The Appellate Court of Maryland Clarifies State Corporate Law in Mekhaya v. Eastland Food Corporation
The Appellate Court of Maryland, in its recent decision in Mekhaya v. Eastland Food Corporation, brought Maryland law in line with the corporate laws of other states, expanding shareholders’ rights. This case changed Maryland business law in several respects. Corporate shareholders now may assert some types of claims directly on their own behalf, even without a written agreement. The court in this decision also limited the “business judgment rule,” and addressed “de facto” dividends.
Clarification of Shareholders’ Rights
The Mekhaya decision is significant because it broadens shareholders’ rights to assert claims against a corporation. Prior to this decision, when addressing a dispute among shareholders, Maryland courts looked to the shareholders’ written agreement or their employment agreements to determine what rights are provided to the shareholder under the agreement. A shareholder was then able to assert a “shareholder derivative claim” on behalf of the corporation. If successful, such a suit would result in the corporation recovering monetary damages if the suit is successful (with the shareholder indirectly receiving benefit, in the role as a shareholder). In the Mekhaya case, however, the shareholders did not have a written shareholder agreement, so the court instead considered what it believed to be the reasonable expectations of the shareholders to determine if the particular shareholder asserting the claim had direct standing to sue the corporation, and to recover damages personally. As a result of this decision, shareholders in Maryland corporations can bring direct claims against a corporation in some situations, and potentially recover damages in their personal capacity. In the Mekhaya case, the shareholder was permitted to assert direct claims of shareholder oppression, breach of fiduciary duty, and unjust enrichment.
Limiting the Business Judgment Rule
The court’s opinion also held the business judgment rule inapplicable to direct claims of shareholders, if the shareholder can show a breach of fiduciary duty owed to the shareholder, and that the shareholder was personally harmed, even without showing an injury to the corporation. The court remanded the case for a determination as to whether the shareholder’s expectations were objectively reasonable.
“De Facto” Dividends
The court also acknowledged ambiguity in the states Corporations and Associations Code, and concluded that some distributions to shareholders may be considered “de facto” dividends, even if the payments are disguised as a large bonus, and not labeled as dividends. The Mekhaya court concluded that a payment to a shareholder might constitute a dividend, even when included as part of a shareholder’s salary as a corporate employee or director.
Lewicky, O’Connor, Hunt & Meiser can answer questions and provide legal guidance to businesses about their legal rights and obligations. We help companies prepare shareholder agreements to avoid future issues of legal interpretation. Please contact us at firstname.lastname@example.org or (410) 489-1996.
A New Paid Family and Medical Leave Insurance Program Takes Effect in Maryland
A new law taking effect in Maryland this year requires many employers in the state to offer paid family and medical leave benefits to their employees. The Maryland General Assembly passed the Time to Care Act (SB 275) on April 9, 2022, but the law takes effect in 2023. This makes Maryland the tenth state in the nation to establish a paid family and medical leave insurance program. This law applies to employers with at least 15 employees, where at least one employee works in Maryland. It does not apply to businesses in which the owner is the sole employee, such as a single-member limited liability company, sole proprietorship, or a C or S corporation. Self-employed individuals may opt into the program. Employers and employees will begin making contributions to the program starting October 1, 2023, with payouts to employees beginning January 1, 2025. The Maryland Department of Labor (“MDOL”) will be responsible for administering and enforcing the program and will determine the rates of contributions by employers and employees by June 1, 2023.
The Maryland Time to Care Act provides up to twelve weeks of wage-replacement benefits from $50 to $1,000 per week to employees who have worked 680 hours in the last twelve months prior to the time the employee is requesting leave. The leave can be continuous or intermittent. The same employee may have up to an additional twelve weeks if the employee has a newborn and a serious health condition preventing the employee from performing the functions of the employee’s job.
Beginning in 2025, employees will be able to submit a claim for benefits and qualify for leave for any of the following reasons:
- Care for a newborn child, newly adopted child, foster care placement, or kinship care with the employee during the first year after the birth, adoption, or placement
- Care for a family member with a serious health condition
- Care for the employee’s own serious health condition
- Care for a service member with a serious health condition resulting from military service who is the employee’s next of kin
- If the employee has to attend to a “qualifying exigency” due to a family member’s military deployment
For employers, the Maryland Time to Care Act means additional payroll withholding and payout that businesses will want to factor into their future planning. Additional compliance issues may arise as well, as the law requires employers to provide proper notice to employees about the benefits, and specific payments into the program and eventually to employees requesting leave. Under the new law, the MDOL may investigate alleged violations of the law. Failure of employers to contribute to the program or to pay their employees may result in fines, back wages to the employee, court-assessed punitive damages, and payment of reasonable attorney’s fees.
Notice will be required by both employers and employees. Employees are required to notify their employer with written notice of their intention to take leave at least 30 days prior to taking the leave if the leave is foreseeable. If the leave is not foreseeable, then an employee needs to give their employer notice as soon as practicable and comply with the employer’s procedural requirements for requesting and reporting the leave. Employers are required to provide notice of the law’s rights to employees, and an employer must provide notice of eligibility to an employee within five business days of the employee’s request for leave.
As further guidance is released, Lewicky, O’Connor, Hunt & Meiser will be able to answer questions and provide legal guidance to businesses about their legal rights and obligations under the Maryland Time to Care Act. We can also assist those looking to form a new business to ensure legal compliance. Please contact us at email@example.com or (410) 489-1996.