As the coronavirus (COVID-19) pandemic disrupts everyday life throughout the world, boards of directors of corporations working around the clock to understand, address, and mitigate its effects on business operations must direct attention to their fiduciary duties. Boards must act affirmatively, and with an eye on the future, to assure that duties to corporations and stockholders continue to be met.
This LawFlash highlights key considerations and best practices that a board of directors should implement during the COVID-19 pandemic in order to fulfill its fiduciary duties, and is one of a series focused on COVID-19’s impact on corporate governance, including the duties and actions of boards and committees, as well the impact on mergers and acquisitions.
Fiduciary Duties of Care and Loyalty
Although variations exist based on the jurisdiction of incorporation of a given corporation, as a general matter a board of directors owes the duties of care and loyalty to the corporation and its stockholders. While circumstances under the COVID-19 pandemic change every day and impacts on business operations continue to be uncertain, a board must nevertheless fulfill its duties to the corporation and its stockholders to avoid the risk of liability.
In order to discharge its duties of care and loyalty, the board must make a good faith effort to remain informed about the corporation and its operations and exercise judgment that is in the best interests of the corporation and its stockholders. The board has a duty to oversee and closely monitor the corporation’s operational viability, legal compliance and financial performance. Thus, to protect itself under the business judgment rule in exercising its oversight and risk management functions during the COVID-19 pandemic, the board should take steps, including working closely with its management team, to become informed and ensure that proper reporting protocols and information-sharing channels are in place. This assures that the board has access to, and can carefully monitor and consider, up-to-date information in connection with a corporation’s response to the COVID-19 pandemic. This task is of increased importance in situations, such as with the current pandemic, in which the corporation’s business and economic conditions are changing rapidly and the corporation’s normal business operations face potential disruption.
The board should routinely evaluate whether its actions in preparation for, and during, the COVID-19 pandemic are sufficient to discharge its fiduciary duties. In particular, the board may consider taking the following actions, including:
- calling one or more special meetings of the board to discuss and assess the impact of the COVID-19 pandemic on the corporation’s business operations;
- establishing, for efficiency purposes, a special committee of the board that is authorized with the power to make decisions on behalf of the board related to the COVID-19 pandemic (subject to non-delegable actions);
- implementing information and reporting systems to ensure that the board receives up-to-date information from management and others and is able to properly understand and monitor the risks and opportunities arising from the COVID-19 pandemic;
- seeking input from management and outside advisors regarding the impact of the COVID-19 pandemic on the corporation and the appropriate responses and contingency plans, as explained in further detail below; and
- maintaining accurate and up-to-date minutes and records of the board’s discussions and actions related to the COVID-19 pandemic.
Key Considerations for Discussions with Management and Advisors
To help ensure that the board is meeting its fiduciary obligations to the corporation and its stockholders during the COVID-19 pandemic, the board should work closely with both its management team and its outside advisors to carefully consider and address potential short- and long-term risks that the corporation may face due to COVID-19. Below are some examples of questions and issues that the board should discuss with these teams.
Discussions with Management
The board should discuss the questions below—along with any other issues that may be applicable to the corporation’s particular business or industry—with the corporation’s management team.
- What should the corporation be doing to ensure the health and safety of its employees, contractors, customers and suppliers? The board should consider what protections, protocols, or policies the corporation must implement to ensure the health and safety of the corporation’s employees, contractors, customers and suppliers. Such protections, protocols, and policies should be made effective as soon as possible, or, for companies currently shut down or otherwise impacted by mandatory stay-at-home orders, once the business reopens or authorities lift the applicable order.
- What are the short-term and long-term impacts of the COVID-19 crisis on the corporation’s work force, supply chain, customer base and infrastructure? The board should work with its management team to assess the short-term and long-term impacts that the COVID-19 crisis may have on the corporation. These include the impact on the corporation’s work force (e.g., whether employees can work remotely and whether a reduction in force is necessary), as well as the impacts on its access to regular supply chain channels, and its customer base. They also include impacts to the corporation’s IT infrastructure (e.g., whether the corporation has the IT infrastructure in place to support remote working, if applicable), and potential cybersecurity risks (e.g., any cybersecurity risks with the work-from-home platforms that employees are using, such as video chat applications).
