Shenker v. Laureate Education, Inc., (2009 Md. LEXIS 837, November 12, 2009) provides an interesting example of when the duties of a board shift from the corporation to the shareholders. Most of the recent case law regarding the duties owed by boards of directors is derived from the Delaware business corporation act. This case is an interpretation of the Maryland business corporation act which is very similar to the Model Business Corporation Act. Therefore helpful in interpreting the Iowa Business Corporation Act. Due to the sparsity of Iowa case law interpreting Chapter 490, we can use the help.
In Shenker the Board chair proposed that he would acquire the company by means of a cash out merger. The Board established a committee of independent directors with the power to retain independent advisors to assess the offer. After rejecting an initial offer and some further jousting between the offerors and several large institutional shareholders, the final offer was found to be fair by the independent advisors, Merrill Lynch and Morgan Stanley. The special committee and the Board approved the offer.
A shareholder lawsuit ensued but was dismissed because it was filed as a direct action, not as a derivative action. The lower courts held that the Board's statutory fiduciary duty ran only to the company and not the shareholders; any claims for breach of fiduciary duties must be brought derivatively.
The Maryland Court of Appeals disagreed. With the Delaware decisions in Revlon and Paramount Communications as a back drop, the court held that there are common law shareholder duties that are triggered once the decision to sell the corporation has been made. The statutory duty of care regards the Board's duties in managing the corporation and is not exclusive of other duties. In the case of a cash-out merger the Board assumes responsibilities to the shareholders and assume the duties of candor and maximizing the consideration paid for the stock.
Important in the court's decision, as it points out, is the fact that because success in a derivative claim would benefit the corporation and hence all of the shareholders, the majority shareholders who were the alleged transgressors would have benefited as well. This apparently didn't sit well with the court.
Of course in Iowa we have 490.202(2)(d) which, if properly reflected in the articles of incorporation precludes monetary liability on the part of directors for any of their actions or inactions unless the conduct (1) resulted in the directors receiving an improper financial benefit, (2) was an intentional infliction of harm, (3) resulted in an improper distribution or (4) was an intentional violation of criminal law. Unless this section of the Code is found to be limited to the duty of care or only to statutory duties, Shenker will have little purchase in Iowa.