Boards of directors play a pivotal role in helping businesses navigate the challenges created by the ongoing coronavirus (COVID-19) pandemic. While many things have changed over the past few months, the fiduciary duties of care and loyalty to the company remain unchanged and may even be more important during these unprecedented times.
Fiduciary Duties Owed by Boards of Directors
Directors have certain fiduciary duties to the company and, thus, to its shareholders. Under the corporate laws of most states, directors have two— the duty of care and the duty of loyalty.
Under the New Jersey Business Corporation Act (NJBCA), directors must “discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent people would exercise under similar circumstances in like positions.” Directors ordinarily satisfy this duty if, acting in good faith, they rely upon: an opinion of counsel for the corporation; written reports setting forth financial data concerning the corporation and prepared by an independent public accountant or certified public accountant or firm of such accountants; financial statements, books of account or reports of the corporation represented to them to be correct by the president, the officer of the corporation having charge of its books of account, or the person presiding at a meeting of the board; or written reports of committees of the board.
Directors are also bound by a duty of loyalty, which means that when their personal interests conflict with the interests of the corporation, they are legally bound to put the corporation’s interest above their own. The duty of loyalty typically involves contracts with the corporation and corporate opportunity. While officers and directors are not completely prohibited from contracting with their company, such transactions are closely scrutinized to verify that they are “fair to the corporation.” If they are not, the transaction must be approved by disinterested board members or shareholders that have been fully advised of the potential conflict of interest. The corporate opportunity doctrine mandates that whenever directors or officers learn of an opportunity that may be beneficial to the corporation, they are obligated to first present the opportunity to the corporation. The failure to disclose the corporate opportunity is considered a breach of the duty of loyalty.
COVID-19 Considerations for Boards
To fulfill their fiduciary duties, boards should become informed about how COVID-19 is impacting the company and how it may continue to impact it in the future. To keep pace with how quickly the situation is changing, boards may need to meet more frequently or to establish a special committee dedicated to COVID-19.
While there are many uncertainties about this pandemic, boards should play an active role in overseeing how management plans to respond to these challenges. Below are several important issues to consider:
- Crisis Response/Communications: Boards should verify that the company has a crisis management plan in place and that it is working effectively. Providing clear and transparent messaging to employees and other stakeholders should also be a priority. Communications should emphasize the importance of protecting health and safety as the company responds to the COVID-19 crisis.
- Business Continuity Plans: Given the uncertainty associated with COVID-19, including the risk of additional rounds of business restrictions, it is imperative to verify that the company has comprehensive continuity and contingency plans in place to mitigate the risks posed by business closures, workforce unavailability, and supply chain disruptions. Boards should also evaluate the adequacy of succession plans for directors and senior management.
- Cybersecurity Risks: Many companies quickly transitioned to a remote workforce, which significantly increased the risk of a data breach. Boards should evaluate how management is addressing these risks, such as those resulting from employee use of personal computers, accessing company information via home wi-fi connections, or storing confidential information outside the company’s servers. Boards and management should then evaluate their existing policies and procedures to determine what changes may be needed to address new cyber threats.
- Financial Health: COVID-19 is forcing many businesses to reassess their short and long-term plans. Boards should work with management to reevaluate the company’s levels of liquidity, indebtedness, and allocation of capital. Other considerations involve whether the company should consider seeking additional financing, or amending the terms of existing debt arrangements. Companies may also want to consider the need to defer, suspend, or reduce dividends.
- Compliance Obligations: Regulators have relaxed certain compliance obligations/deadlines in response to COVID-19. At the same time, the crisis has also triggered the need for additional disclosures in some circumstances. It is imperative that boards/management stay on top of their regulatory obligations and determine what changes may be necessary in response to the pandemic.
- Government Relief: Boards and management should evaluate whether the company is eligible for any state or federal relief, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. With additional stimulus packages and other regulatory relief likely in the future, it is important to stay on top of these developments.
- Future Opportunities: Boards should also keep their eye towards the future. While the COVID-19 pandemic has caused significant economic upheaval, it has also created opportunities for certain businesses, such as lower-cost acquisitions. The outbreak has also resulted in certain operational, technological, and policy changes that may be worthwhile retaining after the crisis has passed.
The challenges posed by COVID-19 are wide-ranging, so boards and company management should leverage all available resources, including financial, operational, and legal advisors. At Scarinci Hollenbeck, our attorneys are here to help businesses of all sizes navigate the complex and ever-changing legal environment attendant to the COVID-19 crisis.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.