1. Amendment to the Maryland General Corporation Law
2. The Standard of Conduct by the American Bar Association
3. Shenker v. Laureate Education, Inc.

The Maryland General Corporation Act was enacted in 1976 under Section 2-405.1(a). It states that a director of a Maryland corporation is required to act in good faith, what he or she believes to be the best interests of the company, and with the care that someone in a similar position would follow.

The 2016 amendment also included these additional changes:

  • The establishment of rules regarding jurisdiction when internal claims are to be adjudicated.
  • REIT or capital stock in a Maryland corporation cannot impose liability on a stockholder involved in an internal claim.
  • Provision for a director of a corporation or trustee of a REIT has consented to the corporation's resident agent to serve as the agent for service regarding civil actions.
  • Provides for the articles of revival to be signed by any two officers.
  • Limits the conversion of a non-stock corporation to that of a foreign corporation when there is no authority by the foreign corporation to issue stock.

With these revisions the Maryland General Corporation Law, the directors were provided with a clear picture of what their fiduciary obligations to stockholders entailed.

Amendment to the Maryland General Corporation Law

In 2009, the Court of Appeals in Maryland determined that the Maryland General Corporation Law was the beginning of the fiduciary obligations of directors of Maryland corporations, not the end.

Governor Hogan of Maryland signed House Bill 354 (chapter 171) into law on April 26, 2016, which took effect in October 2016. The amendment to the Maryland General Corporation Law was put into place to clarify the obligations of a director of a Maryland corporation. In their role as the director, he or she is only obligated to comply with the statutory standard of conduct, not unspecified common law duties.

Additional amendments pertain to the duties owed by the trustees of Maryland REITs. These would be addressing those formed pursuant to the Maryland REIT law. When the 2016 amendment went into effect, it helped resolve the questions of what the duties of corporate directors were. It clears the air of some of the confusion caused by the Shenker cases.

The Standard of Conduct by the American Bar Association

Director duties were historically governed by common law fiduciary duties and the director's conduct. When the standard of conduct by the American Bar Association (ABA) was adopted in the Model Business Corporation Act, codified director duties were elected by the General Assembly that replaced the common law fiduciary duties.

Shenker v. Laureate Education, Inc.

Section 2-405.1(c) (formerly subsection (a)) was clarified and remains pretty much intact. With the addition of subsection (i), it provides that Section 2-405.1 will be the sole source of duties of a director to the stockholders of the corporation or the corporation itself. With this clarification in place, the confusion created by Shenker v. Laureate and its progeny was/is resolved.

The Court of Appeals in regard to Shenker held that the Maryland law recognizes that there are undefined common law duties that govern a director's actions along with the standard of conduct as laid out in Section 2-405.1. While the court determined the statute applies to managerial decisions, other unspecified common law duties would apply to non-managerial decisions.

In Shenker v. Laureate Education, Inc., the Maryland court held that the law would continue to uphold common law fiduciary obligations that went beyond the Maryland General Corporation Law but defining what the common law fiduciary duties encompassed was not made clear. It was also not explained what scenarios would trigger undefined common law fiduciary duties.

Since the court did not define the specific fiduciary duties of corporate directors or when duties were triggered, the Shenker decision resulted in a significant amount of uncertainty being introduced into Maryland corporate law. To preserve the court's holding of Shenker, a stockholder now has a direct remedy when the director's duties are breached under certain circumstances. This eliminated former subsection (g) of Section 2-405.1, which was part of the 1999 amendment to the statute.

With former subsection (g) limiting the enforcement of the standard of conduct for those acting in the right of the corporation, stockholders are allowed to sue directly or derivatively if there is a breach of the standard of conduct.

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