The COVID-19 pandemic and its effect on global business may have been unexpected at the beginning of the year, but its effects are well known at this time. Members of a corporation’s board of directors, and those who manage limited liability companies, should take an active part in assessing and planning for reopening and attempts to return to business as usual. With COVID-19 upon us, its devastating effects on the economy well known and prospects of a resurgence well documented, companies must look ahead and take steps to identify potential dangers to the business of a resurgence of COVID-19, and plan accordingly. Failing to stay fully informed and take adequate steps to plan for and adapt to changing circumstances could result in claims of breach of fiduciary duties, which could result in personal liability without protection of indemnification by the company.
The discussion below speaks in terms of a corporation’s board of directors; however, these concepts apply equally to those who manage limited liability companies unless modified by the terms of the applicable operating agreement. We use Delaware law as a model for some of our remarks, as most states follow the Delaware approach on these matters.
Fiduciary Duties ‒ The Duties of Care and Loyalty
The duty of care requires directors to be well-informed, and the duty of loyalty requires that they act in the company’s best interest. These duties include so-called “Caremark duties,” which require directors to implement an information and reporting system that provides them with adequate information about the business in a timely manner. If directors implement such a system, continuously monitor that information, and make well-informed decisions based on that information, then their well-informed decisions based on that information should be protected from legal challenge by owners, even if the decisions do not result in successful outcomes. This is known as the “business judgement rule.”
We recommend that directors take the following steps in response to COVID-19:
- if not already in place, design and implement an information and reporting system to address the pandemic and/or a potential resurgence;
- once in place, continuously evaluate the information and reporting system to ensure timely reporting of relevant information and to ensure information is reported in sufficient detail to allow directors to take well-informed action;
- use that information to identify new threats and opportunities as they emerge, and adapt the information and reporting system accordingly;
- monitor management’s plans to reopen, and assist in designing contingency plans to continue the business if a resurgence requires closure or materially reduced operations, limits the activities of suppliers, and/or limits access to markets to sell goods or services (for example, raising capital, divesting assets, adjusting workforces up or down or shifting resources on a regional basis, etc.);
- meet more frequently, being mindful of the danger that holding meetings on the regular schedules in place before the pandemic (perhaps quarterly, for example) may be ammunition for an owner to allege that the directors were asleep at the switch, in violation of their fiduciary duties, in the face of stay-at-home orders, protests, curfews, closures, partial openings and the ever-changing state of the economy (which may vary from state to state and country to country); and
- prepare minutes of meetings that are sufficiently detailed to memorialize the fact that adequate and robust information was presented, discussed and analyzed on a regular basis.
Click here to read more Brownstein alerts on the legal issues the coronavirus threat raises for businesses.
This document is intended to provide you with general information regarding updates related to coronavirus. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.
The information in this article is accurate as of the publication date. Because this law in this area is changing rapidly, and articles are not automatically updated, continued accuracy cannot be guaranteed.