Let’s say you own common stock in a Nevada corporation. The corporation then amends its articles of incorporation to change its capital structure and change the amount of common stock and create blank check preferred stock. The corporation failed to comply with majority vote requirement for amendments. You then demand corrective action or you would sue. In response, the corporation conceded error and rescinded their actions. You then sue the corporation for $250,000 in attorney fees because due to your demand and the corrections by the corporation, the other shareholders received a substantial benefit. The corporation moved to dismiss because under Nevada law, the shareholder must file a lawsuit and secure a substantial benefit in order to be awarded attorney fees. The Court advises, yes, although you may have benefited the corporation, you have no case against the corporation.
This factual scenario arose in the Nevada Supreme Court decision of Charles Jesseph, et al v Digital Ally, Inc., 136 Nev. Adv. Op. 59 (September 17, 2020) and the Nevada Supreme Court affirmed the dismissal.
Nevada adheres to the American Rule, providing attorney fees may only be awarded when authorized by statute, rule, or agreement. Thomas v City of North Las Vegas, 122 Nev. 82, 90, 127 P.3d 1057,1063(2006)Id. There are exceptions to this rule, including when attorney fees are special damages. See Sandy Valley Associates v Sky Ranch Estates Owners Association, 117 Nev. 948, 960, 35 P.3d 964, 971 (2001) (emphasizing attorney fees as special damages, as with any other element of damages, must be pleaded under NCRP 9(g) and then proven at trial by competent evidence). But, generally parties must bear their own costs of litigation.
The “substantial benefit doctrine” is another exception to the American Rule. As to shareholder derivative actions, Nevada permits a successful shareholder plaintiff who confers a substantial benefit on all shareholders of the defendant corporation to recover attorney fees although there is no statute to permit the same. Thomas at 90-91, 127 P.3d at 1063; Johnson v US Department of Housing and Urban Dev., 939 F.2d 586, 590-91(8th Cir. 1991)(relied on in Thomas).
In the Jesseph case, the Nevada Supreme Court was asked to acknowledge an independent clam for attorney fees before litigation is filed. The Nevada Supreme Court conducted an analysis and concluded there is an independent claim for attorney fees but predicate litigation is necessary to obtain relief.
To recover an award of attorney fees under the Substantial Benefit Doctrine, a party must demonstrate (1) the class of beneficiaries is small and identifiable; (2) the benefit can be identified with accuracy; and (3) the costs can be shifted with accuracy or exactitude to those who benefit. Additionally, to qualify, the “prevailing party must show that the losing party has received a benefit from the litigation.” Jesseph, 136 Nev. Adv. Op., 59, p.7.
As a matter of first impression, Nevada adopted the “no suit, no fee” approach for these types of cases. In order to file a shareholder derivative lawsuit, the complaint must set out the efforts, or lack of effort, taken to secure action before filing suit. NRS 41.520(2) sets forth requirements for a shareholder suit to be filed to give the corporation the opportunity to correct mistakes. Jesseph, supra. The Nevada Supreme Court also reasoned permitting a claim for attorney fees without litigation encourages “strike suits” where shareholders demand certain actions and corporations settle to avoid attorney fees. The Nevada Supreme Court concluded that, where shareholders are being asked to share in paying attorney fees, it is not appropriate where they have not been before the court. So, as a matter of law, predicate litigation is required before you may recover attorney fees as a damages award.