The duties of directors of a Maryland corporation in a global pandemic such as COVID-19 or any other crisis that creates widespread disruption, including actual and potential impact on the company’s business, are the same as they are in normal times. Under the Maryland General Corporation Law (“MGCL”), the board of every Maryland corporation is charged with (a) overseeing the management of the corporation and (b) making decisions, including those required or permitted by statute and otherwise, in the best interests of the corporation.
In exercising the board’s oversight and decision-making functions, the MGCL requires each director to act in “good faith;” in a manner that each director reasonably believes is “in the best interests of the corporation;” and with the “care [of] an ordinarily prudent person in a like position . . . under similar circumstances.” These duties are augmented by a statutory presumption that any “act of a director is presumed to be in accordance with these duties.” Thus, someone challenging an act (or omission) by one or more directors not only has the burden of proof but also needs to overcome this presumption in favor of the director’s acts. It is important to note that these three standards of conduct apply individually to each director, director by director, and not collectively to the board.
The MGCL also specifically authorizes a director to rely on information, opinions, reports and financial statements prepared or presented (a) by officers or employees reasonably believed to be reliable and competent; (b) lawyers, CPAs and other experts as to matters reasonably believed to be within their professional or expert competence; and (c) a board committee reasonably believed to merit confidence. A director is not acting in good faith if he or she has any knowledge that would cause such reliance to be unwarranted.
While the duties of directors are the same in a pandemic or any other crisis, whether global, national, regional, local or company-specific, the manner in which a director should comply with these standards will, of course, differ according to the circumstances. In general, it can be said that directors should not wait to see whether the chair of the board or lead director calls a meeting or management consults the board; rather, each director should be proactive in initiating discussion with the chair, lead director, other directors and senior management. A director with insight or information not possessed by other directors should share it with the board. One or more board meetings (with, as appropriate, relevant management and advisers) will often make sense, so that directors may gather information, deliberate and make any decisions or take any other action that seems to them to be in the company’s best interests in the circumstances. Directors should try to look forward and understand how the company’s markets will look as the crisis evolves and thereafter.
While the particular actions of directors will vary according to the company and its circumstances, directors should be asking, among other matters, about:
- the nature and likely duration of the crisis;
- any applicable crisis management plan and the actual and potential impact of the crisis on the company’s business (including on employees, customers, suppliers, other important counterparties and stakeholders);
- the company’s ability to discharge its debts in the ordinary course (including compliance with debt covenants and adequacy of collateral) and pay its dividends (preferred and common) in keeping with expectations, make payroll and meet its other obligations in the ordinary course of its business;
- the impact on the company’s near-, intermediate- and long-term strategic plans, pro formas and budgets and on any special projects;
- reactions of major investors, including outreach to them;
- industry- or sector-specific risks or other factors;
- any effect on pending or completed securities offerings or other transactions (including material adverse effects and any required disclosure);
- potential litigation either as a plaintiff or defendant;
- impact on competitors and the industry or sector generally;
- potential impact on executive compensation;
- effect of Congress’s and any state/local governments’ stimulus packages and new tax benefits;
- insurance coverage and potential claims;
- media coverage, investor relations and disclosure obligations (including review of recent market guidance, risk factors and any duty to update any prior disclosure);
- market liquidity for company securities;
- potential challenges to control of the company and available takeover defenses;
- plans for upcoming stockholder and board meetings, including availability of directors to meet on short notice;
- delegation of powers to an executive or other special committees;
- the existence or likelihood of any conflicts of interest arising out of the crisis; and
- possible business opportunities as a result of the crisis.
While there are various protections for directors, including charter exculpation provisions for directors and officers of Maryland corporations, D&O indemnification provisions in charters and/or bylaws, D&O insurance and D&O indemnification agreements, the best protection for a director is performance of his or her duties under the MGCL as outlined above.
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As always, my colleagues and I are available to discuss these or other matters of Maryland law.