This paper follows up on the article published last month titled "SHAREHOLDER[1] PRIMACY IN NEVADA, THE BUSINESS JUDGMENT RULE, GUZMAN AND GOODBYE TO “INHERENT FAIRNESS”. That article discussed the author’s view of the Nevada Supreme Court’s decision rejecting the doctrine of “inherent fairness” in favor of NRS 78.138(7), Nevada’s codification of the business judgment rule. This article examines what actions may be outside of Guzman[2] (and NRS 78.138(7)), and possible differences between Nevada state and federal courts.
To recap, generally, Justice Silver stated that the statute requires the shareholder to both: a) rebut the business judgment’s presumption of good faith, and b) to show that there was a breach of a fiduciary duty involving intentional misconduct, fraud or a knowing violation of the law. Further, that mere allegations of wrongdoing are inadequate to shift the burden of proof to the director and won’t survive a motion to dismiss.
That said, I am totally a fan of Justice Pickering’s Guzman concurrence and dissent distinguishing the roles of the players, saying majority shareholders, acting in their role as such, have different duties than those addressed in NRS 78.137. Supportive are later federal court cases calling out that being clear in the description of the roles and duties of individuals is also needed to prevent dismissal, Gaines v. Keasberry, 2:22-cv-01206-APG-VCF (D. Nev. Jul 25, 2023). Similarly, Streeter v. Izadi, 2:18-cv-01916-RFB-VCF (D. Nev. Sep 21, 2021), distinguishes the different allegations as to officers & directors vs. shareholders.
The authority and responsibilities of officers and directors to act are set forth in statute, common law and the corporation’s documents. So, how does common law impact Guzman and NRS 78.138?[3] Not addressed is the impact of the organizational documents which under NRS 78.138(7) can establish higher standards[4].
Some guidance on what may not be covered by Guzman & NRS 78.138 is found in Tsatas v. Airborne Wireless Network, Inc., 2:20-cv-02045-RFB-BNW (D. Nev. Mar 31, 2023). The United States District Court, in a motion to dismiss, specifically rejected the argument that Guzman and NRS 78.138(7) subsumed common law causes of action against officers and directors, apparently allowing the case to go forward on the claims for fraud, breach of fiduciary duty (loyalty)[5], aiding and abetting a breach of fiduciary duty, negligent misrepresentation and intentional interference with contractual relations. In other words, 78.138(7) is not exclusive, except as to the causes of action referenced therein. Anyone can review the statute and come to their own conclusions as to what actions/inactions are listed as protected.[6]
But also consider subsection (3) and its presumption of good faith. It is unclear to me how it impacts the application of common law causes of action, when viewed from the troublesome point of the Court’s statement that it was construing the First Amended Complaint “liberally” and “in Plaintiff’s favor” in determining that the facts were sufficiently alleged to comply with NRS 78.138(7)’s requirements. If judicial abstention is the basis of the business judgment rule, as confirmed by Guzman, then if one files in the Nevada Federal District Court, does the mood or curiosity of the judge control the specificity requirement of pleading for common law styled claims, or are these common law claims pleaded under a lesser standard? Maybe that statement is a bit harsh, but isn’t it clear that claims under 78.138(7) demand allegation specificity, as apparently required by the Nevada Supreme Court in Guzman?
While Tsatas doesn’t to me clarify the pleading threshold, it calls out that: 1) a non-officer director may have an informal fiduciary duty based on a position of influence and apparent control, and 2) the fiduciary duty of a controlling shareholder to a minority shareholder appears to be outside the statute (that claim was dismissed for improperly pleading). No argument on the second point.
Also, apparently outside the statute is the aiding and abetting of a breach of fiduciary duty. What does this mean? In the normal course of performing their duties officers and directors consult with each other, authorize and approve actions, and then implement them. Isn’t collegial conversation and collaboration part of the fiduciary duties of due care and candor? What is the point of the statute requiring “intentional misconduct, fraud or a knowing violation of law” if the normal, in fact good governance, corporate decision-making process can trigger a claim of “aiding and abetting” a breach of fiduciary duty? Particularly, when the breach itself does not meet the Nevada statutory requirements for liability, or can’t be sustained past a motion to dismiss because of the lack of factual specificity? Is pleading aiding and abetting now subject to being construed “liberally” and “in Plaintiff’s favor” in federal courts?
Fortunately, the same Justine Pickering referenced above authored the opinion in Guilfoyle v. Olde Monmouth Stock Transfer Co., 335 P.3d 190, 130 Nev. Adv. Op. 78 (Nev. 2014) sustaining summary judgment dismissal of a claim of aiding and abetting a breach of fiduciary duty. There are four elements to such claim: 1) a fiduciary relationship between the parties, 2) that duty was breached, 3) the defendant third party “knowingly and substantially participated or encouraged that breach”, and 4) damage was suffered as a result of that breach. In that case, plaintiff presented no evidence of knowledge, participation, or encouragement of that breach. Unfortunately, the pleading threshold of “what is enough” is not answered by this case.[7]
As lumpy as the idea of informal fiduciary duties based on authority and apparent control may seem in light of NRS 78.138, this area of common law fiduciary duties is a developing area. For example, there is some non-Nevada discussion that the covenant of good faith and fair dealing may be linked to a fiduciary duty of disclosure.[8]
Consider that the Nevada Supreme Court in Nutraceutical Dev. Corp. v. Summers, 373 P.3d 946 (Nev. 2011), cited Bedore (see ft. note 5 herein) as standing for the proposition that breaches of fiduciary duty are subject to the “preponderance” standard. The case (pre-Guzman) involved excessive expenditures on development reimbursements, management expenses and professional fees[9]. What I would like clarified is how Bedore’s excessive salaries, being a breach of fiduciary duty which falls under NRS 78.140’s preponderance standard, gets bootstrapped into excessive expenditures (Judge Gonzalez’ determination “disproportionately high”) being a “preponderance” breach of fiduciary duty. Paying oneself an excessive salary should be a very different liability proposition and standard of pleading, than making apparently ill-advised business decisions on expenditures (absent self-dealing, which wasn’t discussed, although footnote 2 says she found “fraudulent conduct”, and an unlawful taking of control of royalty payments). See also footnote 23 of Bedore suggesting that preponderance is the standard in a corporate setting. Hopefully these standard of proof & pleading uncertainties are answered by, or considered of historical interest only, after Guzman.
And so, on we march on trying to locate goal lines for directors and guardrails for judges.
