Does a Nevada board of directors face certain liability for engaging in (otherwise lawful) corporate acts not expressly permitted by the bylaws or articles of incorporation?
Businesses incorporated in Nevada are subject to a number of laws and regulations, as well as the limitations and procedures set forth in their own corporate bylaws and articles of incorporation. When a board of directors opts to act (or not act) under a certain set of circumstances, it must make certain its actions are congruent with both Nevada law and its governing documents – or it could face shareholder liability.
In some circumstances, however, a board of directors needs to act or react in a way that is not necessarily mentioned or supported by the language of the governing documents. Assuming the act is otherwise lawful, this can still present a problem as shareholders technically could raise a derivative action against the board for engaging in corporate acts in violation of the governing documents.
Fortunately, the Nevada legislature recent enacted a set of laws upon which a board can rely in order to ratify, or validate, an otherwise noncompliant act. The ratification laws were modeled somewhat after the recent ratification laws enacted in Delaware,a leading corporate law state. However, citing the Delaware version’s exaggerated complexity, Nevada lawmakers opted to enact a clearer version that will provide guidance to boards as they embark on an act which could potentially result in costly liability.
Under Section 1 of SB 446, which will take effect on October 1, 2015, boards may retroactively ratify or validate a corporate act that would otherwise either not be in compliance or “purportedly” not be in compliance with “Chapter 78 [of the Nevada Revised Statutes] or the articles of incorporation or bylaws in effect at the time of such corporate act.”
If you are considering a corporate act or have questions about how to interpret a certain provision of your company’s bylaws or articles of incorporation, please contact the Stone Law Offices, serving affluent clients throughout Las Vegas and surrounding areas of Nevada. Craig Stone can be reached at: 877.800.3424.