Opinion ID: 2345086
Heading Depth: 2
Heading Rank: 1

Heading: The Sources of Corporate Directors' Duties

Text: Section 2-401(a) states that [t]he business and affairs of a corporation shall be managed under the direction of a board of directors. § 2-401(a). In undertaking those managerial decisions, directors and officers owe the duty of care contained in § 2-405.1(a) [13] to the corporation and its shareholders. Mona v. Mona Elec. Group, Inc., 176 Md.App. 672, 695-96, 934 A.2d 450, 463 (2007). To fulfill this duty of care, directors must perform their managerial acts in good faith, in a manner they believe reasonably to be in the best interest of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. § 2-405.1(a). The Court of Special Appeals here found that § 2-405.1(a) is the sole source of directorial duties. Petitioners seek to refute this conclusion and argue that the only duties referred to in § 2-405.1(a) are those that involve the management of the business and affairs of the corporation, matters in which the corporation has an interest, such as the decision whether a corporation should be sold. Those duties, they concede, must be performed in the best interests of the corporation and are enforceable only by the corporation. Beyond and pre-existing § 2-405.1(a), however, lie additional common law duties (referred to by Petitioners as Shareholder duties) that are triggered once a threshold decision to sell the corporation has been made and which concern only matters personal to the shareholders. Those duties allegedly arise from the Board's undertaking to negotiate the price that shareholders will receive for their shares in a cash-out acquisition of ownership of the corporation, and include fiduciary duties of candor and maximization of the consideration offered for the shares. On this point, we agree with Petitioners and hold that directors of Maryland corporations owe fiduciary duties of candor and maximization of shareholder value to their shareholders beyond those enumerated in § 2-405.1(a), at least in the context of negotiating the amount shareholders will receive in a cash-out merger transaction. It long has been established, by cases decided both prior to and subsequent to the Legislature's enactment of the duty of care for corporate directors contained in § 2-405.1(a), that directors of Maryland corporations stand in a fiduciary relationship to the corporations that they manage and the shareholders of those corporations, a relationship that imposes on directors duties of care, loyalty, and good faith. Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co., 16 Md. 456, 507 (1860); Booth v. Robinson, 55 Md. 419, 436-37 (1881); Storetrax.com, Inc. v. Gurland, 397 Md. 37, 53, 915 A.2d 991, 1000 (2007); Mona, 176 Md.App. at 695, 934 A.2d at 463. We have noted that the confidence reposed in them, and the position they occupy towards the corporation and its stockholders, require a strict and faithful discharge of duty, and they are not allowed to derive from their position, either directly or indirectly, any profit or advantage whatever, except it be with the full knowledge and concurrence of the company, represented by others than themselves. Booth, 55 Md. at 437; Coffman v. Maryland Publ'g Co., 167 Md. 275, 289, 173 A. 248, 254 (1934) (noting that officers and directors stand in a fiduciary relationship both to the corporation and to the stockholders, and may not under any circumstances use the power intrusted to them to promote their personal interests at the expense of the stockholders). We have found also that [i]t is clear that officers and directors of a corporation stand in a sufficiently confidential relation to the corporation's stockholders to impose a duty upon them to reveal all facts material to the corporate transactions. Parish v. Maryland & Virginia Milk Producers Ass'n, 250 Md. 24, 74, 242 A.2d 512, 539 (1968). These fiduciary duties are not intermittent or occasional, but instead are the constant compass by which all director actions for the corporation and interactions with its shareholders must be guided. Storetrax, 397 Md. at 54, 915 A.2d at 1001 (quoting Malone v. Brincat, 722 A.2d 5, 10 (Del.1998)). [14] It is without question that § 2-405.1(a) governs the duty of care owed by directors when they undertake managerial decisions on behalf of the corporation. When directors undertake to negotiate a price that shareholders will receive in the context of a cash-out merger transaction, however, they assume a different role than solely managing the business and affairs of the corporation. Duties concerning the management of the corporation's affairs change after the decision is made to sell the corporation. