Written by Curtis A. Cusinato, Brent W. Kraus and Preet K. Bell
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.
Duties in the Context of COVID-19
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:
- Forming a committee to specifically monitor the rapidly-changing COVID-19 situation, including guidelines from organizations such as the World Health Organization, and assess risk management measures. Some directors or employees may need to step out of their day-to-day roles and dedicate significant time to developing appropriate responses.
- Addressing workplace health and safety issues, including the health and protection of employees. At a minimum, this likely includes directives on proper sanitization and directions for sick employees to stay home, but may also require consideration of more significant restrictions on employees if, for example, the employee visited a high-risk area. Companies may begin to face a tension between civil liberties, such as the right of their employees to travel, and the safety of other employees where they may be exposed to those who have been travelling. Alternative work locations, or having employees work remotely in certain circumstances, may be some options for boards to consider.
- Assess the ability of employees to work remotely, including any additional cyber-security measures that may need to be implemented.
- Consider whether larger meetings or events should be postponed, cancelled or moved to a virtual environment, depending on the circumstances.
- Depending on the corporation's industry, assess how to address or mitigate any financial impacts of COVID-19, for example supply issues, particularly where suppliers are located in high-risk areas or areas subject to travel restrictions, and potential liquidity issues in light of, among other things, market impacts.
- Coordinate constant communication with potentially affected stakeholders including customers.
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. Bennett Jones can assist organizations in developing appropriate responses and measures in the face of the COVID-19 pandemic.