A Maryland state court recently denied a motion to dismiss claims for breach of fiduciary duty asserted by preferred stockholders against the directors of a Maryland real estate investment trust following a merger. The decision may raise questions about how to balance potentially competing interests of preferred and common stockholders in M&A transactions under Maryland law. The decision also raises broader questions as to how Maryland courts may interpret statutory amendments adopted in 2016 that were intended to limit stockholder litigation M&A transactions.

Background

Aquino v. Schanzer was one of multiple stockholder lawsuits arising from the merger of Cedar Property Trust, Inc. (“Cedar”), a publicly traded Maryland corporation and real estate investment trust.[1] At the time of the transaction, Cedar had two series of preferred stock outstanding in addition to common stock. The Articles Supplementary for both series of preferred stock provided for preferred dividends, a liquidation preference, and a conversion right upon a “Change in Control,” but contained no mandatory put right for preferred stockholders.

The transaction proceeded in two phases. First, Cedar’s board of directors agreed to sell a portfolio of properties to a third party for approximately $940 million in cash. Second, the board agreed to a merger with Wheeler Real Estate Investment Trust, Inc. (“Wheeler”), with Cedar surviving as a wholly owned subsidiary of Wheeler. Although Cedar’s common stockholders ultimately received approximately $29 per share in cash, Cedar’s preferred stock remained outstanding and publicly listed. And although preferred stockholders continued to receive their preferred dividend, the shares’ value allegedly fell by two-thirds, prompting Wheeler to launch a program to repurchase the preferred stock at a substantial discount.

The Fourth Circuit’s Decision

Cedar preferred stockholders sued Cedar and its directors in the Maryland federal court asserting claims for breach of contract and breach of fiduciary duty against Cedar and its directors and tortious interference and aiding and abetting breaches of fiduciary duty against Wheeler.[2] The district court denied plaintiffs’ motion to preliminary enjoin the transactions, and later granted defendants’ motions to dismiss. 

The U.S. Court of Appeals for the Fourth Circuit affirmed. According to the Fourth Circuit, plaintiffs’ breach of contract argument failed because the acquisition did not constitute a “Change of Control” as defined in the Articles Supplementary. Rather, a “Change of Control” only occurred when both Cedar and the “acquiring or surviving corporation” lacked any publicly traded common stock, which was not the case because Wheeler common stock remained publicly traded. The Fourth Circuit also affirmed the dismissal of the fiduciary duty claims. Although stating that Cedar’s directors owed fiduciary duties to both common and preferred stockholders under Md. Code, Corps. & Ass’ns § 2-405.1, the court invoked longstanding Maryland and Delaware law holding that “when preferred stockholders invoke their preferential rights, officers and directors do not owe them any fiduciary duties at all, for those rights are purely contractual.”[3] And because the underlying contract and fiduciary duty claims failed, the tortious interference and aiding and abetting claims against Wheeler necessarily failed as well.[4]

The Aquino Ruling

Other Cedar preferred stockholders filed a separate action against Cedar’s former directors in Maryland state court asserting a claim for breach of fiduciary duty. Eschewing a breach of contract claim based on the Articles Supplementary, the plaintiffs instead alleged that Cedar’s board impermissibly structured the acquisition to circumvent the preferred stockholders’ liquidation and conversion rights, and the board knew that the acquisition would cause the value of preferred stock to fall dramatically. According to the plaintiffs, the board was conflicted and acted in bad faith because the directors stood to benefit from the cash payout for their common stock, as well as accelerated vesting of their restricted common stock and change-in-control payments.

The circuit court denied defendants’ motion to dismiss. The court heavily emphasized amendments to Maryland’s Corporations & Associations article in 2016, which were intended to overturn in part the Maryland Supreme Court’s decision in Shenker v. Laureate Education, Inc.[5] Shenker held that in the context of a cash-out merger, directors of Maryland corporations owe common law fiduciary duties to stockholders, and those duties require directors to maximize stockholder value—a holding that effectively adopted Delaware’s Revlon doctrine.[6] In response, Maryland’s General Assembly amended Section 2-405.1 of the Corporation & Associations article to clarify that the duties owed to stockholders are defined solely by statute.[7] 

The Aquino court construed this amendment broadly, although perhaps not as the legislature intended. According to the circuit court, as a result of the amendment, “[c]ommon law or judge-made rules, whether derived from pre-October 2016 Maryland common-law based decisions, or borrowed from Delaware common law, do not supply the standards of conduct of Maryland corporate directors.”[8] The court therefore “disagree[d]” with Kim because “the Fourth Circuit relied upon Delaware common law, seeming to disregard the fact that the General Assembly made clear in 2016 that in Maryland, directorial duties are solely statutory.”[9] Rather, the plaintiffs “alleged a breach of the statutory standards of conduct”—as opposed to the preferential rights defined by contract in the Articles Supplementary––“and that they have suffered harm as a result.”[10] And because the complaint alleged that Cedar’s directors “intentionally structured the complex series of transactions in this case . . . to maximize the payout to the common stockholders (including $23.1 million to themselves)” and “to pay the preferred stockholders nothing,” the circuit court held that the plaintiffs adequately alleged bad faith sufficient to overcome the exculpation clause in Cedar’s charter, and with it the motion to dismiss.[11]

