Nevada and Delaware are often considered to be desirable destinations for businesses choosing to incorporate outside their home state, primarily due to their friendly taxation and litigation laws. However, there are a number of key distinctions between Delaware and Nevada in corporate law that business owners and corporate counsel should be aware of. Ignoring the differences and simply treating Nevada as the “Delaware of the West” can lead to headaches down the road, especially if you’re doing business in Nevada.
What are the key differences between Nevada and Delaware corporate law?
One of the first distinctions between Delaware and Nevada is what their corporate code is called. In Delaware, it’s the General Corporation Law. Nevada is not so easy, for them, it’s the Nevada Revised Statute with chapters and subchapters, often referred to as the NRS plus the corresponding chapters.
Beyond the name, there are several other differences that litigators and business owners should be aware of.
Directors and officers: fiduciary duties and the business judgment rule
Fiduciary duties in Nevada are codified in statutes and so is the business judgment rule. In fact, the business judgment rule is codified as a legal presumption in the same statute, which is NRS 78.138. In Nevada, as a matter of law, directors and officers are presumed to act in good faith, on an informed basis, with the interests of the corporation at the forefront. In performing their duties, directors and officers can rely on financial statements, financial data presented by directors, officers, and others who are reasonably believed to be reliable and competent.
In Nevada, another distinguishing factor is that it is a constituency jurisdiction. In exercising their powers, directors and officers may—but are not required to—consider the effect of a decision on several constituencies in addition to the stockholders. That would include the corporation’s employees, suppliers, creditors, long- and short-term interests of the corporation and its stockholders. Just to underscore this, the NRS specifically states that directors and officers are not required to consider the effects of a proposed corporate action upon any constituent as a dominant factor, so they can weigh those factors as they see fit. In Nevada, it’s not always about maximizing stockholder value.
Under Nevada law, the limitations on personal liability are applied both to directors and officers and neither a director nor an officer is individually liable to the corporation, its stockholders, or to creditors for damages for a failure to act unless it is proven that their act constituted a breach of their fiduciary duties and the breach involved either intentional misconduct, fraud, or a knowing violation of law.
Also, unlike in Delaware, the Nevada statutes do not expressly preclude a corporation from limiting liability for a director’s breach of the duty of loyalty or for any transaction from which a director derived an improper personal benefit.
As it relates to the distribution to stockholders, the Nevada law is a little different since Delaware focuses more on surplus and net profits. Nevada provides that no distribution may be made if, after giving it effect, the corporation wouldn’t be able to pay its debts as they come due in the usual course of business, or total assets would be less than total liabilities, plus whatever would be necessary to satisfy the preferential rights of preferred stockholders. So, there’s an insolvency test and a balance sheet test. Directors can consider financial statements that are reasonable in the circumstances and other factors in determining whether they pass those tests but those tests need to be passed.
Fiduciary duties in the change-of-control context
Something else to be aware of is that even in the change-of-control context or a potential change of control, which would include a defensive posture situation, the business judgment rule applies and the fiduciary duties are the same. There is no heightened standard. The directors have the same fiduciary duties and are entitled to the same presumption of the business judgment rule.
There is one exception that’s very narrow and is laid out with specificity in the statute. There is a precondition to the application of the presumption of the business judgment rule if the directors or officers take action to impede the ability of stockholders to vote for or remove directors. The statute then goes on to say, “Here’s what we don’t mean by impeding stockholders.” For example, the time of the meeting and vote, and a poison pill do not count as impeding.
As a result, the general rule is that even in the change-of-control situation, including a sale of the company, or hostile takeover, the baseline rule of business judgment rule applies. There is no heightened standard or precondition to the application of the business judgment rule.
Stockholders: voting and inspection rights
Stakeholder voting and inspection rights are another area where Nevada and Delaware often diverge. Specifically with regards to election rights, there are a few things to note:
- Director election: In Nevada, directors are allowed to buy a plurality of votes unless you provide otherwise in your articles or bylaws. This is less common, but you can have more than a plurality of votes cast. Additionally, the NRS permits classification of boards and staggered boards. In Nevada, it’s four classes as opposed to Delaware’s three.
