Duties of Directors During COVID-19
Boards of directors managing businesses are facing a very large challenge in today’s business climate. COVID-19 has created extreme hardships for businesses ranging from drops in the supply and demand of products to government mandated closure of businesses. Directors need to be very careful in determining what actions to take with regard to their companies during this crisis and should be mindful of the fiduciary duties they owe their shareholders.
What is a Fiduciary Duty?
Fiduciary Duties Owed to Shareholders
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
Decisions of directors are typically 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.
The Impact of COVID-19 On Fiduciary Duties
COVID-19 does not change the duties owed by directors to their corporation. Directors are still required to keep themselves informed, to be disinterested, and to act in the best interest of the corporation.
What COVID-19 does affect are the decisions that directors may need to make regarding the future of their companies. COVID-19 presents significant business risks that directors will need to navigate carefully. Decisions on whether to limit business operations, take advantage of new corporate opportunities, or focus on maintaining short term liquidity must all be made with the directors fiduciary duties in mind.
During the COVID-19 era it is imperative that directors gather and review all relevant data before making important company decisions. Directors should take time to deliberate, and would be well advised to enlist the help of experts in navigating the current economic and legal climate. While directors cannot delegate the duties they owe to their corporations, they can rely on experts.
Directors should also screen themselves for conflicts of interest before making crucial business decisions. Most importantly, directors must act in good faith and in the best interest of the corporation.
Getting Legal Help
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