For the Plaintiff: Key Questions Boards Face Now
The world is facing an unprecedented pandemic and economic crisis. Our rules of social and business interaction are in flux. Markets gyrate wildly on random news. In some ways, stockholder lawsuits seem misplaced.
A board should be safe legally if it acts sensibly in “reopening.” However, it is important to differentiate the unavoidable risk of a baseless lawsuit from the avoidable risk of a meaningful suit posing a real prospect of liability. Here are a few questions that highlight current issues raised by the pandemic.
Can I be sued for breach of fiduciary duty when my business reopens in the wake of the coronavirus?
No reasonably thoughtful post-quarantine reopening or operating plan should subject corporate directors to liability. The prevailing standards for director oversight of a company’s operations are not overly demanding. A board must implement a system reasonably geared towards ensuring that the company’s operations are conducted in conformity with the law. Having created such a system, the board must act reasonably when fraudulent or illegal business tactics or similar misconduct is indicated, to limit the risk of harm to the company and its stockholders.
As applied to COVID-19, a board paying reasonable attention to the pandemic should not find itself facing a meaningful risk. But, as history shows, even when 95% or more of boards “get it” when it comes to operating with due concern for the safety of those who interact with the company, there are inevitable instances when the wheels of corporate governance fly off the proverbial bus.
What can precedent teach us about board liability in a pandemic environment?
There are several principles and precedents to consider when formulating a COVID-related business reopening plan. The starting place for board oversight is applicable law. Consider a derivative suit following Allergan Pharmaceuticals’ payment of fines for its marketing of Botox. The court found a viable claim when the board allegedly knew that: (1) the FDA had only approved Botox for limited us, based partly on safety concerns, (2) Botox sales were booming for a wide range of unapproved uses, and (3) Allergan’s marketing plan overwhelmingly pushed unapproved uses. The lesson: a board should not stay passive when their company ignores legal restrictions intended to protect people from the virus.
Beyond oversight, the duty of loyalty is worth mentioning. The basis for most director liability is some type of disloyalty or self-interested conduct. When framing disloyalty as personal financial motive different from the stockholders, the coronavirus seems an odd concern.
Realistically, what CEO or controlling stockholder would intentionally operate the business with an intent to put employees or third parties (like vendors or customers) at real risk of grave physical harm?
That said, sometimes an improper motive is not financial. Consider a litigation involving Massey Energy, a West Virginia coal mining company run for years by its CEO, Don Blankenship. Because of his strong political and ideological views, Blankenship expressed contempt towards government regulation of business. This extended, tragically, to his persistent hostility towards the regulators trying to ensure safety for Massey’s mine workers. Following years of battle with the regulators and after numerous safety incidents, the Massey mines suffered an explosion that killed more than 100 workers. Beyond the loss of life, the market and ensuing government reaction made it impossible to operate the business. Stockholders sued. The court found a viable claim that Blankenship breached his fiduciary duties by putting his antipathy towards regulation ahead of legal compliance, and that the board breached their oversight duties because they let Blankenship pursue his “devil may care” approach towards mine worker safety. The lesson: operate for profit while maintaining due regard for the safety and health of employees and customers.
In our current pandemic world, what are the fact patterns most likely to create a real risk of personal director liability?
All things being equal, liability related to business operations during the pandemic should be avoidable. The government would put clear laws and guidelines into the marketplace. Boards, knowing the severity of the outbreak and understanding their business, would use those guidelines to adopt sensible procedures to keep employees and people who touch the business safe while also running the business effectively under the circumstances.
But, alas, these times are unusual. Different levels of government (perhaps driven by personal politics or ideologies) send inconsistent signals about basic things like wearing masks and other precautions to limit infection risk. When the applicable guidelines are confusing, it can be challenging for a board to devise a legally compliant operating plan.
Also, some businesses are more susceptible to an oversight suit than others. Most obviously, if a business has responsibility for the safety of large numbers of “at-risk” populations, the board should be that much more vigilant and proactive. Think of public nursing home operators, where an absence of contagious-virus planning (despite the predictability of an outbreak among the elderly) may have contributed to thousands of avoidable deaths. That said, now that we all experienced this worldwide crisis, every business should adopt some form of pandemic plan before the next coronavirus.
One can also envision that individual personalities — particularly if they are CEOs or controllers who have seen massive personal wealth harmed by a prolonged shutdown — may press for the most rapid reopenings and minimize the need for restrictions that continue to cost them personally. A board overseeing a management plan to reopen for business should be sensitive to individual motives and be willing to expressly consider whether the company’s long-term viability is being put at risk in order to satisfy near-term financial goals.
Ultimately, liability for business oversight is and will remain rare. A thoughtful board should be safe from liability. Taking a conservative approach that puts a proper premium on health and safety over short-term revenues is a reliable way to act morally and in fiduciary compliance.
Mark Lebovitch founded and co-leads the Governance Litigation Practice of Bernstein Litowitz Berger & Grossmann LLP.