Previously, I covered a Nevada Business Court decision applying a common law business judgment rule to Nevada limited liability companies with fiduciary duties. That decision is now being challenged under Nevada’s mandamus procedure. To aid the Nevada Supreme Court in considering the issue, I along with other Nevada business law professors and Nevada business lawyers, filed a request to submit an amicus brief on the importance of the business judgment rule.

The brief contends that Nevada should apply a common law business judgment rule to breach of fiduciary duty claims for Nevada LLCs. We explained that the common law business judgment rule has been a part of American common law for a long time and reviewed the benefits it provides. Most business law professors and business lawyers know the reasons–all standard canon. The business judgment rule lets management take business risks without needing to worry that they will suffer personal liability simply because some business risk does not pan out. Removing it would make managers timid and afraid to do anything different than their peers. Insurance companies would struggle to write policies and price risk if any ordinary business decision could result in liability. We also explained that without the business judgment rule standing behind it, demand futility standards would lose much of their meaning. If you don’t have the business judgment rule, there would often be a substantial risk of liability.

A common law business judgment rule for Nevada LLCs also makes sense in light of Nevada’s clear policy preferences for other business entities. In the corporate context, Nevada enjoys a protective, statutorily-codified business judgment rule. Nevada’s policy has been to limit value-destroying litigation and not police every foot-fault. Applying a common law business judgment rule to LLCs with fiduciary duties maintains consistency with that policy.

At the least, applying the business judgment rule also conforms to existing default expectations. Most persons imposing fiduciary duties in an LLC’s operating agreement likely assumed that ordinary business decisions would be insulated from challenge by a business judgment rule. It’s hard to imagine that anyone would want to manage an LLC and operate a business if every business decision could be second-guessed. Consider the issue for an LLC that operates a restaurant. If you could get sued for changing the menu and losing customers or making any other decision that resulted in a loss, you probably would not agree to fiduciary duties–or to keep running the restaurant.

For Nevada LLCs with fiduciary duties that now operate under the standard assumption that ordinary business decisions enjoy business judgment rule protection, a decision unsettling those expectations would reallocate power within existing LLCs. Minority members would suddenly have more litigation rights. Some might use them immediately and take to court. Others might demand concessions or extract payments in exchange for agreeing to modify operating agreements. It could be a real mess.

Nevada doesn’t have a particularly large body of caselaw, but Judge Gall’s decision was not the first to apply a business judgment rule in the LLC context. Although the decision hadn’t come to mind when I first covered the case, Judge Denton did it over a decade before in Schreck v. Babcock, No. A-09-593059-B, 2013 Nev. Dist. LEXIS 412, *7 (Nev. D. Ct. Aug. 19,2013) (“Nevada’s business judgment rule is codified at NRS 78.138(7). The application of this statute to limited liability companies is not unusual.”). And a Nevada federal court had recognized that many corporate law protections, including the business judgment rule, carry over to the LLC context. Montgomery v. eTreppid Techs., LLC, 548 F. Supp. 2d 1175, 1183 (D. Nev. 2008) (“Federal and state courts have consistently applied the law of corporations to LLCs, including for the purposes of piercing the corporate veil, the ‘alter ego’ doctrine, determining standing, the ‘business judgment rule,’ and derivative actions”). I expect that there are many other Nevada business court decisions doing the same that someone could probably dig out with enough time to comb through old business court decisions involving LLCs. (This might become a project for a research assistant sometime soon.)

Many thanks to Nancy Rapoport, Lori Johnson, Michael Roitman, Jennifer Braster, Sam Castor, J. Robert Smith, Nick Shook, Glenn Gavin, Omar Nagy, Mark Billion, and John Netto for joining in their personal capacities. Thanks as well to the Nevada business lawyers and Nevada in-house counsel who read and commented on the brief but were not able to join because of firm policies and tight time table. Special thanks to James M. Jimmerson for serving as counsel.