Where does setting directors’ compensation fit into Nevada’s world of Guzman v. Johnson, 483 P.3d 531 (Nev. 2021)? See this author’s previous article, "SHAREHOLDER[1] PRIMACY IN NEVADA, THE BUSINESS JUDGMENT RULE, GUZMAN AND GOODBYE TO “INHERENT FAIRNESS” published last month. The starting point is NRS 78.140(5)[2].
Bedore v. Familian, 125 P.3d 1168, 122 Nev. 5 (Nev. 2006), found excessive salaries to be a breach of fiduciary duties. It affirmed the district court’s order to return the excess[3]. Although beyond the scope of this discussion it is worth noting footnote 23. There is a discussion that the standard of proof stated for a breach of fiduciary duty of fraud was a “preponderance” of the evidence rather than the normal “clear and convincing” based on the justification that officers and directors are held to a higher standard of care. Note NRS 78.140(5) provides the presumption of fairness on setting director’s compensation, subject to being proven unfair by a preponderance.[4]
Bedore is cited with approval in Weinfeld v. Minor, 3:14-cv-00513-RCJ-WGC (D. Nev. Mar 27, 2018). Unfortunately, the decision does not identify in what roles the defendants were acting. The litigants’ arguments apparently focused on the “director” role. The defendants were officers, directors and equity owners. Since NRS 78.140 is limited to directors, one wonders what the standard might be for directors (who are also shareholders) granting themselves excessive compensation in their roles as officers.
Solak ex rel. Ring Energy, Inc. v. Rochford, Case No. 3:19-cv-00410-MMD-WGC (D. Nev. Apr 14, 2020) is helpful as it references the findings in the 2003 Bedore case[5]. On a motion for summary judgment, it affirmed that the plaintiff must “plausibly” allege excessive compensation. By itself, mere referencing salaries of comparable directors’ compensation in microcap companies is not enough. The plaintiff must show “comparable work in the same industry”. Some factors supporting allegations of excessive compensation include: the defendants had no special ability of value to the company, their duties do not take substantial time, their work is subcontracted out, and their services are “brief or easy”.
One must ask at what point in time is “excessive” measured? Is it when the contract is entered, or later when there are actual results showing good or bad work? It seems to be bad policy to reward success, as it suggests normal business judgment failures could be punished. That punishment is recapture of the excessive amounts of compensation[6]. NRS 78.138 (Nevada’s codification of the business judgment rule) refers to director’s reliance on data and advice at the time of making the decision, supporting the idea that circumstances at the time of the initial event matter.
Gascue v. Saralegui Land & Livestock Co., 255 P.2d 335, 70 Nev. 83 (Nev. 1953) is a charming case suggesting considering both times. The Saralegui Land & Livestock Company was a small family corporation engaged in the sheep business. When the patriarch Antonio died, two of his daughters, Emily and Candida, took over the business. Multiple deaths, marriages and transfers later, Emily faced a troubled business as the general manager. Families being what they are, certain family members sued seeking cancellation of her shares (not of concern to us) and return of all the salary she was paid. The Court in denying the relief requested determined: 1) the board meeting appointing her as manager was valid and in good faith, 2) Emily was experienced, and respected in the community for her skills, 3) when she took over management the company was “in debt and of questionable solvency”, 4) during her 12 years she “wiped out” all debt while increasing the business value to over $200,000.00 (apparently impressing the Court), 5) she was entitled compensation for her service, and 6) her $200 a month salary was “not excessive” and on occasion she was “being paid less that the company’s sheepherders”. The Court found it manifestly inequitable under the circumstances to work for 12 years without compensation. It did not try to find a lesser number. Perhaps none was offered by the plaintiffs. Note this is not a director’s excessive compensation case and the predecessor of NRS 78.140 was not discussed. But assuming there is not too great of a difference in the definition of excessive compensation between directors and officers, it suggests considering the facts both at the beginning of performance and at the time of the challenge. It is an old case, it deals with officers, and equity under the circumstances was mentioned by the judge in making the decision (unclear if it was plead).
