On October 1, 2016, an amendment to Maryland’s General Corporation Law (MGCL) went into effect that resolves what in recent years has become an open question in Maryland law: what are the duties of corporate directors?

The scope of the fiduciary duties owed by corporate directors is a topic Maryland’s General Assembly has addressed before. In 1976, Maryland adopted the MGCL, its version of the Model Business Corporation Act. The MGCL sought to codify the common law fiduciary duties that had traditionally governed the conduct of corporate directors to that point.

Then, in 2009, a Maryland Court of Appeals decision determined that the MGCL was only the beginning of the fiduciary obligations of directors in Maryland, not the end. In Shenker v. Laureate Education, Inc., 411 Md. 317 (Md. 2009), the Court held that Maryland law continued to recognize common law fiduciary obligations that went beyond those contained in § 2-405.1 of the MGCL, though the Court did not go so far as to define what all of those common law fiduciary duties were. Shenker, 411 Md. at 335–336. The Court also did not explain what factual scenarios might trigger these undefined, common law fiduciary duties.

Because it did not define what all of the specific fiduciary duties of corporate directors were or when these duties were triggered, the Shenker decision introduced considerable uncertainty into Maryland corporate law. Subsequent Court of Appeals decisions added little clarity and even muddied the waters further by looking to the legal standards of other states for guidance. For example, in Sutton v. Fedfirst Fin. Corp., 226 Md. App. 46, 85–86 (Md. 2015) the Court of Appeals, lacking Maryland authority on the question, looked to Delaware courts for assistance in deciding what factual scenarios might trigger fiduciary duties beyond those articulated in the MGCL in the context of a merger transaction.  

The 2016 amendment to the MGCL undoes some of the confusion caused the Shenker line of cases by clarifying that the only fiduciary duties owed by corporate directors are those listed in § 2-405.1. As amended, § 2-405.1(i) of the MGCL states:

This section: [i]s the sole source of duties of a director to the corporation or the stockholders of the corporation, whether or not a decision has been made to enter into an acquisition or a potential acquisition of control of the corporation or enter into any other transaction involving the corporation.

The MGCL makes it clear what these duties of a director are. Directors have a duty to act: “(1) In good faith; (2) In a manner the director reasonably believes to be in the best interests of the corporation; and (3) With the care that an ordinary prudent person in a like position would use under similar circumstances.” § 2-405.1(c).

In addition, the 2016 amendment to the MGCL makes the following notable changes:

• A provision of the MGCL (formerly § 2-405.1(g)) was removed so that stockholders may sue directors directly in certain circumstances for a breach of their fiduciary duties to stockholders, not just derivatively.
• For the purposes of the MGCL, § 2-405-1(a) now defines an “act” as including not just an overt action, but also “an omission, a failure to act, or a determination made not to act….” These changes make it clear that fiduciary duties may be breached by omissions or by determinations not to act as well as by overt acts.

Maryland’s revisions to the MGCL bring needed clarity to Maryland corporate law. With these revisions, directors have a clearer picture of their fiduciary obligations to stockholders. In addition, stockholders have additional statutory options to seek a remedy if those fiduciary obligations are breached.