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Corporate Oversight In the COVID-19 Era

Board of Directors

This article discusses and explains the issues of Corporate Oversight In the COVID-19 Era. The duties of a corporation’s board of directors are even more important during the COVID-19 era. The uncertainty in today’s business climate requires corporations to act with more diligence in determining what actions the company needs to take, and a wrong decision could have a larger impact on the corporations’ financial status than before. Failure to implement proper oversight and investigation into business decisions could result in a breach of a board of directors’ fiduciary duties.

What is a Fiduciary Duty?

Directors of corporations owe fiduciary duties to the corporation including a duty of care, and a duty of loyalty. The duty of care requires directors to act in an informed manner. It requires them to review all relevant information reasonably available to them before making decisions.

The duty of loyalty requires fiduciaries to act in a disinterested manner and in good faith. Its purpose is to prevent directors and officer from engaging in self-dealing, or from taking actions that would benefit themselves at the company’s expense.

The Business Judgment Rule

There is a broad judicial policy of deference to the decisions of corporate directors. It is based on the notion that directors are in a better position to judge whether a particular act or transaction is in the best interest of the corporation that are courts. For these reasons, decisions of directors are examined under what is known as the Business Judgment Rule.

The Business Judgment Rule gives corporate officers and directors broad discretion in making decisions, and Courts will not review or second guess their decisions or hold them liable for their business decisions so long as they are: (1) disinterested and independent; (2) acting in good faith; and (3) reasonably diligent in learning the facts. If these requirements are met, a director’s decision will be presumed to have been made based on sound business judgment, and Courts will not interfere with the business decision.

Reasonable Inquiry

In order to invoke the protections of the business judgment rule, directors must perform their duties “with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (Cal. Corp. Code § 309). Directors cannot close their eyes to what is going on in the corporation, and the business judgment rule does not make directors immune where they completely abdicate their responsibilities.

Courts may find that a director has not performed a reasonable inquiry if they unreasonably fail to investigate material facts. For this to happen, there must be circumstances that call for an investigation, and the material facts must be discoverable through a reasonable investigation.

Conducting a Reasonable Inquiry During COVID-19

There are several actions that a board of directors can take to ensure that it is conducting a reasonable inquiry into corporate acts and transactions.

  1. Establish Committees

A board of directors can establish, and delegate certain responsibilities to, committees for the purpose of information gathering and decision making. The board of directors should maintain communication with this committee, and keep itself informed on the committee’s findings.

  1. Employ Experts

A board of directors can enlist the help of experts in various fields to aid in the decision making process. These experts can range from accountants, to attorneys and other professionals. Enlisting the help of experts can help keep directors more informed, and aid in the decision making process.

  1. Maintain Regular Communication with and Oversight of Officers

A board of directors can rely on the information presented by, and the opinions of, corporate officers who are competent in the matters presented. However, a board of directors should not simply rubberstamp an officer’s recommendation. Maintaining regular communication with corporate officers and reviewing the information they are relying on will help keep directors informed and to fulfill their obligation to conduct a reasonable inquiry.

Getting Legal Help

Brown & Charbonneau, LLP represents large and small companies as well as individuals in cases involving all forms of business disputes. If you are involved in a business dispute, or would like to learn about your rights and how to protect them, we can provide you with the information you need. Contact us or call today at 714-505-3000 to schedule a consultation and learn more about how we can help you.

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