Guzman v. Johnson: Business Judgment Rule Precludes Liability

The case of Guzman v. Johnson involved a shareholder lawsuit against corporate directors for alleged breaches of fiduciary duty in connection with a merger. The plaintiff, Lisa Guzman, filed a class-action lawsuit against the directors of RLJ Entertainment, Inc. (RLJE), as well as its controlling shareholder, AMC Networks, Inc., arguing that they failed to secure the best possible price for minority shareholders. The Supreme Court of Nevada affirmed the lower court’s dismissal of the case, holding that Guzman failed to rebut the business judgment rule under Nevada law.

Background and Legal Issues

In 2016, RLJE entered into an investment agreement with AMC Networks, which allowed AMC to loan RLJE $65 million and obtain controlling interest in the company. The agreement contained a "No-Shop Provision," preventing RLJE from seeking alternative acquisition proposals. In 2018, AMC proposed acquiring RLJE’s remaining shares for $4.25 per share, prompting RLJE’s board to form a special committee to negotiate the offer.

The special committee rejected AMC’s initial proposal, engaging in negotiations that resulted in an increased offer of $6.25 per share, which was ultimately accepted. RLJE shareholders, including AMC, approved the merger in October 2018.

Guzman sued RLJE’s board members and AMC, claiming that:

• The special committee was not truly independent and had a conflict of interest.
• The board members breached their fiduciary duty by not securing a better deal for minority shareholders.
• AMC improperly influenced the merger to its benefit at the expense of minority shareholders.

Court’s Analysis and Findings

The Nevada Supreme Court analyzed the case under Nevada’s business judgment rule, which presumes that corporate directors act in good faith, on an informed basis, and in the corporation’s best interests. The court found:

• Guzman failed to provide sufficient evidence to rebut this presumption and show intentional misconduct, fraud, or a knowing violation of the law, as required under Nevada Revised Statutes (NRS) 78.138(7).
• The special committee conducted arm’s-length negotiations and secured a price higher than AMC’s initial offer.
• Guzman’s claims relied on speculation rather than specific factual allegations that could support a breach of fiduciary duty.
• The court rejected Guzman’s argument that prior Nevada case law automatically shifted the burden to the defendants to prove the fairness of the transaction, holding that Nevada law now requires plaintiffs to affirmatively prove intentional wrongdoing.

Conclusion and Ruling

The Nevada Supreme Court upheld the dismissal of Guzman’s claims, ruling that she failed to overcome the business judgment rule’s protections. The court clarified that Nevada law requires plaintiffs challenging director decisions to prove intentional misconduct or fraud, not merely allege conflicts of interest or dissatisfaction with the transaction outcome.

Legal Guidance for Businesses

For businesses navigating corporate governance disputes, our team at Whitcomb, Selinsky, PC provides legal counsel on fiduciary duties, mergers, and shareholder litigation. We help businesses protect their interests while ensuring compliance with corporate laws.