Nevada’s trial-level business courts are not as heavily observed as the Delaware Court of Chancery. Our in-state ecosystem does lacks anything quite like The Chancery Daily. But we do have Our Nevada Judges which has a broader focus.

With that in mind, I wanted to highlight a very recent Nevada Business Court decision from Judge Gall that considers whether the business judgment rule applies in the limited liability company context.

Nevada limited liability companies are governed by Chapter 86 of the Nevada Revised Statutes. Unlike Chapter 78, which governs corporations, there is no statutory business judgment rule. So what does this mean for limited liability companies? Should their management get business judgment rule protection?

Judge Gall faced a dispute where one party argued that the corporation statute’s business judgment rule and exculpation provisions should apply and the other party argued that because the operating agreement did not specifically set out a business judgment rule, that there should be no business judgment rule.

The Court found that “by adopting fiduciary duties . . . the members incorporated the business judgment rule to assess whether they breached those duties.” After reviewing some literature on the subject, the Court reasoned that when fiduciary duties are in play, it:

makes no sense to incorporate a duty of care without applying the business judgment rule to determine whether that duty has been breached—at least not without leading to an absurd result. With the fiduciary standard in one hand but without the business judgment rule in the other, the fact finder is left to determine whether the complained of transaction could have gone better. This is what the business judgment rule is meant to stop; otherwise, business will slowly stop as disgruntled stockholders and members repeatedly ask the court to step in the place of business fiduciaries and second-guess decisions made by those who are better positioned to act on behalf of the company. 

The Court explained that despite the statutory focus and codification of the business judgment rule for corporations, “Nevada also recognizes the common law, and this court sees no reason why it should or would not do so for LLCs.”

Of course, the common law and the Nevada statute have some differences. The Court decided not to “read in an exculpation provision—as framed in statute—where the Operating Agreement makes no mention of exculpation absent fraud, intentional misconduct, or knowing violation of the law.”

Although would probably be better drafting for an LLC’s operating agreement to specify business judgment rule protection and clear exculpation provisions, Nevada courts may apply a business judgment rule whenever the operating agreement adopts fiduciary duties.

Critically, fiduciary duties are not the default for Nevada LLCs. The statute makes clear that managers owe an “implied contractual covenant of good faith and fair dealing” and whatever “duties, including, without limitation, fiduciary duties, if any, as are expressly prescribed by the articles of organization or the operating agreement.”