We are all in this together: In these rapidly changing times, more than ever, the Board needs to play its role with active engagement, thoughtfulness and resolve. Management is juggling the day-to-day business impact and should use the collective support and wisdom of the Board. Certainly, the Board should continue to be mindful of its fiduciary duties and act with its fiduciary duty of care and loyalty.
Employees: The Board should help management consider issues regarding the respective stakeholders, including the employees. Action has already been taken to immediately address the health and safety of the employees with plans and communication in place. However, the Board should engage in ongoing discussions around the company’s long-term labor force needs, and reevaluate those needs frequently. The future is unknown, and planning for a range of scenarios provides insight. Variables like the impact of supply and demand may shift the location, number and job duties of individuals needed. Likewise, employee compensation is an evolving and hugely consequential topic, and should be part of the Board’s ongoing dialogue. Continuing to create a culture of trust and unity will depend on well-reasoned and thoughtful written communication.
Long-Term Strategies: As management addresses the pressing and immediate issues, the Board should help guide discussions on the medium- and long-term impact of this crisis. In light of COVID-19 and the global oil price collapse, with management, the Board should closely monitor the company’s financial preparedness. This includes considering liquidity and cash management, capital expenditure reductions, reductions in operations and related costs, implementing cash or stock repurchases as well as stockholder rights plans, reduction or suspension of dividends. Likewise the relationships with third party vendors as well as joint venture partners and segregating prepayments for projects will be subject to a keen eye. In addition, every company will be looking at the mergers and acquisitions (M&A) landscape whether it is as a target or buyer as well as opportunities for consolidation.
Business Judgment Duty: In times like these, it is more important than ever for Directors to understand and comply with their fiduciary duties. The business judgment rule will generally protect well-informed and disinterested Directors in making decisions that relate to trying to maximize the value of the company. There will be more scrutiny applied to decisions and transactions that involve an interested party. So, as always, we encourage Directors to continue to approach their roles carefully and thoughtfully, focusing on not only the substance of decisions but also on the good corporate governance processes involved. The fiduciary duties of care and loyalty, which run to the corporate entity, do not change during financial distress.
The bottom line in all situations is that Directors should act in the best interests of the corporation to maximize its value—regardless of the company’s solvency. A good shorthand is that the duty always is to “maximize the pie.”
While Directors are undoubtedly aware of their fiduciary duties, they should also consider that a weak economic environment may enlarge the group of stakeholders with standing (and motivation) to bring a derivative claim for breach of fiduciary duty. In Delaware, for example, creditors gain standing to bring such a claim when a company becomes insolvent as judged by the company’s balance sheet.
Frequent emails or scheduling conference calls for updates and regular Board meetings, as well as keeping well-developed records showing the Board’s consideration of various alternatives and input from advisors, is an important defense against allegations of breached fiduciary duty.
D&O Insurance: In these new times of change, it is also good to check the Directors and Officers (D&O) policy language.
Directors should carefully review their D&O insurance policies to identify provisions that may be implicated by financial distress or a potential restructuring.
Review Side A coverage, which provides direct coverage for individual Directors and Officers when the company is legally unable or unwilling to indemnify them, to:
- Identify whether Side A payments have priority over payments under Side B (reimbursement to a company for indemnity payments it makes on behalf of Directors or Officers) or Side C (payments to the company for securities claims) coverages.
- Ensure that any proceeds related to Side A coverage are explicitly the property of the covered Director.
- Confirm that such coverage will not be impacted or rescinded by a potential restructuring transaction.
It’s also a good idea for Directors to examine the coverage exceptions to insured-versus-insured (IvI) exclusions to determine whether potential suits commenced in connection with a restructuring transaction would be subject to the exclusion (and thus exempted from coverage). Directors should also consider seeking appropriate tail coverage in the event of a restructuring transaction that may trigger the termination of a D&O policy.
Confidence and Calm: Finally, the Board should remember that these are unique, rapidly changing and challenging times. We are all in this together and asked to go above and beyond to relate and innovate in order to make a difference. Working with knowledgeable subject matter advisors and management, such collective wisdom helps the Board to consider the broadest set of knowledge, analysis and insight, and act with prudence. The strength of a Board’s leadership will provide confidence and calm to help guide others through the storm.