The Maryland General Assembly enacted Senate Bill 148 and identical House Bill 354 (together, the “2016 Legislation”), which amend the Maryland General Corporations Act (the “MGCL “) and the Maryland REIT Law (the “MRL”) to clarify the duties of directors of Maryland corporations and trustees of Maryland real estate investment trusts in light of the Maryland Court of Appeals decision (our highest state court) in Shenker v Laureate Education, Inc.., 411 Md. 317, 983 A.2d 408 (2009). Governor Hogan signed into law the 2016 legislation yesterday.
STANDARD OF LEGAL CONDUCT
Maryland has had a statutory standard of conduct for directors of Maryland corporations since 1976, when MGCL Section 2-405.1(a) was enacted, based almost verbatim on Model Business Corporation Section 8.30(a). Act as then in force. . Under 2-405.1(a), each director is required to act (1) in good faith, (2) in a manner that he reasonably believes to be in the best interests of the corporation (and not shareholders or any group of shareholders) and (3) with the care that an ordinarily prudent person in a similar position would use in similar circumstances.*
With respect to the duties of the trustees of a Maryland real estate investment trust established under the MRL (a “Maryland REIT”), the MRL has for several years referred to subsections (d) through (g), but not to subsections (a) through (c) of MGCL Section 2-405.1, casting doubt on whether the duties of trustees of a Maryland REIT were the same as those of directors of a a Maryland corporation. However, we have long believed that a Maryland court would look to the MGCL to interpret the duties of trustees of a Maryland REIT.
THE SHENKER DECISION
In shenker, a case involving a “squeeze-out merger”, the Court of Appeals ruled that when a decision to sell the company was made, the directors of a Maryland corporation owed shareholders common law obligations of ” candor and good faith efforts to maximize shareholder value.” the shenker The court also held that a claim for breach of these common law obligations may be pursued in a direct shareholder suit, even though MGCL Section 2-405.1(g) prohibits a direct claim by a shareholder for breach of directors’ duties. Other language of the court in shenker was also troubling, including the notion that directors have two types of duties: the day-to-day management duties contained in the MGCL and another set of undefined common law duties in the context of an extraordinary matter. Nothing in the MGCL indicates that the standard of legal conduct applies only to current affairs. In fact, MGCL Section 2-405.1(d) specifically addresses directors’ duties in the context of extraordinary actions such as a change in corporate control. However, without basis in the MGCL, the Shenker court limited the application of 2-405.1(d) to hostile takeovers, excluding a negotiated acquisition of control as in Shenker.
2016 LEGISLATION
Although plaintiffs’ attempts to broaden the application of shenker in subsequent litigation were unsuccessful and Shenker generally did not affect the advice we provide to directors or trustees regarding their duties in the event of a change of control or otherwise, the 2016 legislation provides additional clarity regarding the duties of directors and trustees under Maryland law. The legislation confirms that a director must act in accordance with the legal standard of conduct under section 2-405.1(a) of the MGCL in all circumstances, both in day-to-day management activities and in extraordinary matters, such as a change of control. The legislation also confirms that the duties of directors are identical in unsolicited and solicited transactions.
In addition, the 2016 Act distinguishes between the “acts” and the “duties” of a director. Deeds are what a director does as a director, including as a member of a committee of the board of directors, such as overseeing the management of a company’s affairs and affairs and making decisions. Duties are standard for a director’s performance of these acts: (a) in good faith, (b) acting in a manner reasonably considered by the director to be in the best interests of the company, and (c ) the care of a prudent person in a similar position in similar circumstances. It is important to note that these duties apply to each director individually, director by director, and not collectively to the entire board of directors.
The 2016 legislation further amends the MGCL by removing Section 2-405.1(g), the statutory prohibition against directing shareholder claims for violation of the statutory standard of conduct. We believe that this statutory ban on direct claims contributed to the court’s decision in shenker to invoke the duties of common law directors with a right to bring a direct action in the event of a breach of these duties. The result of this amendment should be that a shareholder’s right to sue directly or indirectly for breach of the legal standard of conduct will be determined under applicable case law, which distinguishes between harm to the company (derivative claim available) and shareholder harm (derivative claim not available), as was the case prior to the addition of 2-405.1(g) in 1999.
The 2016 legislation (a) also retains the statutory presumption in section 2-405.1 that any act of a director of a company complies with the three-part statutory standard and (b) extends the non- liability of article 2-405.1 to provide that “an act of a director of a company concerning or affecting [i] an acquisition or possible takeover of the company or [ii] any other transaction or potential transaction involving the company may not be subject to greater duty or scrutiny than that which applies to any other act of a director. »
Finally, the 2016 legislation amends the MRL to expand the reference to all subsections of Section 2-405.1 of the MGCL to clarify that a trustee of a Maryland REIT is generally subject to the same obligations as a director of a Maryland corporation.
