Corporately, Las Vegas and Nevada again seek a race to the bottom

race to the bottom

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In many ways the economic well-being of Las Vegas and Nevada is based on a race to the bottom of human decency. Nearly a century ago, it was the enactment of laws allowing open gambling, quick divorces and even quicker marriages that jump-started what had been a dying 19th century financial model based on little more than mining and ranching. Suddenly, folks had a reason to come here and cough up some of their money with little in the way of inhibition.

The addition 50 years ago of legal houses of prostitution in a number of Nevada counties (not containing Las Vegas or Reno) added to that perception. The lack of a state income or corporation tax insured that the public education system would remain underfunded and dreadful, a scenario welcomed generations ago by political leaders (although efforts are being made to fix that now). This tax structure is much to the benefit of well-heeled retirees or even moderate retirees with grown kids fleeing states with good school systems–paid by state income taxes, be they high or low.

Here at the New to Las Vegas world headquarters I’m watching the latest phase of Nevada’s ability to profit from the foibles of others. Over the past several decades the Silver State has been changing its corporation laws to make it easier for officers and board directors of public corporations to avoid accountability by shareholders (perhaps you with a retirement account) for many of their actions.

The target of all this gun play is the tiny state of Delaware, wedged along the East Coast among New Jersey, Pennsylvania and Maryland. The entire state is less than one-seventh the land size of Nevada’s rural Nye County. But some 1.6 million corporations call Delaware home, dwarfing its human population of 1 million. A single building alone in Wilmington, Delaware’s largest city, contains the registered agent for more than 300,000 corporations. That’s more than all the corporations in all of Nevada, whose human population is 3.2 million. Delaware does not levy a income tax on corporations that do no business in the state–which is almost all of them.

Delaware wrested away the dubious title of Mother of Trusts from my native New Jersey a century ago after then-Gov.-and-later-President Woodrow Wilson cracked down on corporate antitrust abuses, and the First State cried, “Hey, we’re just next door!” Delaware now gets about 28% of its state budget from incorporation fees and related charges. That’s not too far off from the 33% that Nevada reaps directly from the casino and entertainment industry, its raison d’être.

Here’s why any of this is an issue. A corporation has to be officially formed and registered somewhere to allow shareholders to enjoy “limited liability,” the notion granted by law  that their personal assets beyond their investment are protected in the event a corporation fails. In the U.S. that somewhere means a state. That doesn’t have to be the state in which the corporation mainly does business and for large corporations rarely is. But the laws of the state of incorporation often decide matters of grave importance, like what directors and officers can get away with at the expense of shareholders. Delaware laws and courts historically have been solicitous of shareholder rights.

A newly distributed paper by Michal Barzuza, the Nicholas E. Chimicles Research Professor of Business Law and Regulation at the University of Virginia Law School, details how Nevada has been going about its corporate business. The title is “Nevada v. Delaware: The New Market for Corporate Law.”  She doesn’t mince many words.

Nevada law is significantly different from Delaware, first and foremost in how it eliminates liability for most of the cases of breach of the duty of loyalty. Self-interested, conflicted transactions in Nevada are not subject to meaningful judicial scrutiny. Nevada law poses significant hurdles to bringing derivative lawsuits. … On top of that, Nevada makes it much more difficult for shareholders to access board minutes, cutting off a crucial pathway to litigation in the first place. These lax constraints … impair shareholder litigation rights significantly, and facilitate self-dealing transactions, poor corporate governance practices, and managerial misconduct.

It was way back in 1987 when the Nevada legislature dramatically changed its corporation laws by saying that corporations could choose that its officers and directors could not be sued for breach of duty of loyalty to the corporation or its shareholders, and that would stick. This is called exculpation. Those running a corporation heretofore could only be sued for intentional misconduct, fraud or knowing violation of law–something of a high bar. The Nevada legislative history made it pretty clear that the idea was to attract business from Delaware, which was more protective of shareholders.

In 1997, Nevada added a law that in effect allowed publicly traded Nevada corporation to refuse requests by shareholders to inspect corporate books and records, contrary to practice elsewhere. Two years later, Nevada again changed its corporation code to give managers and directors more protection when trying to fend off an unwanted tender offer.

In 1981, Nevada modified its law again to make exculpation the default option. By 2017, another law made the explicit point that Nevada courts were not to follow precedents from courts in other jurisdictions–like Delaware–when it came to the fiduciary duties and liability of directors and officers. A string of Nevada court decisions, including one involving Wynn Resorts founder Steve Wynn, generally has made it hard for aggrieved shareholders to sustain their lawsuits in Nevada claiming looting and self-dealing by corporate biggies. In Nevada, unlike Delaware and other places, it’s not always about maximizing shareholder value.

Nevada’s relatively hands-off approach to insuring that corporations do right by their shareholders has drawn a lot of recent notice. Three Delaware-incorporated public companies, Cannae Holdings, Fidelity National Financial and TripAdvisor, have announced plans to reincorporate in Nevada. TripAdvisor won a lawsuit in Delaware allowing it to move, but hasn’t done so yet, because the opinion held out the possibility that a mere move to Nevada might constitute breach of fiduciary duty on the part of its board members and officers. Nevada filed a court brief in that case supporting TripAdvisor’s right to move without repercussions.

Tycoon Elon Musk moved the incorporation of his privately owned renamed social media company X from Delaware to Nevada. But after a Delaware judge in January nixed a $55 billion pay package for him from his publicly traded Tesla on grounds it wasn’t fair to shareholders, Musk started bad-mouthing Delaware and talking up Nevada. (I should mention that earlier this year Reuters won a Pulitzer Price for a withering series about Musk’s business practices that included his dubious dealings in Las Vegas.) Last month he won shareholder approval for a $46 billion pay package–and approval to re-incorporate in Texas, another jurisdiction not seen as terribly protective of shareholder rights. Other states in the race to the bottom hunt include Wyoming and South Dakota. Meanwhile, law firms in Las Vegas tout the supposed big advantages of moving a corporation to the Silver State.

Nevada has started business-oriented courts in Las Vegas and Reno in an effort to compete with Delaware’s well-established Court of Chancery, which only hears business cases. But the overall un-sophistication of Nevada judges is a recurrent theme heard locally when lawyers here are able to voice their opinions anonymously. For more than a decade, Las Vegas Law Blog, without question the liveliest and most entertaining online forum of any kind in Nevada and widely read in legal circles, allows attorneys to do just that in an open forum where practitioners hiding their identities regularly pummel the intellectual deficiencies of their elected bench-sitters.

In June, Nevada Secretary of State Francisco V. Aguilar, whose office registers corporations, co-wrote an opinion article for the editorial page of the The Wall Street Journal–no great friend of shareholder rights–talking up Nevada as a great place to do corporate business over Delaware. He walked a tricky path. Aguilar all but admitted that Nevada courts were nowhere near as experienced or predictable as Delaware’s when it came to sophisticated business matters. This matters to corporations who want predictability. Aguilar even felt compelled to write, “This doesn’t mean that the West will be too wild.” Some of Steve Wynn’s investors might beg to differ.

In the latest legislative session, lawmakers last year approved a law making it easier for Nevada corporations to block shareholders who have a right to inspect corporate records from making their findings known. The race to the bottom here continues unabated.

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