- Removal of directors: Removal of directors in Nevada is a little different then Delaware and other states. In Nevada, it takes two-thirds of the voting power of the issued now-standing stock entitled to vote to remove a director from office. Nevada law also does not make a distinction between removal for cause or removal without cause.
- Stockholder meetings: Unless the articles or bylaws provide for a different proportion of the voting power, a quorum or majority of the voting power is required. That includes those who are present in person or by proxy, and that’s regardless of whether proxy has authority to vote on all matters.
- Voting standards: The default voting standard for stockholder action in Nevada, except again in the election of directors, which is a plurality, is more votes cast in favor of the action or the proposal than votes cast in opposition.
Inspection is another distinction with Delaware, as stockholder inspection rights under Nevada law are more limited than in Delaware. There are two statutes to be aware of, one relating to governing documents and stock ledgers, and the other to books and records.
- Governing documents: In Nevada, a stockholder of record for at least six months before the demand, holding at least five percent of the outstanding shares or with written authorized by the holders of five percent, may inspect articles and all amendments, bylaws and all amendments, and the stock ledger or duplicate stock ledger that shows limited information, such as names, places of residence, and number of shares.
- Books and records rule: In Nevada, a stockholder who owns at least 15% of the issued and outstanding shares or has been authorized by 15% can inspect books of account and financial records, make copies, and audit them. As in Delaware, that request can be denied to any stockholder who doesn’t furnish an affidavit that says the request is for a purpose related to stockholder duties.
- However, these requirements do not apply to a corporation that furnishes detailed annual financial statements or has filed during the last 12 months all reports required under Section 13 or Section 15 via the Securities Exchange Act of 1934. So, if you’re a public company, these requirements don’t apply to you.
Anti-takeover statutes
There are some key distinctions between anti-takeover statutes in Delaware and Nevada. Nevada has a control share law. Unlike Delaware, Nevada law is modeled after the Indiana statute, which puts limitations on voting rights for certain stockholders who make public market acquisitions of shares over certain thresholds, such as a one-fifth or one-third majority. The statutes very rarely apply, however, because there are a number of hurdles to applying the statues including the need for 200 record stockholders, requiring 100 or more to have a Nevada address, and then the requirement of doing business in Nevada directly or through an affiliate corporation.
Those three hurdles funnel down the potential of a takeover to a small group of companies. If you do find yourself in a takeover scenario, you can opt out of the statutes in your articles or bylaws, or with respect to a particular stockholder or a particular transaction.
Corporate litigation in Nevada
There are several nuances when it comes to corporate litigation. The first is the structure of the courts. Nevada judges are elected, including the Supreme Court. Any other distinction with Delaware is that Nevada does permit jury trials in corporate law cases. Until recently, Nevada had no appellate court but now has a Court of Appeals, in addition to the Supreme Court.
District courts can hear corporate law cases in Nevada, but there are business courts in both Washoe County (Reno) and Clark County (Las Vegas), and there’s statutory procedure for transferring cases between counties to get your case in front of the business court judge.
Another thing to note is, there’s not a lot of Nevada-specific case law. There are very few Nevada Supreme Court cases directly interpreting the different statutes highlighted. As a result, it’s important you always look at the statutes first and use that as your primary reference.
With the lack of Nevada-specific case law, many practitioners who come from out of state think you can just apply other states’ precedents and corporate case law here. For example, while Delaware case law may be persuasive in the absence of Nevada statutes and precedent on an issue of corporate law, it doesn’t take the place of clear guidance from Nevada courts and statutes. So, if Nevada statutes directly address an issue or Nevada case law does, Delaware case law isn’t going to apply.
Overall, the most important thing to remember is—do not assume that Delaware law controls a Nevada entity. In some instances, that can be moderately problematic. In other cases, it can result in personal liability for your directors, or mean your deal is prohibited for four years—representing a profound impact. It can even impact how deals are negotiated and how boards of directors conduct their affairs, make decisions, and proceed with the company’s business. So, when in doubt, call or look it up. Don’t assume that Delaware is the rule of the road.
CSC can help you do business in any of the 50 states, including Nevada or Delaware. Learn more about all of our business solutions here.
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