Though the COVID-19 pandemic put in-person classes, business operations, and vacation plans on hold, there has been no pause of the duties of boards of directors to their respective companies. Board members should keep their fiduciary duties and the practical steps they can take to meet those duties top-of-mind as they guide their companies through the COVID-19 pandemic. We have highlighted board members’ duties and some practical tips boards of directors can take to meet their obligations to their companies during the pandemic.
Board Duties and the Business Judgment Rule: A Refresher
Under Delaware law-which most jurisdictions widely follow when it comes to directors’ duties-directors have a duty of care and duty of loyalty.
- The duty of care requires directors to make informed and deliberative decisions based on all material information they have reasonably available to them.
- The duty of loyalty requires directors to act (or decide not to act) in a disinterested and independent manner, with the honest belief that the action or inaction is in the best interests of the company and its shareholders. How will decisions made by board members be evaluated by courts if those decisions are challenged? Courts evaluating board decisions under Delaware law first look to the “business judgment rule,” which allows a rebuttable presumption that directors satisfied their fiduciary duties in making business decisions.
- If the presumption is rebutted-such as in cases of related party transactions or lack of director independence-Delaware courts apply the more exacting “entire fairness” standard, which normally shifts the burden to directors to prove the fairness of a challenged corporate transaction or decision.
- As part of the duty of care and duty of loyalty, directors have the duty of good faith, oversight and disclosure. They have to act in good faith, be diligent in overseeing the company, and disclose any conflicts of interest as well as anything that is in the best interest of the company to know.
Making an Informed and Disinterested Decision
Directors’ decisions must be “informed and disinterested.” During the COVID-19 pandemic, the logistics of obtaining the information necessary to make such a decision may require a little more diligence than before. Directors should initially determine (i) what information they need, both internally from management, board committees, and company records, and externally from third-party experts or other professionals; and (ii) how best to obtain that information promptly and efficiently. The latter part can be more involved during the pandemic. For some boards, the ease of in-person board meetings in conference rooms with a paper packet of pertinent information has been put on hold indefinitely. Many boards will have to consider how to obtain the necessary information remotely, as well as conduct remote meetings, while ensuring adequate security measures are in place so that highly-confidential company information is kept safe during the process.
Director Oversight Duties
Directors have duties of oversight which can require additional attention as a result of the pandemic. In summary, directors have the duties outlined by the Delaware cases below:
- In In re Caremark International Inc. Derivative Litigation (1996), the Delaware Court of Chancery stated directors have a duty to implement adequate information and reporting systems to provide directors with the timely and relevant information they need to properly carry out their oversight duties. Directors’ failure to follow through with these measures could indicate a breach of the duty of loyalty. Directors should be careful, because in jurisdictions such a Delaware, directors have no right to exculpation for a breach of the duty of loyalty.
- In Marchand v. Barnhill, Inc. (2019), the Delaware Supreme Court emphasized that a board of directors’ Caremark duties requires directors to ensure that board-level reporting systems are in place for pertinent issues for the subject industry. In Marchand, an outbreak of listeria at an ice cream manufacturer resulted in deaths, shut down manufacturing operations, and caused a liquidity crisis. Reports about listeria’s growing presence in the facilities were presented to management, but not to the board. The court found the board’s Caremark duties required the directors ensure that board-level reporting systems were in place on the pertinent issues for the industry (i.e. food safety).
- In In re Clovis Oncology, Inc. (2019), the Delaware Court of Chancery found a viable Caremark claim. In that case, the board had implemented a reporting and information system, but it failed to monitor the system once the system was established. In doing so, the board ignored red flags about management’s inadequate response to “mission critical” industry risks. A Delaware Court of Chancery judge made a similar finding in Hughes v. Hu (2020), where the court permitted a derivative action asserting a Caremark oversight claim to move forward where the company had seemingly adopted a monitoring system, but the board allegedly failed to provide appropriate oversight.
These decisions together make clear that a board not only must have an information and reporting system in place, but it also must maintain an open and continuing dialogue with management to allow for constant communication and follow-up regarding the company’s material developments.
What are the Practical Steps Boards Can Take to Provide Appropriate Oversight During the Pandemic?
Boards of directors should modify their pre-COVID protocols to ensure they are carefully monitoring the effect of COVID-19 on the company. Here are some practical tips for boards to consider to ensure they are providing appropriate oversight during the pandemic.
- Designate a board committee specifically charged with overseeing COVID-19 related matters.
- Identify core mission-critical compliance risks posed by COVID-19. In other words, determine the specific components and operations of your company that are likely to be impacted by COVID-19, and the risks of falling out-of-compliance. You can use this information to determine necessary steps to stay in compliance.
- Set up systems to facilitate board-level monitoring of operations with those mission-critical compliance risks. The board will need to keep a close eye on those components and operations determined to be at risk of being impacted by COVID-19.
- Implement a regular process or protocols that require management to keep the board apprised (on a regular basis and ad hoc as needed) of the status of the company’s COVID-19 response. This will include the impact of COVID-19 on the company’s financial position, the impact on operations, and any COVID-19-related compliance issues, risks and opportunities.
- Conduct regular (weekly, if possible) board meetings to discuss new COVID-19 developments relevant to the company. Evaluate the information obtained from management, and be part of the decision-making process where board-level decisions must be made. Receipt of information from management is not enough to carry out the board’s oversight duties.
- Make sure you have appropriate cybersecurity and data privacy measures in place for board meetings and communications as well as communication with management. You will be discussing sensitive company data, and you don’t want others to have access to that because of loose cybersecurity and data privacy measures.
- Communication between management and the board is key. Material information should first be disclosed and discussed among management and the board. If there are any communications outside of the boardroom-including disclosures to the general public or internal employee communications-make sure efforts are coordinated so management and the board are on the same page.
- Work with management to establish contingency and succession plans in case any members of management or the board test positive for COVID-19 and are unable to carry out their duties.
- Importantly, document everything. The board’s (and any relevant board committees’) COVID-19 related actions should be contemporaneously documented in meeting minutes and board resolutions. Meeting minutes should be comprehensive, and the board should keep organized binders of documents demonstrating the reporting structures and action items taken by the board.
Contact your Baker McKenzie employment attorney for assistance with this and other COVID-19 related employment questions.