If you look at a map of the United States, it is clear that Nevada and Delaware are very different. No one could mistake one for the other. However, while in many instances the differences between Nevada’s and Delaware’s corporate laws are as great as the states’ differences, all too many lawyers and courts have ignored them.
As one example, if any of several Nevada public corporations tried to follow their bylaws in order to remove a director, they would be very disappointed as the relevant bylaw provisions may work in Delaware, but are invalid in Nevada.
Perhaps the most significant instance in which the two states’ corporate laws vary is with respect to directors’ fiduciary duty. In both states, directors are required to act in the best interests of their corporations, but the states differ greatly as to how to determine what is the best interests of a corporation. In Delaware, the best interests of the corporation means the best interests of the shareholders, plain and simple. In 1991, Nevada decided to take a different path and adopted a “constituency” statute, which allows the directors to consider the interests of all the constituencies of the corporation in their decision-making process, including not just shareholders but also the corporation’s employees and the interests of the localities in which the corporation has offices or businesses, among other factors.
As an example, if the board of a Delaware corporation agreed to accept a takeover, their obligation would generally be exclusively to the shareholders. If one potential acquirer offered to pay $1.05 a share and another potential offered $1 a share but promised to keep all the employees, the board of a Delaware corporation would have no choice but to accept the $1.05 offer. In Nevada, however, the board could consider the interests of the employees and accept the second offer.
Unfortunately, several years after Nevada adopted its constituency statute, a federal court decided that the Delaware law on fiduciary duty still applied to Nevada corporations. The court achieved this result by deciding that although the board of a Nevada corporation could consider other interests than the shareholders, it had to give primacy to the shareholders. Applied to the example above, this decision meant that although the board could consider the interests of the employees it would still have to accept the offer that gave the shareholders the higher price even though it provided no job security to the employees.
In its next session the Nevada Legislature amended the constituency statute to make it clear that the purpose of the statute was to set an entirely different standard than Delaware’s.
Nonetheless, although some recent cases give hope that the message is getting through to some courts, even after the Legislature passed the “we really mean it” statute, other courts continue to decide cases applying concepts inconsistent with Nevada law. This continued conflating of Nevada and Delaware law, led the Legislature in 2017 to adopt Senate Bill 203, which tells lawyers and courts “we really, really mean it,” including a specific statement that Nevada corporate statutes “must not be supplanted or modified by laws or judicial decisions from any other jurisdiction.”
Whether this latest attempt to have Nevada law govern Nevada corporations will finally succeed remains to be seen.
Jeff Zucker, a director of Fennemore Craig’s Las Vegas office, focuses his practice primarily on corporate transactions and real estate, and represents a wide variety of privately and publicly held companies. For more information,contact Jeff Zucker at jzucker@fclaw.com.
