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Nevada vs. Delaware - The Latest Research!
This research reviews the accuracy of claims made in " Nevada vs. Delaware " reported on many websites in our industry. There are five areas where a specific act would be protected under Nevada law, but a corporate director or officer would be exposed to liability in Delaware :
1. ACTS OR OMISSIONS NOT IN GOOD FAITH
Before it was amended, effective June 15, 2001 , Nevada Revised Statutes (NRS) 78.037(1) allowed a Nevada corporation's Articles of Incorporation to contain:
"A provision eliminating or limiting the personal liability of a director or officeholder to the corporation or its stockholders for damages for breach of fiduciary duty as a director or officer."
However, such protection was prohibited for "acts or omissions which involve intentional misconduct, fraud or a knowing violation of law."
Before this change was made, it was discussed in David Mace Roberts & Rob Pivnick, "Tale of the Corporate Tape: Delaware , Nevada and Texas ":
"Without doubt on this subject, Nevada is more director- and officer-friendly than either Delaware or Texas . . .The NRS seems to imply that a limitation of liability statement may exculpate directors for a breach of the duty of loyalty, acts not in good faith, and receiving improper benefits. If true, directors may act contrary to the interests of the corporation by receiving improper benefits or otherwise act in bad faith, without vicarious liability, if the articles of incorporation eliminate director liability for such acts. "
Effective June 15, 2001 , a subsection (7) was added to the statute:
"A director or officer is not individually liable to the corporation or its stockholders for any damages as a result of any act or failure to act in his capacity as a director or officer unless it is proven that:
(a) His act or failure to act constituted a breach of his fiduciary duties as a director or officer;
(b) His breach of those duties involved intentional misconduct, fraud or a knowing violation of law."
This subsection, in effect, gives all directors and officers of Nevada corporations the protection that the former NRS 78.037(1) merely allowed corporations to include in their articles. In other words, all Nevada corporations now have a limitation of liability statement for directors and officers imposed by law . And, this protection includes acts not in good faith, since NRS 78.138(7) tracks the language of the former NRS 78.037(1). With these amendments, in Nevada , there no longer exists corporations that have limitation of liability statements, and corporations that do not.
In Delaware , Such Is Not The Case.
When a Delaware corporation's Articles of Incorporation do not contain a limitation of liability statement, the protection provided for directors from personal liability comes under the business judgment rule. "As a substantive rule of law, the business judgment rule provides that there is no liability for an injury or loss to the corporation arising from corporate action when the directors, in authorizing such action, proceeded in good faith and with appropriate care."
This being the case, an act of a Delaware corporate director not in good faith, which rises to the level of "gross negligence," can lead to personal liability if the corporation has no limitation of liability statement in its articles. When such a statement does exist, acts not in good faith are still not protected.
The Delaware General Corporation Law (GCL) is codified and this section, which covers only directors, allows a provision in the articles of incorporation:
"Eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective."
The legislative commentary"makes clear that no such provision shall eliminate or limit the liability of a director for . . . failing to act in good faith."
The Delaware statute quoted above treats intentional acts of misconduct and knowing violations of law as different from acts or omissions not in good faith.
It is noteworthy to mention that section (ii) of the Delaware statute quoted above treats intentional acts of misconduct and knowing violations of law as different from acts or omissions not in good faith. This bolsters the interpretation above, as under that statute a Nevada director is only liable for breaches of fiduciary duty that involves intentional misconduct, fraud, or knowing violations of law. Thus, such are not acts "not in good faith."
In Delaware , under no circumstance is a director protected for acts not in good faith. However, in Nevada , such acts are protected, either by a limitation of liability statement found in the articles of incorporation before June 15, 2001 or since then. Therefore, on the issue of corporate director acts not in good faith, Nevada law provides protection not found in Delaware law.
ACTS BY OFFICERS EXEMPT FROM MONETARY DAMAGES
A limitation of liability statement in the Articles of Incorporation could include officers as well as directors. This made Nevada one of only six states to have such laws covering officers as well as directors. (The other five states are Louisiana , Maryland , New Hampshire , New Jersey , and Virginia .)
With the recent changes to Nevada 's corporate laws, a limitation of liability statement is no longer needed for officers or directors. To repeat, this section, applicable since June 15, 2001 , is a statutorily imposed limitation of liability statement for officers and directors. Only acts of intentional misconduct, fraud, or a knowing violation of law will lead to an officer's (or director's) liability.
With the recent changes to Nevada's corporate laws, you no long need a limitation of liability statement for officers or directors
Protection for officers in Delaware corporations is nearly non-existent. GCL allows limitation of liability statements in the articles of Delaware corporations, applies on its face to directors only.
