This Sullivan & Cromwell memo reviews a recent Nevada Supreme Court decision holding that the default standard of review for a transaction involving a controlling stockholder isn’t entire fairness, but the business judgment rule. Here’s the intro:
In a March 25, 2021 decision in Guzman v. Johnson, the Supreme Court of Nevada affirmed the District Court’s dismissal of class action claims concerning AMC Networks, Inc.’s (“AMC”) acquisition of its subsidiary, RLJ Entertainment Inc. (“RLJE”). Plaintiff claimed that, since AMC was RLJE’s controlling stockholder and RLJE directors were interested parties, Plaintiff had successfully rebutted the business judgment rule and shifted the burden of proof to the Defendant directors to show that the deal was a product of both fair dealing and fair price.
The Supreme Court disagreed, ruling instead that Nevada’s statutory business judgment rule admits no exceptions, and thus the standards for corporate director and officer liability are the same regardless of the circumstances or the parties involved in the transaction. As codified in Nevada, the business judgment rule presumes directors and officers acted in good faith and on an informed basis, and allows for director or officer liability only when the plaintiff affirmatively rebuts the business judgment presumption and demonstrates that the fiduciary breach involved intentional misconduct, fraud, or a knowing violation of law.
Unlike the strict, judge-made “entire fairness” test applicable to interested transactions in Delaware and a number of other states, the statutory business judgment standard in Nevada provides the “sole avenue to hold directors and officers individually liable for damages arising from official conduct.” Applying that standard, the Court found that Plaintiff pleaded no intentional dereliction of duty and affirmed dismissal of Plaintiff’s claims against RLJE directors.
Nevada’s business judgment rule is set forth in its corporate statute, and that appeared to have presented an impenetrable barrier to claims that the standard should be abrogated when dealing with a transaction involving a controlling shareholder. Many states – but not Delaware – have also embedded deferential versions of the business judgment rule in their own corporate statutes, and this decision may be a helpful precedent for directors of companies organized in those states as well.
– John Jenkins