US court says no distinction between managerial and non-managerial duties of directors
On 31 August 2023 the Supreme Court of Maryland held (overruling a previous decision) that there is no distinction between the ‘managerial’ and ‘non-managerial’ duties of directors of a Maryland corporation and said that the “sole source of the duties of the director is found in section 2-401.1 of the Maryland General Corporation Law (MGCL) which places the powers of the corporation in the hands of the directors.
The case involved a preliminary dispute regarding the framing of the causes of action between family members who were shareholders in a corporation where one of them alleged oppressive conduct depriving him of a managerial position and unfair distribution of profits through bonuses to other shareholders rather than dividends due to all shareholders.
The MGCL provides that “all business and affairs of a corporation, whether or not in the ordinary course, shall be managed by or under the direction of a board of directors” and “all powers of the corporation may be exercised by or under the authority of the board of directors except as conferred on or reserved to the stockholders by law or by the charter or by-laws of the corporation.” Directors are obliged to act in good faith, in the best interests of the company and with the care that an ordinary prudent person in a like position would use in similar circumstances. Shareholders participate in the economic success of the corporation but dividends are authorised by the board of directors. Directors may, under certain circumstances, be held personally liable to the corporation for improperly authorising dividends in violation of the standard care set forth. That does not entitle a shareholder to a direct action as opposed to a derivative action. The shareholders claim for compensatory damages is therefore against the company as the party responsible for making the payments. A direct action is only appropriate where the board has breached a duty owed directly to the shareholder and the shareholder suffers an injury that is separate and distinct from any injury suffered either directly or indirectly by the corporation or indirectly by the shareholder because of injury to the corporation.
A commercial company is a legal entity conceived in the mind and legitimated by statute “for the avowed purpose of achieving a maximum profit with a minimum exposure to liability”. Corporations are legal entities separate and apart from their owners and they are owned, but not managed, by its shareholders.
Similarly, section 66 of the South African Companies Act of 2008 provides that the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company to the extent that the Act or memorandum of incorporation provides. In this respect, the South African Companies Act of 2008 deliberately did not follow the shareholder-centred nature of British company law so that the board’s authority is derived from statute not granted by shareholders.
[Eastland Food Corporation v Mekhaya No. 37, September term, 2022]