When a director is not protected by a limitation of liability statement in the Articles, he can still find solace in the business judgment rule. Not so for officers of Delaware corporations. "Some states extend the business judgment rule to officers as well as directors, limiting officers' liability to gross negligence." "Most jurisdictions, though, have not addressed the application of the business judgment rule to officers. The reason for this is unclear. In any event, it is prudent for officers to assume that they will have exposure for ordinary negligence." As you can see, Nevada corporate law provides substantial protection from monetary damages for corporate officers.
Delaware provides little to no protection for officers. On this issue, Nevada law is superior.
1. BREACH OF A DIRECTOR'S DUTY OF LOYALTY
Under the former NRS 78.037(1), a limitation of liability statement in a Nevada corporation's Articles of Incorporation protected directors from personal liability except in cases of intentional misconduct, fraud, or a knowing violation of law. As we mentioned, this protection has now been codified at NRS 78.138(7), giving all Nevada directors a limitation of liability statement as a matter of law.
In reviewing the "intentional conduct, fraud, or a knowing violation of law" language of the former NRS 78.037(1), stated that this "seems to imply that a limitation of liability statement may exculpate directors for a breach of the duty of loyalty." Their conclusion is sound, given the language of the statute. Since NRS 78.138(7) mirrors the language of the former NRS 78.037(1), their conclusion is equally applicable to the new statute. Thus, Nevada laws appear to protect Nevada corporate directors from breaches of the duty of loyalty. Delaware law does not follow suit.
In Delaware corporations when the Articles include a limitation of liability statement, the limits of GCL § 102(b)(7) come into play. This section reads, in pertinent part, that a limitation of liability
provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders.
The courts in Delaware have construed this section literally, holding that a limitation of liability statement in a Delaware corporation's articles pursuant to § 102(b)(7) shields directors from breaches of the duty of care (i.e., for acts of "gross negligence"), but not for breaches of the duty of loyalty. "A breach of loyalty claim requires some form of self-dealing or misuse of corporate office for personal gain."When a corporation's articles do not include a limitation of liability statement, and thus §102(b)(7) is inapplicable, the only protection available for Delaware directors is the business judgment rule. However, this rule does not protect directors who breach their duty of loyalty.
The fiduciary duties of directors include a duty of care and a duty of loyalty. This latter duty has been described as follows:
The duty of loyalty is a broad and encompassing duty that, in appropriate circumstances, is capable of impressing a special obligation upon a director in any of his relationships with the corporation. This duty of loyalty embodies both an affirmative duty to protect the interests of the corporation and an obligation to refrain from conduct that would injure the corporation and its stockholders or deprive them of profit or advantage. In other words, directors must eschew any conflict between duty and self-interest.
In Delaware , a breach of the duty of loyalty is not protected by the business judgment rule. Thus, on this issue once again, Nevada law provides more protection for directors than does the law of Delaware .
This issue is closely related to the issue of the duty of loyalty. In Delaware, interested director transactions are allowed and are valid if 1) there is good faith approval by a majority of disinterested directors upon full disclosure; 2) there is approval by shareholders after full disclosure (interested shareholder votes do not count); or 3) the transaction is fair and either approved or ratified by the directors or shareholders. Nevada law is similar. These statutes involve disclosed transactions. When an undisclosed transaction occurs, the two states differ.
In Nevada , the former NRS 78.037(1) allowed limitation of liability statements in corporate articles, except for acts or omissions involving intentional misconduct, fraud, or a knowing violation of law. As interpreted by Roberts & Pivnick, supra, this seemed "to imply that a limitation of liability statement might exculpate directors for . . . receiving improper benefits."
Once again, since the new NRS 78.138(7) codifies the limitation of liability statement as a matter of law for Nevada corporate directors, the same conclusion still pertains.
Nevada corporate directors are apparently protected in situations involving transactions when they receive undisclosed personal benefits.
This is not the case in Delaware
Undisclosed personal benefits to a Delaware director are an issue of the duty of loyalty. ( See the previous section, especially the quotes from Graham v. Taylor Capital and Ward, et al.) As such, Delaware law does not protect them, either in situations involving GCL § 102(b)(7) or under the business judgment rule.
Even beyond this, in cases involving director interest in a corporate transaction, the business judgment rule is inapplicable, and the director has the burden of proving the transaction is "fair." If he cannot do so, he is liable. The director's only hope is to disclose the transaction, and come within the terms of GCL § 144(a), supra. If he does so, the business judgment rule applies, unless the transaction rises to the level of disloyalty to the corporation.
On the issue of undisclosed personal benefits to corporate directors, Nevada law appears to provide protection, whereas Delaware law clearly provides none.
