The emergence of COVID-19 and its sudden and significant impact on markets, businesses and the entire economy are uncharted waters for companies and their boards and managers. In the past two weeks in particular, businesses have had to rapidly address (i) personnel and customer health and safety; (ii) compliance with the health authority and other governmental directives; (iii) alteration of business practices and testing the limits of their systems; (iv) supply chain issues; (v) if public, a likely precipitous decline in stock value; (vi) potentially, cash flow issues; and (vii) actual or potential breaches of contract.
Unanticipated global events like this test organizational leadership, including a company’s board of directors. Fortunately, while the content of any given decision will be unique, our law has provided directors with a valuable framework in which to make those decisions. Further, despite the rapidly changing environment, the principles that had driven boards and investors to focus their attention on long-term sustainability initiatives only a few weeks ago are exactly the same principles that they should focus on now, even where short-term sustainability may have suddenly eclipsed the priority of longer term goals. At the same time, the current environment requires certain immediate considerations.
The Duty of Loyalty and Duty of Care
First of all, a director’s statutory duty to act honestly, in good faith, with a view to the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances, endures through any crisis.
The uniquely Canadian conception of the duty of loyalty of corporate directors is extremely flexible, and is discussed in detail in our April 2019 blog post. First and foremost, directors must remember that their duty is to the company itself, not to the shareholders or any other stakeholder group. As the pandemic foists decisions on the board that could involve severe, zero-sum trade-offs among the interests of shareholders, employees, creditors, suppliers, customers and others, the overall requirement to make decisions in the interests of the company itself has not changed. The fiduciary duty is a “broad, contextual concept,” allowing boards to take into consideration the unique constellation of stakeholders, risks and opportunities that touch each company as it pursues its corporate purpose, as long as the board’s decisions ultimately treat stakeholders equitably and fairly. Practically speaking, this means that boards must bring their business judgment to bear on the decision before them, with the company’s ultimate aims and the interests of each affected stakeholder group in mind. Furloughs, closures and revisions to dividend policies all may be necessary, and will likely be acceptable as long as the interests of the employees, customers and shareholders are considered and available alternatives evaluated.
The duty of care requires directors to act on an informed basis after due consideration of the relevant materials, appropriate deliberation and input from qualified advisors. This duty, too, can be flexible, as in unprecedented times such as these the “comparable circumstances” against which to judge a board’s process will be limited. Depending on the company and the particular decision, some of the practical steps below may be appropriate for boards to be able to demonstrate that their decisions were made carefully and diligently, and that all reasonably available information was received and considered. More frequent (virtual) meetings are almost certain, and boards will need to be in close contact with management for information and their trusted advisors for advice.
In this turbulent time, boards of Canadian companies should take great comfort in the strength of the “business judgment rule” in Canada. Given the lack of recent precedent and the constantly moving environment, no decision will be perfect; some, in fact, may turn out to have been unfortunate. Recognizing that business decisions are almost never perfect in hindsight, particularly in a time of volatility, the business judgment rule provides that where a board has made a business decision honestly, prudently, in good faith and on reasonable grounds, a court should not second-guess the directors’ judgment. The Supreme Court of Canada’s key statement is that “provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination… it is worth repeating that perfection is not demanded.”
Addressing the New Reality
Boards and some committees are very likely meeting (virtually) more frequently than their regular meeting schedule. Management is very likely working flat out, much of it in reactive mode, to address the new reality.
In the context of the above, boards might consider the following actions, among others:
- Given the speed at which the situation is developing, engage one or more existing committees or strike a special committee that can meet more frequently than the entire board to facilitate risk assessment and oversight of risk mitigation steps and changes to strategy.
- Remain informed of developments that affect the company’s business and stakeholders, keeping in close contact with the CEO and key subject matter executives, and consider and discuss the risks to the business and stakeholders arising from the pandemic and mitigation planning.
- Have regular briefings on the company’s progress towards meeting its short-term requirements including those recommended by government guidelines.
- Be aware of, and have oversight over, the company’s short term financial circumstances and planning for longer-term financial impact.
- Consider the reasonableness of the current company strategy and adjustments to strategy within the company’s purpose. While the duty to consider the company’s long-term goals endures, there may be a shift in focus to short-term strategy. Sustainability and resiliency in the face of long-term, more gradual risks, like climate change, have been a focus for boards recently; sustainability and resiliency are equally important in the face of changes that are more sudden.
- Oversee those actions that are in the company’s power to ensure its employees and other stakeholders – which may include the public itself – are safe. This may include lay-offs, closing brick-and-mortar establishments and strengthening work-from-home resources and policies to assist with social distancing.
- Focus on business continuity, and succession, even short term handling of job responsibilities and decision making, if executives become incapacitated.
- Implement a crisis communications plan and ensure communications internally and to stakeholders, including press releases, are appropriate and consistent with that plan. Where a company has a disclosure committee, it may need to meet (virtually) more frequently than usual.
- Maintain the tone at the top. There is much anxiety in so many facets of life in this pandemic. A board can provide a model for stakeholders in remaining calm and committed to its values and ethics.
- For many companies COVID-19 will present not only risks, but opportunities as well. Boards should be prepared to evaluate those opportunities should they arise.
- As always, but in particular where decisions are difficult, boards should appropriately document their deliberations.
If you have any questions about corporate governance in the time of COVID-19, or wish to discuss any matter in this post, please contact any member of our Corporate Governance Group.
Valerie (Val) is the Co-Chair of the firm's Mergers and Acquisitions practice group and Chair of the firm's Technology Law practice group; her practice is transactional (mergers and acquisitions / corporate finance) as well as ...
Stuart is the head of the Corporate Finance and Securities Group at Lawson Lundell. His practice focuses on corporate and commercial law, with an emphasis on corporate finance and securities and mergers and acquisitions.
Stuart has ...
Chat has a broad corporate and securities law practice, with a particular focus on mergers and acquisitions, corporate governance and corporate finance. Chat advises clients on a wide range of domestic and international ...
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