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Immunizing the board: What directors should be thinking during pandemic

Friday, April 24, 2020 @ 8:51 AM | By Linda Fuerst and Steve Leitl


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Steve Leitl
The COVID-19 pandemic will likely result in increased exposure to liability on the part of directors of U.S. and Canadian companies. This includes an anticipated uptick in both securities class actions and securities regulatory investigations, derivative actions in the U.S. and potentially more oppression actions in Canada, as well as a rise in shareholder activism, short attacks and proxy fights. The suspension of limitation periods in many provinces across Canada gives class counsel and securities regulators more time within which to investigate and commence proceedings.

It is expected that the number of securities class actions alleging misrepresentations arising out of accounting issues will increase as a result of COVID-19. High risk areas for public companies include the adequacy of risk disclosures, the provision of guidance, oral statements made during analysts’ calls and the adequacy of internal controls over financial reporting, which may be impacted by employees of entire departments and companies working remotely.

In these uncertain circumstances, directors should consider the wisdom of issuing guidance and whether there is a need to withdraw or revise guidance previously given. The reasonableness of the assumptions underlying the guidance, and the process followed to prepare a forecast will affect the ability of directors to rely upon a defence available to them under Ontario securities law in response to a statutory secondary market misrepresentation claim.

Recent guidance provided by the U.S. Securities and Exchange Commission (SEC) concerning its expectations of public companies in light of the pandemic, underscores that boards of directors cannot afford to be passive recipients of information from management. The board must take, and the minutes must reflect, that appropriate steps were taken to oversee and appropriately challenge management’s judgments relating to the company’s public disclosures. Boards also need to be scrupulously careful about trading in the company’s securities given the amount of material non-public information to which they likely now have access.

Other steps that directors should take now include ensuring that the company has a robust process for elevating critical information about changes in financial condition in a timely fashion so that directors are adequately informed and can discharge obligations to make timely disclosure of material information or to update information already disclosed.

The board should resist any temptation by management to overpromise in public disclosures, particularly on earnings calls. In general, the board should strive for consistency in messaging to all of the company’s stakeholders concerning the impact of, and the company’s response to, COVID-19, to avoid allegations that its public disclosure was misleading or that it made selective disclosure of non-public information.

All of that said, it is important to bear in mind that the fundamental duties of care and loyalty owed by directors to the corporation do not change in times of crisis. Moreover, both in Canada and in the U.S., directors should be careful to ensure that their processes in discharging those duties will enable them to shelter behind the business judgment rule. Directors should ensure that their decisions are being made on an informed and reasoned basis.

When making difficult decisions about, for example, cutting dividends, shutting down some or all operations or deciding not to pay creditors, it will be important for the board to be able to demonstrate that it obtained appropriate advice, including from qualified experts (particularly when dealing with complex issues arising from the pandemic), considered a range of alternatives, challenged management as appropriate and had the best interests of the company in mind.

Linda Fuerst is a senior partner at Norton Rose Fulbright Canada LLP. Her litigation practice covers a broad range of commercial and professional liability matters, with a particular focus on securities litigation, class proceedings and regulatory issues. Steve Leitl is a senior partner at Norton Rose Fulbright Canada LLP. His practice covers a broad range of commercial litigation matters, with an emphasis on securities, M&A, directors’/officers’ liability, class actions and internal investigations.

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