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del.1986) (noting that, once sale became inevitable, [t]he directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company). Beyond that point, in negotiating a share price that shareholders will receive in a cash-out merger, directors act as fiduciaries on behalf of the shareholders. See Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 48-49 (Del.1994) (noting that once directors decide to sell control of a corporation, they have an obligation to search for the best value reasonably available to the stockholders). As a result of the confidence and trust reposed in them during the price negotiation, their ability to affect significantly the financial interests of the shareholders, and the inherent conflict of interest that arises between directors and shareholders in any change-of-control situation, the common law imposes on those directors duties to maximize shareholder value and make full disclosure of all material facts concerning the merger to the shareholders. See Bennett v. Propp, 187 A.2d 405, 409 (Del.1962). Based on the well-established principle that statutes are not presumed to make alterations in the common law other than as may be declared expressly, we disagree with the Court of Special Appeals's and Board Respondents' contentions that § 2-405.1(a) supersedes or supplants all recognized common law duties that pre-existed the adoption of the statute in 1976. See Walzer v. Osborne, 395 Md. 563, 573-74, 911 A.2d 427, 433 (2006); Davis v. Slater, 383 Md. 599, 615-16, 861 A.2d 78, 87 (2004); Romm v. Flax, 340 Md. 690, 698, 668 A.2d 1, 4-5 (1995). We read § 2-405.1(a) as codifying the duty of care owed by directors when acting in their managerial capacities, rather than as a replacement of all previously recognized common law fiduciary duties of directors owed to the corporation and its shareholders. As such, we hold that § 2-405.1(a) does not provide the sole source of directorial duties, and that other, common law fiduciary duties of directors remain in place and may be triggered by the occurrence of appropriate events. This view is shared in an opinion authored by the Maryland Attorney General in 1997. See 62 Op. Atty Gen. Md. 804 (Md.1977). There, the Attorney General contended that the statutory standard of care contained in § 2-405.1(a) imposes separate and distinct obligations upon corporate officers and directors from other common law duties, such as the duty to refrain from usurping a corporate opportunity. Id. at 812. In that opinion, cited favorably by the Court of Special Appeals in cases prior to the present litigation, see Indep. Distribs., Inc. v. Katz, 99 Md.App. 441, 461, 637 A.2d 886, 895 (1994), the Attorney General opined that when the Legislature enacted § 2-405.1(a), it did not intend to abrogate the fiduciary duty imposed upon a director or officer not to usurp a corporate opportunity. 62 Op. Atty Gen. Md. at 13-14. Although we deal here with directorial duties other than refraining from usurping corporate opportunity, the Attorney General's opinion suggests that, in enacting § 2-405.1(a), the General Assembly did not seek to occupy the entire field of directorial duties owed by corporate directors, but instead intended to codify the duty of care owed by directors in exercising their managerial duties. Our conclusion also is consistent with the Delaware Supreme Court's holding in Revlon. In that case, the Delaware Supreme Court held that, where it is clear that the board has determined that the corporation is for sale or sale is a foregone conclusion, the duty of the directors changed from the preservation of [the corporation] as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. Revlon, 506 A.2d at 182. The court noted that, at this point, the directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company. Id. Board Respondents contend that § 2-405.1(f), an amendment to the statute added in 1999 stating that [a]n act of a director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director, demonstrates the Maryland Legislature's intent to reject the reasoning of Revlon and the line of Delaware cases that follow it. As will be discussed infra, it is clear to us that the 1999 amendments to § 2-405.1 merely enhanced the protections and defense mechanisms that directors may employ against hostile takeover attempts. Revlon and the duties that it described are aimed at the duties involved in a situation where sale of the corporation is a foregone conclusion and the primary remaining interests are those of the shareholders in maximizing their share value in a sale. For that reason, coupled with the presumption regarding the effect of statutory enactments on the common law discussed infra, we conclude that § 2-405.1 does not supersede the common law duties long recognized in Maryland, including those characterized in Revlon, that, when faced with an inevitable or highly likely change-of-control situation, corporate directors owe their shareholders fiduciary duties of candor and maximization of shareholder value. Thus, we hold that the Court of Special Appeals erred in concluding that § 2-405.1(a) is the sole source of directorial duties for Maryland corporations and that that subsection supersedes and subsumes all pre-existing common law duties owed by corporate directors to their shareholders. Once the threshold decision to sell Laureate was made, Board Respondents owed fiduciary duties of candor and maximization of shareholder value to Petitioners, common law duties not encompassed or superseded by § 2-405.1(a).