NRS 78.138: Director Duties, Liability Shield, and Indemnification

NRS 78.138 is the Nevada statute that defines the fiduciary duties directors and officers owe their corporation, presumes their business decisions were made in good faith, and shields them from personal liability for damages unless a plaintiff clears a demanding three-part test. It governs how boards make decisions, what interests they can weigh, and when a lawsuit for money damages can actually reach them personally.¹

The Two Duties Every Nevada Director and Officer Owes

Under NRS 78.138(1), directors and officers of a Nevada corporation owe two fiduciary duties to the company itself. They must act in good faith with the corporation’s interests in mind, and they must exercise the care a reasonably careful person in the same role would use under similar circumstances.¹ The first is about loyalty and honest intentions. The second is about diligence in reaching a decision.

The statute judges process, not outcome. A director who gathers relevant information, consults advisers, and deliberates carefully has satisfied the duty of care even if the deal loses money. A bad result is not a breach. A careless process can be.

The Business Judgment Presumption

NRS 78.138(3) gives corporate leaders one of the strongest presumptions in any state’s corporate law. Courts start from the assumption that directors and officers acted in good faith, on an informed basis, and with the corporation’s best interests in mind.¹ The burden sits on whoever is challenging the decision.

In practice, that means a lawsuit built on “the board made a bad call” will rarely get anywhere. A plaintiff needs specific facts showing the decision-makers were uninformed, conflicted, or acting in bad faith. Vague allegations of poor judgment do not clear the presumption, and courts will not step in to second-guess ordinary business choices.

When Directors Can Rely on Reports and Advisers

NRS 78.138(2) lets directors and officers lean on the work of others when making decisions. They can rely on financial statements, legal opinions, valuations, and other materials prepared by people they reasonably believe are competent on the subject.² The statute recognizes three sources:

Other directors, officers, or employees the director reasonably believes are reliable and competent on the matter.
Outside professionals such as lawyers, accountants, financial advisers, valuation experts, and investment bankers, so long as the matter falls within their professional expertise.
A board committee established under NRS 78.125, provided the relying director does not sit on that committee and the matter is within the committee’s authority.

The right to rely is not unconditional. A director who already knows facts that would make reliance unwarranted cannot use an outside opinion as cover. If you know the numbers in a financial report are wrong, pointing to the accountant who prepared it will not protect you.²

Interests Directors Are Allowed to Weigh

Nevada directors are not locked into maximizing short-term stock price. NRS 78.138(4) lets them consider a wide range of factors:

Employees, suppliers, creditors, and customers whose relationships depend on the corporation.
Effects on the state and national economy.
Community and societal impacts.
Both long-term and short-term corporate interests, including the possibility that those interests are best served by the corporation remaining independent rather than being acquired.
Stockholder interests, again including the possibility that stockholders benefit from continued independence.

That last point carries weight in the takeover setting. A board can conclude that rejecting an acquisition offer serves stockholders better in the long run, even when the bid exceeds current market price. NRS 78.138(5) reinforces this by not requiring directors to treat any single group’s interest as the dominant factor.¹ A board can prioritize employee retention over creditor preferences, or long-term growth over immediate dividends, without that choice becoming a basis for liability.

The Test for Personal Liability for Damages

NRS 78.138(7) makes it genuinely hard to reach a director or officer’s personal wallet. A plaintiff has to satisfy three separate requirements, and all three must be met:

Rebut the business judgment presumption from subsection 3 by showing the director did not act in good faith, on an informed basis, or with the corporation’s interests in view.
Prove that the act or failure to act was a breach of the fiduciary duties the statute establishes.
Show that the breach involved intentional misconduct, fraud, or a knowing violation of law.

The third requirement is where most claims collapse. A director who honestly believed a risky bet would pay off, or who signed off on a contract that later soured, is insulated from personal liability as long as they were not acting fraudulently or knowingly breaking the law. Negligence and errors in judgment do not clear the bar.¹

Where the Liability Shield Ends

The protection is powerful, but it has limits worth knowing before you rely on it.

