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Corporate directors’ liability bill aims to clarify court-created confusion

ANNAPOLIS – Corporate-board directors who comply with the statutory obligations of good faith and related duties would be immune from liability in shareholder lawsuits following sales and acquisitions under pending legislation.

The bill would eliminate the confusion in corporate boardrooms created by a 2009 Maryland high-court ruling that directors have “common law” obligations to their shareholders beyond those specified by statute, said Sen. Brian J. Feldman, the measure’s sponsor.

In Shenker v. Laureate Education Inc., the Court of Appeals failed to specify just what the directors’ additional, “common law” duties are, making it difficult for them to know the extent of their legal obligations when their companies are bought or sold, Feldman told the Senate Judicial Proceedings Committee on Wednesday.

“Predictability is important” for directors, he said, adding that his measure would make the standards clear by limiting them to those specified in statute.

“Anybody in the state of Maryland acting as a director of a board will know what their conduct should be,” said Feldman, D-Montgomery.

The statutory standards require directors to act in “good faith,” in a manner they reasonably believe to be in the corporation’s best interests and “with the care that an ordinarily prudent person in a like would use under similar circumstances.” Directors are also entitled under the law to rely on the opinions of and data from lawyers, accountants and officers of the company they reasonably believe to be competent.

Directors do not act in good faith if they have any knowledge concerning the matter in question which would cause their reliance on the information and opinion to be unwarranted, the law states. Directors who act in accordance with the statutory standards of conduct have “no liability in any action” based on their actions.

Feldman’s measure, Senate Bill 148, follows recommendations from the Maryland State Bar Association’s Business Law Section’s Committee on Corporation Law.

Committee member Scott R. Wilson, who advises corporate boards, said SB 148 would remove the “unintentional chaos” the Court of Appeals created with its Shenker decision. Following that decision, corporate attorneys could not give directors “clear direction” regarding their legal obligations to the corporation and shareholders with regard to sales and acquisitions, said Wilson, a principal at Miles & Stockbridge PC in Baltimore.

Now the advice is simple, he added: “If you comply with the statutory standard of conduct, you have no liability. If you don’t, then of course you do.”

But Sen. H. Wayne Norman Jr., an attorney who has represented shareholders, said language in Feldman’s bill needs to be changed because it could be interpreted as giving directors immunity from liability in all cases.

“Directors have made really bad, self-serving decisions,” said Norman, R-Cecil and Harford, referring to some cases he has litigated.

And Sen. Robert G. Cassilly, R- Harford, said enactment of SB 148 would not be a cure-all for corporate directors, as the Court of Appeals could again rule that they owe duties to shareholders beyond those listed in statute.

SB 148 has been cross-filed in the House of Delegates as House Bill 354, with Del. Benjamin F. Kramer, D-Montgomery, serving as chief sponsor.