- What is the corporation’s liquidity profile and what are the potential financial impacts of COVID-19 on the business? The board should understand the corporation’s current cash flows and access to credit, and should ask management to reforecast expected corporate revenues. In light of this information, the board should work with management to analyze the financial impacts of the COVID-19 crisis on the business (e.g., whether there is enough liquidity to pay all near-term expenses, such as payroll and rent, and the impact that the corporation expects to see on its revenues during and following the crisis).
- Does the corporation have a business continuity plan in place? If not, the board should work with management and its outside advisors to develop a business continuity plan that can be used during the COVID-19 pandemic and any future threatening events or circumstances that the corporation may face.
- What does the corporation need to do to prepare for business ramp-up after the initial wave of the COVID-19 crisis ends? While many companies are, appropriately, currently focused on reacting to the initial impacts of the COVID-19 pandemic on their businesses, they should also look to the future. As the crisis continues, the board should work with management to ensure that a seamless process and plan exists for business ramp-up as stay-at-home orders are lifted and the initial wave of the COVID-19 crisis comes to an end. The board should also consider how the corporation’s business might look in the post-COVID-19 world.
Discussions with Advisors
The board should work proactively with its management team to consult with the corporation’s outside financial and legal advisors and carefully consider the below questions, along with any other issues that may be applicable to the corporation’s particular business or industry.
- What federal, state and local financial assistance, if any, is available to the corporation? The US government through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as well as state and local governments, are providing financial assistance in the form of forgivable and low-interest loans, financial grants, and other financial relief. The board should work closely with its financial and legal advisors to determine what, if any, governmental financial assistance may be available to the corporation, as well as how to apply for and access such financial assistance. For more information, see “CARES Act Analysis: US Senate Passes Coronavirus Aid, Relief, and Economic Security Act” and “CARES ACT: Paycheck Protection Program Provides Small Business Loans To Support Employees”.
- What are the corporation’s financial covenants under its credit facility and what risks for breach are there? Does the corporation have access to additional credit under its current facility? The board’s legal advisors can analyze and help the board understand the corporation’s current negative covenant requirements in its existing debt and equity structure, as well as the potential for breach based on updated financial forecasts. Additionally, the corporation’s legal advisors can review and analyze the corporation’s access to additional cash under a revolving credit facility, including the application, if any, of any material adverse change provisions.
- For public companies, what disclosure obligations does the corporation have with respect to the COVID-19 crisis and impact on the business? How does COVID-19 impact the corporation’s annual stockholder meeting and proxy solicitation process? The board should understand and actively consult with its outside legal advisors with respect to disclosure implications stemming from the COVID-19 crisis, including additional risk factors or other disclosures in the corporation’s 10-Q filing for the first quarter of 2020, and the impact, if any, on the corporation’s annual stockholder meeting. For more information, see “SEC Guidance for Disclosure Relating to COVID-19 Crisis”.
- How should the corporation address various human resources concerns? The board should work with outside legal counsel as human resources issues arise throughout the COVID-19 crisis. For example, the board should consult with legal counsel before implementing any furloughs, layoffs, or reductions in workforce to ensure that such actions are taken in compliance with applicable laws. Additionally, the board should seek legal counsel’s guidance in taking steps to ensure the health and safety of the corporation’s workforce once employees can return to work. For more information on employment and employee benefits issues employers during the COVID-19 pandemic, see the Morgan Lewis COVID-19 Employment/Employee Benefits webpage.
- What insurance coverage does the corporation have and how might policy renewals be impacted? The board should consult with management and the corporation’s insurance brokers to determine whether any existing insurance policies, such as business interruption policies, cover losses incurred due to the COVID-19 pandemic. In addition, boards should consider the impact on policy renewals when coverage terms expire—in terms of cost, new policy exclusions, and the need for additional coverage.
In summary, in times of crisis, as is the current case with the COVID-19 pandemic that threatens all countries across the globe, a board of directors must take affirmative action to stay informed, be diligent, act thoughtfully, and actively participate in the corporation’s response to the crisis in order to fulfill its fiduciary duties to the corporation and its stockholders.
Coronavirus COVID-19 Task Force
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
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