Business Judgment Rule in Maryland

The Appellate Court of Maryland recently issued an unpublished opinion in the case of Special Situations Fund III QP, L.P. v. Travel Ctrs. of Am. Inc.[1], in which it analyzed the application of the Business Judgement Rule when a corporate merger is challenged. Unlike in Delaware, where the Business Judgment Rule and the duties of corporate directors have been developed solely by judge-made case law, the Business Judgment Rule in Maryland has been codified by the Legislature at Md. Corps. & Assoc. Code § 2-405.1.[2]

Directors of Maryland corporations are required to act:

(1) In good faith;

(2) In a manner the director reasonably believes to be in the best interests of the corporation; and

(3) With the care that an ordinarily prudent person in a like position would use under similar circumstances.[3]

An act by a director relating to or affecting the acquisition or a potential acquisition of control of the corporation, or any other transaction or potential transaction involving the corporation, may not be held to any higher duty or greater scrutiny than is applied through the statutory Business Judgment Rule.[4]

A director acting in accordance with the standard of conduct set forth in § 2-405.1 has immunity from liability arising from the performance of the director’s duties.[5]  The statute also creates a presumption that a director acted in accordance with the Business Judgment Rule.[6]

When a party brings a lawsuit to challenge actions of a board of directors that fall within the board’s business judgment, the claimant must plead specific facts in the complaint sufficient to overcome the Business Judgment Rule.[7]  This can be accomplished in either of two ways:

(1) by pleading facts showing fraud or bad faith,[8] or

(2) by pleading facts showing that a director has a conflict of interest relating to the board’s decision, i.e., that the director, or someone close to the director, has a personal financial interest in the outcome of the board’s decision.[9]

If a plaintiff pursues the second route and pleads facts sufficient to show a financial conflict of interest, then the burden will shift to the board of directors to show that its action was just and proper, and that no advantage was taken of the stockholders.[10]  In other words, when pursuing the second path, a claimant must plead facts that demonstrate fraud, bad faith, unconscionable conduct, or a conflict of interest – but this can be overcome by the board by showing that the directors with an interest in a contemplated transaction disclosed their conflicts beforehand, or demonstrate that the transactions implicated by those conflicts are fair and reasonable to the corporation.[11] If the board or the stockholders were properly informed of a conflict of interest beforehand, then the contract or transaction may still be authorized, approved, or ratified by a majority of the disinterested board members or stockholders.[12]

[1] 2025 Md. App. LEXIS 1006 (Nov. 25, 2025).

[2] Special Situations Fund, p. 40, n. 3; Hanks, James J., Maryland Corporation Law, § 6.09 6-78 (2d ed. 2020, Supp. 2024).

[3] Md. Corps. & Assoc. Code § 2-405.1(c).

[4] Id., § 2-405.1(h).

[5] Special Situations Fund, p. 41.

[6] Id.

[7] Id., p. 42.

[8] Cherington Condominium v. Kenney, 254 Md. App. 261, 279 (2022); Special Situations Fund, p. 42.

[9] Kenney, 254 Md. App. at 279; Special Situations Fund, p. 43.

[10] Kenney, 254 Md. App. at 279-80; Special Situations Fund, p. 43.

[11] Kenney, 254 Md. App. at 285; Special Situations Fund, p. 61.

[12] Kenney, 254 Md. App. at 283; Sullivan v. Easco Corp., 656 F. Supp. 531, 535 (D. Md. 1987); Special Situations Fund, p. 61.