Articles of Incorporation Can Raise the Bar

A corporation whose articles of incorporation were filed on or after October 1, 2003, may impose greater individual liability on directors and officers than the statutory default.¹ Read the articles before accepting a board seat. They can hold you to a stricter standard than NRS 78.138 alone would.

Damages, Not Every Remedy

Subsection 7 protects against personal liability “for any damages.” That wording is specific. Courts can still order equitable relief such as injunctions to block a harmful action, an accounting, or rescission of a transaction, even without proof of intentional misconduct. The high bar applies to making a director pay out of pocket, not to every form of judicial relief.

Unlawful Distributions Have Their Own Rules

NRS 78.300 creates a separate liability track. Directors who authorize an unlawful distribution are jointly and severally liable to the corporation for the lesser of the full distribution amount or the actual loss sustained, and that liability lasts three years from the violation. A director who dissented on the record at the time, or who was absent and promptly recorded a dissent upon learning of the action, avoids this liability.³

Statutory Carve-Outs

NRS 78.138(7) also cross-references other Nevada statutes that impose their own liability standards, including securities violations under NRS 90.660 and certain insurance and trust company obligations. Directors serving in those regulated industries should not assume the general shield covers everything.

Change-of-Control Situations

NRS 78.138(8) confirms the statute’s standards apply to all situations, including actual or potential changes in control, unless the articles of incorporation say otherwise.² The same fiduciary framework and the same liability shield govern board decisions during mergers, hostile bids, and proxy fights.

One companion provision adds a wrinkle. NRS 78.139 covers directors who resist a change in control in a way that interferes with stockholders’ ability to vote for or remove directors. In that scenario, directors must first show they had reasonable grounds to believe a threat to corporate policy existed and that their response was proportionate to the threat. Clearing that test earns them the good-faith presumption. Failing it strips the presumption and exposes the decision to closer scrutiny.² Boards defending against acquisition attempts need to document both the threat analysis and the reasoning behind their chosen response.

Indemnification and Advancement of Legal Costs

The statute’s liability shield is backed up by a framework for covering the legal costs directors and officers incur when they are sued.

NRS 78.751(1) requires a corporation to indemnify any director, officer, employee, or agent who wins their case, whether by a full verdict, a dismissed claim, or a favorable resolution on any individual issue within the case. The corporation covers reasonable expenses, including attorney’s fees. The statute uses “shall,” not “may.”²

When a director does not win outright, NRS 78.7502 lets the corporation indemnify them for expenses, judgments, fines, and settlements if either the person is not liable under NRS 78.138, or the person acted in good faith and reasonably believed their conduct was in the corporation’s best interests. In criminal matters, they also must have had no reasonable cause to believe the conduct was unlawful. In derivative suits, indemnification cannot cover amounts where a court has found the person liable to the corporation unless a judge determines it is still fair and reasonable to indemnify.⁴

Waiting until a case ends to be reimbursed can be ruinous. NRS 78.751(2) lets the corporation advance legal expenses as they are incurred, before any final judgment, so long as the director provides an undertaking to repay if a court later determines they were not entitled to indemnification. A corporation’s articles or bylaws can make this advancement mandatory.²

1
Nevada Legislature. Nevada Code 78.138 – Directors and Officers: Fiduciary Duties; Exercise of Powers; Presumptions and Considerations; Liability to Corporation, Stockholders and Creditors
2
Nevada Legislature. Nevada Revised Statutes Chapter 78 – Private Corporations
3
Nevada Legislature. Nevada Code 78.300 – Liability of Directors for Unlawful Distributions
4
Nevada Legislature. Nevada Revised Statutes 78.7502 – Discretionary and Mandatory Indemnification of Directors, Officers, Employees and Agents