After nearly three months of an unprecedented nationwide shutdown, many states have begun lifting the emergency orders issued to reduce COVID-19 transmission rates. Governors in these states are making calculated decisions, weighing the risks of a spike in infection rates against the risks of further economic decline and other adverse effects of lockdown orders. But corporate directors may not solely rely on these political decisions for protection of their business decisions.
Without a vaccine or effective treatment for COVID-19, directors must make their own calculated judgments regarding corporate operations in a post-lockdown environment where COVID-19 remains a grave threat to health, safety and business prospects. There are some key issues that boards of Delaware corporations may face in the current environment, through the lens of traditional fiduciary duties, identifying some of the legal risks and factors the board may consider to mitigate those risks.
Corporate constituents — health, safety, and stockholder value. Directors of a Delaware corporation — and any corporation in a state with similar law — owe duties of care and loyalty to the company they serve and all of its stockholders. Although Delaware is not a constituency state — that is, the directors’ duties are owed to the corporation and its stockholders — directors are by no means precluded from considering the interests of other stakeholders, as long as the directors’ ultimate objective, when considering those interests, is to maximize long-term value for stockholders. Similar law exists in other states as well, and certain states expressly allow consideration of constituencies other than stockholders.
As companies reopen in the face of a pandemic, issues facing employees, suppliers and customers — and their health, safety and well-being — may very well affect stockholder returns. Additional sources of liability may arise for a corporation; employees, suppliers, or customers may have new claims related to the pandemic. New costs, including safety measures, may be imposed on the business. Directors should not be subjected to judicial second-guessing for decisions made in the ordinary course that take into account health and safety issues, even if those decisions involve greater expenditures or reductions in revenue and profits — so long as the directors’ ultimate objective is to promote the long-term interests of the company and its stockholders. These stockholder-focused objectives may be met by non-stockholder-focused actions, for example, by acting to safeguard the company’s workforce, to reduce reputational harm, or to preserve goodwill.
Informed decision-making and the duty of oversight. In times of uncertainty, directors must be certain that they are informed. Quarterly or even monthly board meetings may be insufficient, when the business — and the entire global economy — changes on a daily basis. While it is management’s responsibility to ensure the day-to-day operation of the business, in a crisis, directors should be seeking more information from management and keeping a closer eye on key metrics and unexpected shocks. Given the increased risk of liability (and the severity of the consequences of infection), directors should endeavor to be certain that they are providing sufficient oversight of management and the company’s operations.
Boards should consider reviewing their reporting systems and controls to ensure they are up to task, and any red flags reported through those systems should be reviewed and addressed at the board level. Consideration should be given to either establishing committees of the board charged with duties tailored to pandemic-related issues or assigning those duties to existing committees. Directors must also be ready to take necessary action if they receive reports of problems or pandemic-related issues. With the economy reopening amid a pandemic, an increase in the number — and complexity — of regulatory requirements is likely. In 2019, before the onset of the current crisis, the Delaware courts issued several notable opinions serving as important reminders to directors as to their obligations to oversee key areas of risk, including risks associated with regulatory non-compliance.
Directors should also take care that the deliberations of the board and any committees are appropriately documented. Stockholders are increasingly taking advantage of their statutory right to inspect corporate documents, and board minutes are routinely sought. In many cases, board minutes may be the sole evidence before a court of the directors’ actions and decisions. Additional attention to the board minutes now may pay dividends later.
Other legal challenges. Directors should also be cognizant of criticism or legal challenge in connection with actions taken (or not taken) to protect their companies from the economic effects of the pandemic. For example, directors should consider whether to abandon or pursue mergers or other strategic transactions, depending on their particular situations. Directors should also focus on the financial health of the company, including, most critically, its liquidity position and ability to withstand business disruption. Directors should regularly review and update the company’s short- and medium-term financial plans.
When assessing the company’s overall financial health, directors should also consider, among other things, whether to pursue or forgo financial assistance, whether from lenders or the government, or whether to seek debt or equity financing. Each of these decisions may draw challenge from investors (or creditors or contractual counterparties), so informed decision-making will remain crucial. Companies with controlling stockholders should be particularly sensitive to other procedural safeguards (such as the use of special committees) when considering financing transactions or other strategic transactions.
Activism and related concerns. The effects of the pandemic have created dislocation in the markets — and have severely diminished valuations in particular industries and sectors, giving rise to potential activist campaigns. Public company boards should review their structural defensive profiles and take appropriate measures to ensure that they are sufficiently prepared to deal with any activist threat that may emerge.
Private-company boards should consider actions that might be taken by their large investors or preferred stockholders. These directors should accordingly remain active and engaged — and be prepared to effectively communicate their long-term plans for preserving and maximizing stockholder value.
The pandemic has affected virtually every company, regardless of the industry or sector. While different boards may face unique issues, the fundamental duties of directors — care and loyalty — remain the same. Given the risks posed by reopening a business during a pandemic, directors should adopt an active and engaged role in overseeing their company’s operations, with an eye toward maximizing the long-term value for their stockholders.
Blake Rohrbacher and John Mark Zeberkiewicz are directors of Richards, Layton & Finger, P.A., in Wilmington, Del. The views expressed herein are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or its clients.