Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 8 MIN READ

Nevada's business court, three years in

The Eighth Judicial District has spent the last three years trying to become somewhere a Delaware-style case comes to die, with uneven results

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 6 sections
  1. What EDCR 1.61 actually does
  2. The statute the court is applying: NRS 78.138
  3. What three years of docket has produced
  4. The private-equity use case
  5. Who this actually changes the math for
  6. Sources

evada's Business Court, the specialty division of the Eighth Judicial District Court in Clark County, is coming up on three years under the rule that rewrote its docket. The question the reorganization was designed to answer, whether Nevada can be somewhere a serious entity-governance case lands on purpose rather than by accident, is beginning to have a partial answer.

It is still Delaware's country. But the gap is narrower than it was in 2016, and a handful of Nevada business court rulings are now cited outside the state.

What EDCR 1.61 actually does

The mechanics sit in the Rules of Practice for the Eighth Judicial District Court, specifically Rule 1.61 on the "Assignment of business matters." The rule defines a business matter as any case where the primary claims or issues are governed by NRS Chapters 78 through 92A or by comparable statutes from other jurisdictions, without regard to the amount in controversy. That is the Nevada corporation code (Chapter 78), the LLC act (Chapter 86), the partnership chapters (87, 87A, 88, 88A), the statutory trust code (Chapter 88A), and the merger and conversions regime (Chapter 92A). The rule also reaches UCC claims, business torts, stock and asset purchase disputes, commercial real estate, and franchise relationships.

The rule was reshaped in 2015, effective September 21 of that year, alongside a companion change to EDCR 1.33 and Administrative Order 15-11, which together updated how business matters are reassigned and calendared among the business court judges. The practical effect was to consolidate the kinds of cases that had been arriving in the business court by opt-in or by ad hoc designation and make the assignment more automatic, closer to Delaware Chancery's jurisdictional claim over equity cases.

There are five business court judges at present: Nancy L. Allf, Mark R. Denton, Susan H. Johnson, Joanna S. Kishner, and Timothy C. Williams. Cases are assigned to them by rotation rather than by party selection. Discovery disputes stay with the assigned judge rather than being sent to a discovery commissioner, which is one of the operating differences most commonly cited by practitioners as speeding up the docket.

The business court charges a filing supplement on top of the ordinary civil case fee. Litigants pay more to be there; in exchange they get a specialist judge, a faster motion calendar, and a written opinion if the matter goes to merits. The supplement discourages the stray consumer dispute from using the rule as a venue trick, which was one of the early complaints about the pre-2015 version.

The statute the court is applying: NRS 78.138

The substantive law a Nevada business court judge is applying looks familiar until it doesn't. NRS 78.138 codifies the fiduciary duties of directors and officers, the business judgment rule, and the standard for individual liability. It is not Delaware's judge-made common law; it is a statute that the legislature rewrites every few sessions and that Carson City has been steadily narrowing in directors' favor since the early 2000s.

Subsection 3 of NRS 78.138 sets the presumption. Directors and officers, in deciding matters of business, are presumed to act in good faith, on an informed basis, and with a view to the interests of the corporation. Subsection 7 controls when that presumption may be overcome for the purpose of imposing individual liability. A director or officer is not individually liable to the corporation, its stockholders, or its creditors for any act or omission in that capacity unless the presumption has been rebutted and the breach involved intentional misconduct, fraud, or a knowing violation of law.

That language does real work. Delaware's analogous standard under 8 Del. C. § 102(b)(7) permits exculpation from duty-of-care claims but does not insulate loyalty or good-faith breaches; Delaware plaintiffs can plead gross negligence and survive a motion to dismiss in some configurations. NRS 78.138(7) pushes the floor higher. Gross negligence is not enough. Without pleaded facts suggesting intentional misconduct, fraud, or a knowing violation, a Nevada plaintiff is in trouble before discovery.

The Nevada Supreme Court has read the statute consistently in this direction. Shoen v. SAC Holding Corp., 137 P.3d 1171 (Nev. 2006), held that directors and officers face personal liability for a duty-of- loyalty breach only where the breach involves intentional misconduct, fraud, or a knowing violation of law, tracking the statutory text. In re Amerco Derivative Litigation, 252 P.3d 681 (Nev. 2011), extended the analysis to the demand-futility context, requiring particularized pleading of facts that raise a reasonable doubt as to the directors' independence or their entitlement to the business judgment presumption. Both opinions are core reading for Nevada corporate defense practice and both are what the business court judges are now applying under EDCR 1.61.

Carson City's direction of travel is legible: make Nevada an attractive domicile for directors and officers on the merits, not just on tax. The commerce tax that came online in 2016 ended the simplest version of Nevada's pitch. What NRS 78.138 offers in its place is substantive: an entity-law defendant in Nevada can lose on the facts, but the path to loss at the pleading stage is narrower than in Delaware.

