Back to Corporate and M&A Law Committee publications

James J Hanks, Jr.
Venable, Baltimore
jhanks@venable.com

Hirsh M Ament
Venable, Baltimore
hmament@venable.com

 

The responsibilities of directors or other overseers of a business (as well as many non-profits) in a global pandemic such as Covid-19 or any other crisis that creates widespread disruption, including actual and potential impact on many elements of the company’s business, are the same as they are in normal times – only more so. No matter the law of the jurisdiction where the entity is formed, their responsibilities are more alike than they are different.

Directors (or others with supervisory positions) have two principal responsibilities: to oversee the operation and performance of the business and to make decisions. The oversight responsibility is ongoing; it is not just a responsibility that recurs periodically around the time of board or committee meetings. The decision-making responsibility is somewhat more episodic but closely allied with the oversight responsibility – especially in a crisis.

Augmenting the discharge of these responsibilities are duties imposed by the law, recognised practice and accepted culture of the jurisdiction where the entity encapsulating the business is formed. Sometimes these duties are expressed by statute; sometimes they are developed by cases or other rulings of judges and regulators. Wherever the entity is formed and however the duties of overseers are expressed, they embrace two key concepts – that the overseers will act prudently and loyally in carrying out their oversight and decision-making responsibilities. These two duties reflect the widespread expectations of investors in business entities around the world, especially businesses with ties to many countries and legal systems.

The duty of prudence requires that, in supervising the operation and performance of the business and making decisions for it, directors or other overseers act with the care that a person in a like position would reasonably believe appropriate under similar circumstances. The most important, but not the only, element of the duty of prudence is information. Directors and other overseers should gather all material information reasonably available to them, which means, among other things:

• thinking about what information a reasonable person faced with the same or similar situation would want to know;

• asking for that and any other relevant information;

• posing questions; and

• seeking expert advice.

Overseers or decision makers will often not know what they should know in a particular situation. The active involvement of an informed and focused staff can aid the information-gathering process (many boards of larger companies have their own staff reporting directly and exclusively to the board).

The duty of loyalty requires that business overseers perform their oversight and decision-making responsibilities based on their objective assessment of the best interests of the company, and not based on any personal interest. In many jurisdictions, the duty of loyalty also encompasses a broader obligation to act in good faith. ‘Good faith’ may be difficult to prove and, therefore, the more pragmatic view may be that good faith is the absence of bad faith. A director or other overseer should be expected to disclose any personal, familial, social, economic or other condition or circumstance that could cause a reasonable person to question whether the overseer’s focus was on the best interests of the business.

In exercising their duties, directors or other overseers are generally permitted to rely on information, opinions and reports prepared or presented by management, experts and board committees. Directors are not acting in good faith if they have any knowledge that would cause such reliance to be unwarranted. The exercise by directors or other overseers of their duties is often accompanied by a legal or practical presumption in favour of compliance with the applicable legal standard.

While the duties of directors or other overseers are the same in a pandemic or any other crisis – whether global, national, regional, local or company-specific – the manner in which a director should comply with these duties will, of course, vary with the circumstances. In general, it can be said that directors should not wait to see whether the chair or lead director calls a meeting or for management to consult the board; rather, each director should be proactive in initiating discussion with the chair, lead director, other directors and management. A director or other overseer with insight or information not possessed by other directors should share it with the board.

One or more board meetings (with, as appropriate, relevant management and advisers) will often make sense, so that directors or other overseers may gather information, deliberate, make any decisions or take any other action that seems to them to be reasonable in the circumstances. In this regard, a director should not hesitate to ask to hear the ‘other side’, including any dissenting views of management or its advisers, and to ask questions about the progress or status of matters discussed at earlier meetings of the board. Directors should try to look forward and understand how the company’s markets will look in the fullness of the crisis and thereafter. Board and board committee minutes should reflect the presence of directors, officers and advisers for all or only parts of meetings and also the times of convening, recessing and adjourning meetings. Minutes should also reflect, of course, the matters discussed in as much or as little detail as is appropriate in the circumstances.

While the particular actions of directors or other overseers will vary according to the company and its circumstances, directors or other overseers should be asking, among other matters, about:

• the nature and likely duration of the crisis;

• any applicable crisis management plan and the actual and potential impact of the crisis on the business of the company (including on employees, customers, suppliers, other important counterparties and stakeholders);

• the company’s ability to discharge its debts (including compliance with debt covenants and adequacy of collateral), pay its dividends (preferred and common) in keeping with expectations, make payroll and meet its other obligations in the ordinary course of its business;

• the impact on the company’s near, intermediate and long-term strategic plans, pro formas and budgets and on any special projects;       

• reactions of major investors, including reaching out to them;

• industry or sector-specific risks or other factors;

• any effect on pending or completed securities offerings or other transactions (including material adverse effects and any required disclosure);

• potential litigation either as a plaintiff or defendant;

• impact on competitors and the industry or sector generally;

• potential impact on executive compensation;

• effect of any actual or expected governmental and/or central bank stimulus packages;

• insurance coverage and potential claims;

• actual or expected legislative, judicial, regulatory or other governmental reaction, either company-specific or industry-wide;

• media coverage, investor relations and disclosure obligations (including reviews of recent market guidance, risk factors and any duty to update any prior disclosure);

• market liquidity for company securities;

• potential challenges to control of the company and available takeover defences;

• plans for upcoming shareholder and board meetings, including availability of directors to meet on short notice;

• delegation of powers to executive or other special committees;

• the existence or likelihood of any conflicts of interest arising out of the crisis; and

• possible business opportunities as a result of the crisis.  

There are various protections for directors under the laws of many jurisdictions and a company’s governing documents, including directors’ and officers’ (D&O) liability insurance and D&O indemnification agreements. However, the best protection for directors in overseeing the operation and performance of the business and making decisions is the performance of their duties as outlined above.