Incorporate Nevada: Benefits To Officers and Directors

2007-03-08 10:33:40

( Business )



What are the advantages for directors and officers if they incorporate nevada as opposed to incorporate delaware?

The claims that have been made that there are five areas where Nevada law protects a certain act whereas under Delaware law, the officer or corporate director would be liable, are quite accurate.

Act or Omissions not done in good faith
In 2001 an amendment provided for the articles of incorporation in Nevada to contain a provision which meant that the office holder or director would not be held liable to the corporation or stockholders for a breach of fiduciary duty. However, this protection does not cover intentional fraud, misconduct or knowing violation of law.

With regard to this, if you incorporate nevada the environment is more officer and director friendly than if you incorporate in delaware. It means that if you incorporate nevada, by law, the directors and officers have limited liability. There are no longer some corporations where liability is limited and some not.

This is not the case in Delaware. If the articles of incorporation in Delaware don’t include limitation of liability, the personal liability of the directors is protected by the business judgement rule of no liability if the director acted in good faith and is responsible for “gross negligence”, he is personally liable (unless otherwise stated in the articles of incorporation). It does, however, treat knowing violations of law and intentional acts of misconduct differently.

Officers exempted from monetary damages
Under Nevada law officers as well as directors are included in the limitation of liability – one of six states to have this provision. So, because of changes to the corporate law in Nevada, you don’t need a statement limiting liability for either officers or directors.

Similar protection for officers in Delaware is nearly non-existent. Officers in Delaware, unlike directors, cannot rely on the business judgment rule. Delaware law provides very little or no protection for officers. Nevada law is superior in this respect.

Breach of duty of loyalty by directors
Nevada law protects directors from breaches of loyalty duty, whereas Delaware law does not. In Delaware the incorporation articles can protect the director from breach of care duty but not so breach of loyalty duty. A breach of loyalty is seen as being self-dealing or misuse of director’s office for personal gain.

Transactions concerning the director’s undisclosed personal benefit
This is related to duty of loyalty. In Delaware a director transaction can be made:
1) when full disclosure is made a majority of directors who are disinterested approve in good faith,
2) if disinterested shareholders approve after full disclosure,
3) if the transaction is fair and has been approved by the shareholders or directors.

The Nevada law is similar. This involves disclosed transactions.
For undisclosed transactions the two states differ.

Nevada’s directors are evidently protected when transactions involving undisclosed personal benefits are concerned – not the case under Delaware law.

In Delaware undisclosed personal benefits is a loyalty duty issue and under Delaware law, they are not protected.

Likewise the issue of director friendly indemnification written in law is in favour of Nevada with Delaware lagging behind.


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