On March 11, 2020, the World Health Organization officially declared COVID-19 a pandemic. The ramifications of COVID-19 are being experienced worldwide, with President Trump suspending all travel from Europe, and even the NBA and NHL suspending their seasons indefinitely. At a more local level, businesses are facing their own decisions with respect to how to manage the virus and make responsible decisions, while still trying to maintain corporate profitability. In these circumstances, boards of directors must be mindful of their legal obligations and duties, and the particular considerations that may arise as a result of COVID-19.
The corporate statutes in Canada set out two main statutory duties for directors, known as the duty of loyalty and the duty of care. Pursuant to the duty of loyalty, directors must act honestly and in good faith with a view to the best interests of the corporation. In acting in accordance with the duty of loyalty, directors should consider the interests of all stakeholders (including shareholders, employees, retirees and pensioners, creditors, customers and governments), the environment and the long-term interests of the corporation. The duty of care is the standard to which the performance of directors' obligations is expected to conform. Directors must act in an informed and prudent manner, the contours of which are driven by the factual circumstances of each situation. Perfection is not demanded of directors—rather, there must be an appropriate degree of prudence and diligence in reaching a reasonable business decision. Provided that directors act on an informed basis and free from conflict of interest, the courts in Canada generally defer to directors under the business judgment rule.
While directors owe their fiduciary duties and obligations to the corporation, and not to individual stakeholders, it is worth remembering that directors must act in a way to promote the success of the corporation and must have regard to the interests of the corporation’s employees. In addition, they must act reasonably in light of the factual circumstances at the time, which currently includes the existence of the COVID-19 pandemic. Therefore, if directors were completely reckless or blind as to the potential impact of COVID-19, there could be a risk of liability. As a practical matter, boards of directors should be able to demonstrate that they sought to inform themselves as to applicable risks, and have put in place an appropriate response to any COVID-19 issues that may impact the corporation and/or its employees.
Each corporation and each situation is different and therefore it is impossible to develop a comprehensive checklist for all corporations. One of the key factors is currently the location of the corporation and its employees, which will drive the appropriate response. Some current considerations that boards of directors may wish to consider include:
The impact of COVID-19 could be very significant to corporations, and boards of directors need to be mindful of their unique duties and obligations in these circumstances. Every corporation and every situation will be different and may require a different response.