The coronavirus pandemic, caused by SARS-CoV-2 a/k/a COVID-19, has disrupted the global economy throughout 2020, across all financial sectors, and has left many corporations facing unprecedented challenges. How these corporations adapt to this crisis, from its impact on big decisions to day-to-day ones, will be closely scrutinized. For boards of directors and chief officers, this means keeping a close eye on COVID-19 developments to assure decisions are made with full knowledge and compliance with directors and officers’ fiduciary duties.
Directors and officers owe fiduciary duties of care and loyalty to the corporation they are serving. These duties, which are the result of the directors and officers being the agents of the corporation’s shareholders, require directors and officers to act in good faith, be properly informed when making decisions, and act in the best interests of the corporation and its shareholders. Courts assess the board of directors’ and company officers’ conduct in discharging these duties by using the business judgment rule. The business judgment rule is a rebuttable presumption that all parties acted in good faith, on an informed basis, and with the honest belief that their actions were in the corporation’s best interest.
When directors or officers breach either of these two primary fiduciary duties, they may be held personally liable for resulting harm to the company. In a common related claim, directors and officers can be sued for not adequately overseeing the affairs of the corporation, subjecting them to a Caremark claim for noncompliance.
A corporation’s board of directors and officers are required by their duty of care to inform themselves in matters significant to the corporation. They should use all reasonably available, material information when acting, or refraining from acting, with the level of care a prudent and cautious person would use in a similar situation based on that information.
Most corporations, when informed of the severity of COVID-19 and the potential danger their employees were in, launched an initial response to the pandemic. New and changing information has been released about the virus since these initial responses were developed, and directors and officers must adjust their corporation’s response as more information is provided. If directors and officers continue to fulfill their obligations and act in good faith, as well as in the best interest of the corporation, they will be protected by the business judgment rule.
While acting in the best interest of the corporation and its shareholders, directors and officers are also required by the duty of loyalty to put the corporation’s interest above their own. Directors and officers are obligated to avoid any actions that would harm the corporation, including taking away (usurping) opportunities from the company or creating a conflict of interest. By regularly reviewing their holdings and affiliations for conflicts of interest in the rapidly changing market surrounding the pandemic, directors and officers can avoid violating their duty of loyalty. If an individual on the board of directors serves on more than one corporate board, they must evaluate and ensure that their interests do not conflict with how quickly operations are changing in a variety of industries.
There are many risks to corporations resulting from the COVID-19 pandemic. Directors and officers should keep these risk areas in mind and implement practices to mitigate the risks involved.
While employee health and safety should always be a top priority for corporations, COVID-19 has made entities take a new look at how to keep their employees safe. Regularly speaking with internal and external counsel to ensure the corporation remains in compliance with new federal and state health regulations is crucial to mitigating risk. Consulting with local health care experts and physicians to create new company safety protocols will help protect employees from the virus. Providing clear communication to employees regarding new health and safety protocols will show the entire company that the board of directors and officers are acting in good faith and in the best interests of the business.
With a good number of employees in corporations across the country working from home for the foreseeable future, directors and officers must also prioritize cybersecurity. Virtual platforms have been essential in keeping businesses running smoothly. Working with IT and cybersecurity experts to assess any risks to company data and training employees to keep their own data safe while working at home will help keep information secure.
All corporations have been financially impacted by COVID-19. Maintaining business continuity is a key part of fulfilling one’s duty of care as a director or officer of a corporation. Creating forecasts to track potential financial scenarios will help provide a clear picture of how COVID-19 will impact company operations this year as well as next. The board of directors and officers must oversee all aspects of the business to evaluate what capital may be needed to maintain the supply chain and relationships with vendors and customers. Changes in the market will also affect how the business proceeds with its operations. There may be relief opportunities available for the corporation that directors and officers should be aware of, as well as tax law changes that were implemented at the beginning of the pandemic.
The board of directors and company officers play an important role in ensuring that the corporation they oversee will survive the uncertainty created by the COVID-19 pandemic. This also puts these parties at increased risk for liability exposure. A directors and officers liability insurance policy may be triggered by accusations that a director or officer has committed a “wrongful act” in carrying out their fiduciary duties. If your corporation has received a D&O liability claim and plans to fight it, contact the experienced business litigation attorneys at Burford Perry today.