As the COVID-19 (Coronavirus) outbreak continues to wreak havoc across the globe, boards of directors have a critical oversight role to play in helping their companies navigate through these uncertain times. Below is a checklist of practical steps boards should consider in responding to the current crisis:
1. Hold board meetings early and often. If a regular board meeting is not scheduled in the near future, call a special meeting to discuss the impact of COVID-19, and the company’s response. Given the speed at which the crisis is evolving, the board will likely need to meet more often than before. Make the meetings virtual to eliminate the need for travel. The closer financial distress is, the more often the board should meet, if for no other purpose than to receive an update. The board should continue to provide oversight, long-term planning, and strategic support, and its efforts should be documented in board minutes and other meeting materials. The board should continue to play a supportive internal role, not a public facing one.
2. Convene a special committee tasked with managing the crisis, or aspects of it. This committee should meet regularly with management and provide oversight to the company and regular reporting to the board. Given the myriad of issues that the COVID-19 outbreak is raising—from the health and safety of your employees to increased cyber security risks to financial and operational stability—consider having more than one committee. For a number of companies, on an interim basis, the audit committee, risk oversight or similar committee can be tasked to provide the necessary oversight.
3. Implement systems to monitor COVID-19 risks. Last year, the Delaware Supreme Court emphasized the board’s heightened oversight responsibilities in times of crisis. In Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), the court reversed dismissal of a breach of fiduciary claim against the board of an ice cream company. The company was dealing with a listeria outbreak that had a significant impact on the company’s operations. Although the board met monthly, the court found that the plaintiff had adequately alleged that the board “failed to implement any system to monitor [the company’s] food safety performance or compliance.” Directors need to ensure there are adequate reporting processes that allow them to obtain up-to-date information about COVID-19’s impact on the company’s operations.
4. Carefully consider the company’s COVID-19 disclosures. This includes the need to provide adequate disclosures about what the company knows now and the need to provide additional information regarding the ongoing impact of this pandemic on the company’s operations. Review risk factors, MD&A, earnings guidance, financial statements, and other relevant disclosures, and ensure that they appropriately disclose known risks, trends, and uncertainties.
5. Give special consideration to earnings guidance. Discuss with management whether changed circumstances merit an update to or withdrawal of earlier guidance. Review and update cautionary language to maximize the protection of the safe harbor for forward looking statements.
6. Evaluate the financial strength of the company. The board should understand how the financial strength of the organization is being affected by the pandemic. Directors should understand, for example, the company’s capital structure, cash sources and needs, upcoming debt service requirements, and loan and indenture covenants. It might be prudent to begin identifying where the company can cut back if necessary, consistent with (1) continuing basic operations, (2) continuing minimal operations needed to preserve the ability of the company to function again, or (3) shutting down operations and retaining just enough personnel to manage a windup or shutdown. Once the company is in the early stages of financial distress, the directors should consider retaining legal and financial professionals with relevant experience to help develop a coordinated and comprehensive strategy. Those professionals can also help directors understand their fiduciary duties, including whether they have duties to other constituencies such as creditors, and whether certain transactions will receive heightened scrutiny. Too often companies wait until the cash is about to run out to begin planning and consulting professionals, which is usually too late. The best time to undertake aggressive steps to deal with financial distress is when the company still has some options and flexibility.
7. Seek Appropriate Advice. Directors can retain experts and advisors and should consult with them when appropriate. Many boards have legal counsel attend all meetings, and the board should understand in advance the legal implications of material decisions. In certain circumstances, it may be appropriate for the board to engage advisors directly rather than relying on those retained by management. This is particularly true where there is the potential for management to be conflicted. Keep in mind, however, that although directors may rely on advisors, they cannot outsource the board’s decision-making responsibilities.
8. Be especially careful about board minutes and materials. Make sure minutes and materials reflect the thoughtful consideration given to the issues without transcript-like detail or lots of adjectives and adverbs. Also take care to ensure that the materials are consistent with the company’s public disclosures. This is important because potential plaintiffs can get access to them easily by sending a request under Delaware 220 or Cal. Corp. Code 1601.
9. Review your indemnity agreements and insurance coverage. During times of financial distress, it is important that directors have indemnity agreements with the company, but it is even more important that they have adequate D&O insurance coverage. Because a company cannot indemnify its directors and officers if it becomes insolvent, insurance will likely be the only financial protection directors have if a claim is made against them. Review and consider whether you have sufficient coverage, including the policies’ terms and limits. Also consider advanced payment for policy renewals, especially if your current policy period is ending soon.
10. Be cautious in your written communications. As you ramp up virtual communications, the volume and scope of electronic communications will increase. This not only creates an increased cybersecurity risk, but it also creates a litigation risk. That’s because board-related emails, texts, and instant messages will come to light in the event of litigation.
In short, directors have a key role to play in ensuring that the companies they oversee will weather the uncertainty created by the COVID-19 pandemic. This also puts directors at increased risk. This alert provides guidance on how to mitigate that risk.
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