On April 26, 2016, Governor Hogan signed House Bill 354, which amends the Maryland General Corporation Law as it pertains to the duties of directors of Maryland corporations. The amended law states that the directors need only only with the statutory standard of conduct, not an unspecified common law fiduciary standard. The amendment is set to take effect October 1, 2016 and is important for both directors and stockholders to be aware of the changing requirements moving forward.
Under previous standards, a director of a Maryland corporation was required to act: in good faith, in a manner the director reasonably believes to be in the best interest of the corporation, and with the care that an ordinary prudent person in the same position under similar circumstances would use. The amendment to the Corporation Law establishes a codified sole source of duties required of a director as it pertains to the corporation and to the stockholders of the corporation.
The amendment also resolves the ambiguity that was established in Shenker v. Laureate Education, Inc., which stated that Maryland law recognized certain undefined common law fiduciary duties placed on a director beyond what was specifically provided for in Section 2-405.1 of the Maryland General Corporation Law. The decision in Shenker left the door open for what may be considered an “undefined common law fiduciary.”
With this amendment, the language and duties described in Section 2-405.1 is the sole source of a director’s duties under Maryland corporation law. However, the legislature did ensure that a stockholder’s rights to seek remedy for a director’s breach of duty would remain.
Previously, under Section 2-405.1(g), a stockholder’s remedy was limited to the standard of conduct to those acting by or in the right of the corporation. Now the section provides for a stockholder to obtain a direct remedy for a breach of of the director’s duties under certain circumstances. Going forward, a stockholder’s right to sue directly or derivatively for a breach of the standard of conduct will be subject to case law analyzing direct versus derivative stockholders’ claims. If the claim is determined to be direct, it will be subject to the statutory business judgment rule provided in 2-405.1(g).
Lastly, the amendment makes a change to the definition of “act.” Section 2-405.1(a) defines an “act” to include overt acts, omissions, failures to act and the making of a determination not to act. This change puts more responsibility on the director, being overly cautious and failing to act could potentially give a stockholder a reason to bring a claim against them.
Whether you are a director or a stockholder it is important to take a moment and review the amendments to the Maryland General Corporation Law that go into effect October 1, 2016. As a director it is important to know what your responsibilities are and as a stockholder it is vital to know what your rights are should the director act in a way that harms the corporation and in turn the stockholder.
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