Takeaways

Aquino creates uncertainty over the scope of fiduciary duties owed to preferred stockholders. Both Kim and Aquino acknowledged that directors owe fiduciary duties to preferred stockholders, but likewise acknowledged a degree of uncertainty over the scope of those duties.[12] In Kim, the Fourth Circuit followed existing Maryland and Delaware case law distinguishing between the contractual and fiduciary duties owed to preferred stockholders, ultimately concluding that “a board does not owe fiduciary duties to preferred stockholders when considering whether or not to take corporate action that might trigger or circumvent the preferred stockholders’ contractual rights.”[13] The Aquino court rejected reliance on that case law, finding that the statutory duty to act in good faith ran to preferred stockholders and formed the basis of their claims. Aquino therefore opens the door to fiduciary duty claims by preferred stockholders “when the rights of common and preferred stockholders are not fully aligned, and the board enters into a series of transactions that benefits only the common stockholders and harms the preferred stockholders.”[14]

The court’s rationale raises significant questions about how a board is to weigh the interests of competing classes of stock in a merger. Generally, preferred stockholders’ rights are contractual and set forth in the corporation’s organizational documents. In our experience, it is typical for preferred shares to remain outstanding in public company REIT mergers, and change of control redemption rights over the type at issue in this case are relatively common among Maryland REITs. Preferred stockholders can also protect themselves by seeking put rights triggered by changes of control. Cashing out preferred stockholders may result in less merger consideration for common stockholders. Moreover, there may be preferred stockholders who prefer to continue to receive dividends instead of being redeemed. Maryland courts would be well served to clarify how boards should view these situations and address the tension between two or more classes or series of stock.

Aquino opens the door to renewed stockholder litigation despite the post-Shenker statutory amendments. As the circuit court acknowledged, Shenker gave rise to “concern[] that the Supreme Court had misconstrued the statute and had introduced uncertainty in Maryland corporate law.”[15] The amendments that Maryland’s General Assembly adopted in 2016 overturned Shenker, at least to the extent it recognized common-law fiduciary duties and adopted Delaware’s Revlon doctrine, and thus limited stockholder litigation against the directors of Maryland corporations. But by suggesting that the amendments abrogated all preexisting Maryland and Delaware case law, the Aquino court may have opened the door to novel theories that would have been foreclosed under that case law, including the theory of liability advanced by the preferred stockholder plaintiffs.

Aquino suggests a further break with Delaware law. Historically, Maryland courts have borrowed liberally from Delaware corporate law in the absence of controlling Maryland authority. The Aquino court, however, took the view “that the General Assembly in October 2016 ended reliance on Delaware common law (or pre-amendment Maryland common law) to define the duties owed by directors of a Maryland corporation or to determine when those duties do, or do not, apply.”[16] Other Maryland decisions have not gone so far, and it remains to be seen whether a Maryland appellate court would do so. 

[1] No. C-15-CV-25-731, MDBT 1-2026 (Jan. 2, 2026).

[2] Kim v. Cedar Realty Trust, Civil Action No. GLR-22-1103, 2023 WL 4896635 (D. Md. Aug. 1, 2023), aff’d, 116 F.4th 252 (4th Cir. 2024).

[3] Kim, 116 F.4th at 267 (internal citation omitted).

[4] Id. at 268.

[5] 411 Md. 317 (2009). The Maryland Supreme Court was known as the Maryland Court of Appeals when Shenker was decided.

[6] See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

[7] See Md. Code, Corps. & Ass’ns § 2-405.1(h) (“An act of a director of a corporation relating to or affecting an acquisition or a potential acquisition of control of the corporation or any other transaction or potential transaction involving the corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director.”); (i)(1) (“This section [i]s the sole source of duties of a director to the corporation or the stockholders of the corporation, whether or not a decision has been made to enter into an acquisition or a potential acquisition of control of the corporation or enter into any other transaction involving the corporation.”).

[8] Aquino, slip op. at 3.

[9] Id. at 15.

[10] Id. at 17.

[11] Id. at 19.

[12] Kim, 116 F. 4th at 267 (“In general, directors owe fiduciary duties to both common and preferred stockholders. Yet precisely when these duties kick in is a bit more complicated.”); Aquino, slip op. at 13 (“Maryland case law on the rights of preferred stockholders in this scenario is sparse.”).

[13] Kim, 116 F.4th at 267.

[14] See Aquino, slip op. at 12.

[15] Id. at 2.

[16] Id. at 16.