The uncertainty created by the COVID-19 pandemic has created a business environment unlike anything encountered in recent history—well beyond the effects of “normal” crises. Given the increased stress that this situation puts on businesses and its uncertain duration, director duties include vigilant and proactive corporate governance in consultation with management on an ongoing basis. In this article, we offer some thoughts on actions directors should take in light of the COVID-19 pandemic.
In all circumstances, directors have a duty (i) to act honestly, in good faith, and in the best interests of the corporation (i.e. the duty of loyalty), and (ii) to exercise the same skill, diligence and care that a reasonably prudent person would exercise in similar circumstances (i.e., the duty of care). Directors owe these duties to the company and its owners, but in certain circumstances should also consider the interests of other stakeholders, like employees and creditors, when making major corporate decisions. The current crisis has not changed the director role. However, in light of the crisis, the fulfillment of these duties may be more difficult because the situation is anything but business as usual. Also, while corporate legal duties may flow to shareholders, directors may hold the workers’ and customers’ health in their hands, which highlights a different, but equally important category of responsibilities.
The directors must be in constant communication with management, since certain issues presented by the crisis may not be obvious from the boardroom. The board should be reaching out to its peers, as management does the same to help identify evolving best practices. Once decisions are made, the directors must remain cognizant that its mandates will need to be implemented by company management, so all decisions should be clear and concise. Moreover, given the unfolding nature of the crises, there will not be one decision or one set of directives, but rather a continuous process of communication, investigation and adjustment.
With these obligations in mind, and in light of the current circumstances, directors should consider taking the following actions:
While there may be no exact blueprint to follow during the current crisis, your existing company documentation (even if it needs to be “dusted off”) and information from governmental agencies, medical professionals and other outside experts may help to provide a framework. Taking the above actions will help your company navigate these difficult times by promoting organization, setting clear expectations and ensuring that the company will survive for the future.
Finally, remember that the above will create a record (and actions should be recorded) that, no matter the outcome, the board took a measured and proactive attempt to carry out its director duties to the best of their abilities in uncertain times. The protection of the business judgment rule on directors does not depend on outcomes as much as that they engaged in a thoughtful and well-researched process to attempt to manage the massive uncertainty that lies ahead.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: The Effective Director and The Effective Board.]
©All Rights Reserved. April, 2020. DailyDAC™, LLC d/b/a/ Financial Poise™
Jeremy Waitzman advises his clients on significant transactions and operational issues in their businesses. Described by clients as “an essential business advisor” and “a partner in the success of my business,” Jeremy has substantial experience representing businesses of all types and sizes from inception, guiding them through significant growth, and often through ownership’s exit. His…
Etahn M. Cohen, Sugar Felsenthal Grais & Hammer LLP, concentrates his practice in corporate and securities representation of entrepreneurs, closely-held and middle-market businesses and their investors, acting as an outside general counsel for many of his clients. His practice reflects a wide range of businesses, including startups and established companies in all types of corporate and…
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