
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm News
Author: Dan Brecher
Date: May 20, 2020
Counsel
212-286-0747 dbrecher@sh-law.comBoards 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.
Directors have certain fiduciary duties to the company and, thus, to its shareholders. Under the corporate laws of most states, directors have two main fiduciary duties — 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.
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:
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 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.
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