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Managing a corporation in a pandemic: How directors and officers can fulfill their duties and limit risk

Canada Publication March 30, 2020 - 12 PM ET

The fiduciary duty (loyalty) and duty of care owed by directors and officers of Canadian corporations require them to oversee the management of the corporation with a view to the corporation’s best interests. The Supreme Court of Canada has held that the fiduciary duty is a “broad, contextual concept” that is not confined to short-term profit or share value. In considering what is in the corporation’s best interests, directors may consider the interests of various stakeholders, including shareholders, employees, creditors, consumers, governments and the environment. The content of the duty “varies with the situation at hand.

For many corporations, the extraordinary circumstances triggered by the COVID-19 pandemic have materially changed the situation at hand. As such, determining the corporation’s best interests may involve a more complex analysis. This is particularly so where the interest of shareholders in value maximization may run counter to the interests of other stakeholders, such as employees.

Business judgment rule

How do directors and officers satisfy this increasingly challenging duty and minimize their exposure to personal liability? The answer begins with good governance and processes that ensure due consideration of stakeholder interests. If directors and officers follow best practices and processes in this regard, under the “business judgment rule” Canadian courts are more likely to be deferential to their decisions so long as the decisions lie within a range of reasonable alternatives.

The specific forms of governance and decision-making processes that should be followed will vary depending upon the nature of the corporation’s business. In general, noting the situation at hand, directors should be asking tough questions, including about the viability of the corporation’s business model, the need for additional or modified disclosure (for instance, guidance on revenue), management’s crisis management plans, compliance with contractual covenants (for instance, debt covenants), newly available contractual rights (for instance, the right to declare force majeure), new supply chain risks, employee safety, and any newly available government assistance.
  
In this particular situation at hand, directors and officers should consider the availability of expert advice on COVID-19 issues, and in any event stay on top of COVID-19 developments, including changes to laws and government programs. The need for more frequent board meetings and management reports should also be considered.

In terms of personal exposure, directors and officers should also seek advice on the adequacy of the corporation’s D&O insurance coverage and their rights of indemnity, and pay close attention to corporate tax obligations that can lead to personal liability.

We also refer the reader to the Norton Rose Fulbright publications:

- Managing Securities litigation risks in the age of uncertainty
 
- COVID-19: Legal considerations for Canadian boards


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