Exercising Business Judgment Through COVID-19

As COVID-19 related restrictions begin to ease, boards and management face unique decisions as to how to return to a new normal amid evolving legal requirements, health guidelines and divergent stakeholder concerns and expectations. A focus on business judgment will assist corporate leaders in making these tough decisions and finding a path to the other side of the pandemic.

D&O Duties

The COVID-19 pandemic has forced boards and management teams to face unprecedented challenges and make quick decisions in order to guide their companies through uncharted waters. Canadian corporate law provides a well-worn framework for decision making and directors and officers should continue to bear in mind their fundamental duties as outlined in the various Canadian corporate statutes [1].

Aspects of directors’ and officers’ duties all have implications in navigating decisions related to COVID-19:

• Duty to manage or supervise management. Boards generally supervise the management of the business and affairs of the corporation, rather than manage it directly. There are limitations on boards’ ability to delegate both generally and with specific limitations under various corporate statutes.
• Fiduciary duty. Acting in the corporation’s best interests may extend beyond its shareholders to considering the interests of its broader stakeholders (including employees, creditors, consumers, governments and the environment, among others), as most notably set out in BCE Inc. v. 1976 Debentureholders [2] and recently adopted in the Canada Business Corporations Act. In this context, directors may be looking to see what the corporation as a “good corporate citizen” ought to do taking guidance from BCE where it was stated that “…conflicts may arise between the interests of corporate stakeholders inter se and between stakeholders and the corporation. Where the conflict involves the interests of the corporation, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen. [3]“
• Duty of care. Directors and officers are required to perform their duties with the care, skill, and diligence of a reasonably prudent person. In determining whether the duty of care has been satisfied, Canadian courts will generally defer to the business judgment of the board, provided that it acted in a reasonable and informed manner. This is generally referred to as the “Business Judgment Rule”.

Failure to satisfy any of these duties may subject directors, officers and corporations to liability.

Risk Oversight

The COVID-19 pandemic will have likely shifted corporate risk profiles in significant ways and may require boards and management teams to evaluate not only the principal risks to their company’s business, but also their risk oversight activities. In particular, health and safety compliance and risk governance may now be front and centre. As a best practice for Canadian public companies, National Policy 58-201 Corporate Governance Guidelines suggests that boards adopt written mandates which explicitly acknowledge board responsibility for the identification of the principal risks of the issuer’s business and ensuring the implementation of appropriate systems to manage these risks. However, how to oversee risk is left to corporate leaders’ discretion and it remains to be seen whether the explicit acknowledgement of these responsibilities could serve to increase potential director liability.

In very general terms, risk oversight forms part of the overall duty of supervision, which must be carried out with care. While Canadian case law has not specifically discussed a duty of risk oversight, guiding principles have arisen in U.S. case law which may prove helpful for COVID-related decision making. The Caremark [4] line of cases in Delaware establishes boards’ specific responsibility for risk oversight and legal compliance, outlining two prongs of the oversight duty:

• Implement and maintain a system of information, reporting and controls to oversee legal compliance and manage risks.
• Monitor the system and take action as needed.

In this line of cases, U.S. courts have been heavily deferential to boards’ business judgment in all aspects of risk oversight, as long as a system exists and is being monitored. While these principles have yet to be tested in Canadian courts which may take a different approach, Canadian courts generally assess whether directors have met their statutory obligations on the basis of the Business Judgment Rule.

Business Judgment

The Business Judgment Rule is the doctrine that courts rely on to avoid second-guessing decisions of corporate boards, provided that the decision is well-informed and reasonable in the circumstances. Courts recognize that boards can be required to make decisions with imperfect information and limited time. A board’s decision does not need to be perfect, but rather should be based on informed deliberation. Given the unique issues boards are facing as their businesses begin to resume operations and/or transition into post-COVID operations, reliance on the Business Judgment Rule and good process/governance will likely prove to be an important tool for directors and officers.

In exercising their business judgment, directors and officers are required to:

• act prudently and on a reasonably informed basis;
• make decisions in light of all the circumstances about which the directors or officers knew or ought reasonably to have known; and
• make and act on decisions that are within a range of reasonable alternatives.

Process, Process, Process

Case law in both the U.S. and Canada highlights the importance of deliberation in the exercise of business judgment and decision-making, provided the decision is within a range of reasonableness. This should offer corporate leaders some level of comfort during this new phase of the COVID-19 pandemic, as the breadth of information (and misinformation) available, coupled with both legal requirements and soft guidelines for reopening, make decision making and strategic planning increasingly difficult.

Boards and management should not let current uncertainty cripple decision making but rather aim to make well-informed decisions in reliance on the Business Judgment Rule. To do so, consideration should be given to governance and process:

• Governance Policies, Mandates and Charters. Boards and management should continue to comply with their existing corporate governance policies and update or revise such policies as needed in light of the current situation. They should also review any codes of conduct which may contain relevant statements of values.
• Committee Structures. Consideration should be given to whether pre-existing committees or new special committees (for example, a Health and Safety Committee) should be struck to address ongoing COVID-19 developments and concerns, particularly as businesses face new operational challenges.
• Time Considerations. While a board may typically meet four to six times annually, this crisis may require a greater frequency of meetings. In addition, sufficient time for deliberation should continue to be allocated at each meeting to allow directors to properly digest information and issues as they arise.
• Information Gathering. As more businesses emerge from lockdown, boards should continue to seek to ensure that they have frequent access to reliable information about COVID-19 so that they can best understand the potential and apparent risks and challenges to the business associated with the pandemic. Consideration should be given to whether additional expertise is required to fully understand the ever-developing COVID-19 situation.
• Coordination with Management. Given the speed at which the COVID-19 pandemic has developed, increased dialogue and communication between Boards and management is also appropriate, while being mindful of the risk for micromanagement. While boards should continue to delegate day-to-day decision making to management, the ability to make appropriate strategic plans, both short- and long-term, may require up-to-date and in the moment information from key employees.
• Maintain Minutes. Board meetings are a critical component for directors’ fulfillment of their statutory duties and reliance on the Business Judgment Rule. Minutes of meetings are required to be kept. While there is little direction in Canadian corporate law as to how maintain minutes, they should succinctly and accurately reflect the material aspects of the board’s deliberations and should serve as a record of discussions and decisions on material issues.
• Stakeholder Engagement. Consistent dialogue with and consideration of stakeholders will serve to keep boards informed of the issues facing both the corporation and those with a vested interest in the success of the business. This may include increased engagement with employees, lenders and shareholders. While governmental plans to reopen the economy have given rise to new legal requirements, broader public health concerns about the well-being of employees, customers, suppliers and the community at large will likely also impact decision-making. Frequent stakeholder updates through press releases and material change reports (as required) and other communications may also serve the corporation well in seeking to ensure that shareholders and other stakeholders have an accurate picture of the business.

Limitations of Business Judgment

Importantly, the Business Judgment Rule will not be available in all cases. The Business Judgment Rule will not give boards, management and corporations permission to ignore statutory obligations and so, to the extent that a business must comply with newly enacted laws or government orders related to COVID-19, companies should seek to fully understand and comply with their legal obligations. Additionally, directors may not be able to rely on the Business Judgment Rule in the context of decisions made where they have a material conflict of interest.

Endnotes