Loan terms

Are you looking for stricter loan conditions? Nevada may be able to help | Allen Matkins

Nevada corporate law is quite protective for directors and officers. Following the decision of the Supreme Court of Delaware in Smith vs. Van Gorkum, 488 A.2d 858 (1985), the Nevada Legislature amended the statute to permit the exoneration of directors and officers. In 2001, the Nevada legislature took a big step forward by making exoneration automatic. Nov. Statistics. 2001, c. 601, § 3. Three authors (Zhihong Chen, Ningzhong Li, and Jianghua Shen) have hypothesized that the 2001 change in Nevada exacerbates conflicts between corporate borrowers and their lenders. They conclude that lenders reacted to this increased stress by imposing more unfavorable loan conditions, such as higher interest rates and more covenants. Their article, to appear in the Journal of Law and Economicsis available here.

Although it is beyond my ability to question their methodology, I do question their central premise that “everything has changed, completely changed”1 in 2001. Prior to the 2001 amendments, Nevada law permitted corporations to adhere to a low liability regime by passing a charter amendment exonerating directors and officers. Presumably, many companies have taken advantage of this option. Further, I disagree with the authors’ statement that “prior to the June 2001 legislative change, Nevada corporate law was similar to Delaware corporate law”. Prior to 2001, Nevada law permitted the exoneration of officers as well as directors. This remains a significant difference between Nevada and Delaware. The old Nevada law also did not include Delaware’s exception for breaches of duty of loyalty.

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1.William Butler Yeats, Easter 1916.