Traditionally, in Maryland, as in many states, the fiduciary obligations of corporate directors run to the corporation and its shareholders as a class, rather than to individual shareholders. A recent opinion of the Maryland Court of Appeals, however, has partially rejected that long-standing rule. In Shenker v. Laureate Education, Inc., 2009 Md. LEXIS 837 (Court of Appeals, November 12, 2009), click here, Maryland's highest court held that, in a cash-out merger situation, where a decision to sell a company has been made by its Board of Directors, those directors owe a common law fiduciary duty to maximize the value to be received from the sale by the shareholders. Moreover, individual shareholders can sue those directors for breach of that duty.

The plaintiffs in Shenker were shareholders in a successful publicly held Maryland company, Laureate Education, Inc. During 2006 and 2007, several of the directors of LEI and some private equity investors purchased LEI through a cash-out merger transaction. In a cash-out transaction, sometimes called a freeze-out, the dominant shareholder(s) generally incorporates a company to gain ownership of the target company through a cash transaction. The inside directors are, thus, able to pressure other shareholders to sell their shares to the acquiring company for cash. Shenker and other shareholders accused the interested directors of failing to maximize the price per share in the offer and misleading the shareholders with regard to the tender offer. The trial court and Court of Special Appeals dismissed the action finding that the shareholders could not maintain a direct action against the directors under Maryland law. Under their reasoning, such a claim could only be maintained derivatively. They also held that the directors owed no fiduciary duty to the shareholders, but only to the company.

The Court of Appeals rejected that analysis. It found that, while Section 2-405.1 of the Corporations and Associations Article of the Maryland Code established the duties of directors while engaged in their managerial duties for the corporation, other common law duties coexisted with those statutory duties. Specifically, it found that the directors owed the shareholders the common law duties of candor and good faith efforts to maximize shareholder value and that a shareholder alleging that directors had breached those duties could maintain a direct suit against those directors.

Relying upon the Delaware Supreme Court's decision in Revlon, Inc. v. MacAndrews & Forbes Holding, Inc., 506 A.2d 173, 182 (Del. 1986), the Court of Appeals held that those common law duties are triggered once the Board has determined to sell the corporation. And the common law duties are personal to the shareholders. In a sale situation, the directors act as fiduciaries for the shareholders and owe a duty to maximize the price per share that is realized. In addition, according to the court, the directors owe a duty to make full disclosure to the shareholders of all facts related to the transaction.

The Maryland court's holding is the opposite of the rule in Virginia. In Willard v. Moneta Building Supply, Inc., 515 S.E.2d 277 (Va. 1999), the Virginia Supreme Court expressly rejected the Revlon rule, holding that in a sale situation, a director is not required to maximize the sales price, but is only required to "act in accordance with 'his good faith business judgment of the best interests of the corporation.'" Id. at 284. Moreover, as the court found in Willard, in the absence of fraud or some other disqualification under Section 13.1-747 of the Code of Virginia, the directors, as majority shareholders, maintained the right to control the management of the corporation by voting their shares to approve the sale of the company. Id. at 288. Section 13.1-747, allows for the dissolution of a corporation where the directors are acting in a manner that is illegal, oppressive or fraudulent.