 (2020). According to the Court, NRS 78.138(7) provides the sole avenue to hold directors and officers individually liable for damages arising from official misconduct.
This leaves me somewhat puzzled. Is it the case that under Nevada law that the business judgment rule would not be rebutted by a showing of:
- directors were grossly negligent in failing to inform themselves of all material information reasonably available to them?
- the board failed to make a decision?
- failed to exercise oversight?
- waste?
