It is no secret that COVID-19 has been difficult for businesses, both in terms of financial health and longevity. In addition to keeping your business afloat, what else should you consider “essential” during this time of economic volatility? Your fiduciary duties. Whether a director, an officer, or a manager, if you are part of an entity’s management, you owe fiduciary duties to the entity itself and its owners, and, in times of severe financial distress, these duties may in fact be owed to additional third parties. This article provides a recap of duties and suggestions on how you, as a member of management, can protect yourself while also furthering the best interests of the company.
Fiduciary Duties of Management
As a general principle, if you are a director, officer, or manager (collectively, “Management”), you owe duties of care and loyalty to the corporation or company (collectively, the “Company”) and its shareholders, partners, or members (collectively, “Stakeholders”). Depending on the type of entity involved—a corporation, a limited liability company, or otherwise—the application of these duties may be more nuanced, but the principles are largely the same.
- Duty of Care: requires that you act in the same manner as a reasonably prudent person in your position would act when making decisions for the Company. This means that you must be informed of all material information prior to making any decision.
- Duty of Loyalty: requires that you act in good faith and in the best interests of the Company and its Stakeholders and avoid conflicts of interest through self-dealing or personal gain.
The duties you owe to the Company and its Stakeholders could eventually shift to include other third parties—creditors—if your Company becomes insolvent. It is important to be mindful of your Company’s financial performance and seek the guidance of experienced counsel to better understand your Company’s solvency and prepare strategies to minimize the risk of breach of fiduciary duties.
Keep These on Your “To-Do” List
COVID-19 presents a unique set of challenges, and the following “best practices”—should remain on your “to-do” list in all circumstances:
- Maintain the Company’s corporate formalities. This is not a time to skimp on the process. You should strive to be available and participating in meetings and ensure the corporate books and records, including financials, are accurate and up to date.
- Make informed, transparent decisions. You should continue to do the necessary due diligence and information gathering prior to making corporate decisions. All decisions should be made by fully informed Management in good faith and in the best interests of the Company, with particular emphasis on avoiding conflicts of interest.
- Review terms of major contracts. You should review major contracts, especially those affecting finances and supply chain, to assess whether current trends could lead to a breach of representations or warranties. You should also review force majeure clauses (1) in existing contracts to assess whether any relief or protections are available and (2) in future contracts to ensure adequate protection of your Company’s interests.
Understanding Your Exposure
Following the best practices above may help reduce the risk of litigation and limit challenges to Management decisions. You should be familiar with your Company’s governing documents to better understand your risk exposure.
You should also examine your director and officer (“D&O”) insurance coverage and be aware of the type and limits of your Company’s policy. If you do not have D&O coverage, consider whether promptly procuring such a policy is feasible and makes sense from a business perspective. Despite the uncertainties, it is essential that each member of Management remain vigilant in fulfilling his or her fiduciary duties—during COVID-19 and beyond. If you have specific questions about the topics discussed in this article or need guidance on how to implement these best practices in your company, Cokinos | Young STRUCTURE, the transactional team of Cokinos | Young, would be happy to discuss and help tailor a plan that fits your company’s individual needs.