What three years of docket has produced

The Business Court Division has not yet generated a body of opinions comparable to Chancery's output. That is not only about court capacity. Chancery is a court of equity with four hundred years of English borrowing behind it, a specialized bar that practices nowhere else, and roughly 1.3 million entities on its state's rolls to supply the caseload. The Delaware Division of Corporations reported 216,005 new formations in 2018 and $1.16 billion in net entity-tax revenue. Nevada's entity-formation numbers are perhaps a tenth of that on a generous reading of the Secretary of State's filings data.

What the Nevada docket has produced, though, is a small run of governance rulings that read like Chancery opinions and that practitioners have begun to cite. The highest-profile recent example is the Wynn Resorts derivative litigation before Judge Timothy C. Williams. On September 6, 2018, the court denied the defendants' motion to dismiss the amended complaint, holding that the lead plaintiffs had pleaded sufficient particularized facts to support demand futility against the majority of the Wynn Resorts board. The court found the allegations sufficient to plead that the board had actual knowledge of serious allegations that the CEO had violated the law and had failed to act. That ruling, applying NRS 78.138 and Nevada's demand-futility framework, was one of the first times a shareholder derivative suit survived demand futility in this country on a sexual-harassment-oversight theory. The opinion is now being read alongside Delaware's Caremark line for reasons Chancery judges did not write.

The Wynn ruling is the exception, not the rule, and that is the point. Most of the business court docket is private-equity deal disputes, closely held entity fights, LLC dissociation cases, and UCC Article 9 collateral disputes. The 2015 rule change pushed that kind of matter onto a track where the judge already understands it. Practitioners report resolution times measured in quarters rather than years, and a merits decision at the end rather than a remand for a jury that would never have been empaneled.

The private-equity use case

The reason a private-equity sponsor ever considered a Nevada holding company was seldom about Nevada courts. It was about the NRS 78.138 standard and the absence of a state corporate income tax. Three years into the expanded business court, the court piece is starting to earn some of its own weight.

Sponsors structuring funds that are going to hold a lot of Nevada operating property, real estate developments, hospitality assets, gaming-adjacent businesses, have begun to keep the top-of-structure entity in Delaware and the Nevada-situs operating subs in Nevada with confidence that an operating-entity dispute will be heard by a judge who has seen one before. That division of labor is not novel; it is how sophisticated Delaware and New York pairings have been built for decades. Nevada now occupies a third slot in that triangle for a narrow set of industries.

The limits are real. Nevada does not have the appellate bench specialization Delaware does; an appeal from a business court judge goes to the Nevada Supreme Court, which decides tax, criminal, family, and civil matters on the same docket. There is no Nevada equivalent of Chancery's written-opinion tradition in every matter of consequence. Many business court rulings remain on the docket without a published opinion, which means they do not become citable law in the way a Chancery bench ruling often does.

Who this actually changes the math for

If you are forming a new venture-backed startup in 2019 and your counsel tells you to incorporate in Delaware, your counsel is still right. Institutional investors will ask for it. The Chancery bench is still the bench that has seen your deal before. Fund documents assume Delaware. None of this has moved.

What has moved is the calculus for a Nevada-situs operating business whose disputes are most likely to be with Nevada counterparties, Nevada landlords, Nevada creditors, or Nevada co-owners. The case for forming a Nevada corporation or LLC in that fact pattern now includes a real answer to the "what court decides this if it breaks" question. Three years ago the honest answer was a rotating civil docket in front of a judge who might be hearing a personal-injury case the same afternoon. EDCR 1.61 closes that gap.

The tort-defense angle is where NRS 78.138 keeps earning attention outside the state. Executives sitting on boards of Nevada entities, whether those entities are operating companies or holding vehicles, are getting a defense standard that forces a plaintiff to plead intentional misconduct, fraud, or knowing violation. A handful of reinsurance structures, captive insurance vehicles, and family-office holding companies have moved their top-hat entities to Nevada for that reason alone. The business court has not created that migration; it has made it more credible by providing a specialist tribunal to defend the bargain.

Three years is the right horizon to ask whether a judicial experiment is working, and by that horizon Nevada's business court is working for the narrow set of parties it was designed to serve. It has not displaced Delaware and nothing the legislature or the Eighth JDC can do will cause it to. What it has done is give Nevada a venue that can take a governance case seriously, which is a precondition for the substantive statute to mean anything. If the next three years produce more Wynn-sized written rulings, the gap narrows further. If they produce mostly unpublished bench rulings on closely held-entity fights, Nevada stays where it is: second-tier, usable, and improving at a pace Carson City can live with.

Sources

Keep reading

More from the journal.