Nevada Supreme Court Holds Statutory Business Judgment Rule Applies to All Claims Against Corporate Officers and Directors: State’s Highest Court Refuses to Find Exception to Application of Statute in Favor of “Inherent Fairness” Where Target Board Agrees to Merger With a Controlling Stockholder

Sullivan & Cromwell LLP - April 22, 2021
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In its recent decision in Guzman v. Johnson, the Nevada Supreme Court held that Nevada’s statutory business judgment rule must be applied even when the challenged transaction has a controlling stockholder and there are allegations of self-dealing. Despite Plaintiff’s claim that the buyer was the target’s controlling stockholder and that the target board was interested in the transaction, the court rejected Plaintiff’s argument that the court should apply the “inherent fairness” standard. “Inherent fairness,” the default standard for such transactions in Delaware and most jurisdictions, shifts the burden to the Defendants to show that the deal was the product of fair process and fair dealing. Instead, the Court held that Nevada’s statutory business judgment rule admits no exceptions, and that plaintiffs are therefore required to (1) rebut the presumption that the board acted in good faith, which under Nevada law generally requires a showing of self-interest, and (2) show that there was a breach of fiduciary duty that involved either “intentional misconduct, fraud, or a knowing violation of law.” Applying that statutory standard, the Court held that Plaintiff pleaded no intentional dereliction of duty and affirmed dismissal of Plaintiff’s claims against both Defendant directors and the controlling stockholder.

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