5/20/20

Monitoring and Oversight in the COVID-19 Era

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A board’s core duties to employ reasonable and effective oversight of management and business operations are even more important in this unique COVID-19 era.  Beyond potentially harming the company’s business value and reputation, failure to adequately monitor corporate risks can expose directors to personal liability for breach of fiduciary duty.  This alert discusses the contours of those duties and how boards can mitigate risks of claims of inadequate monitoring and oversight arising from the COVID-19 pandemic.

The Basis for Monitoring and Oversight Duties

Monitoring and oversight obligations are well-established, flowing from the 1996 decision In re Caremark Int'l, 698 A.2d 959 (Del. Ch. 1996).  Last month, the Delaware Chancery Court reaffirmed and summarized these Caremark duties: 

The board of a Delaware corporation has a fiduciary obligation to adopt internal information and reporting systems that are ‘reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with law and its business performance. . .’ ‘Failing to make that good faith effort breaches the duty of loyalty and can expose a director to liability.’ 

Hughes v. Hu, C.A. No. 2019-0112-JTL, 2020 Del. Ch. LEXIS 162, at*39 (Del. Ch., April 27, 2020) (citations omitted).

Caremark instructs that board engagement and involvement are required to manage the mission critical risks that affect a corporation’s operation.  Even though Caremark set a high bar to establish directors’ liability for breach of the duty of oversight, recent Delaware decisions have permitted such claims to proceed, potentially boding ill for directors who are not engaged and vigilant in these exigent times.  Several recent pronouncements clarify directors’ oversight obligation:

Effective Monitoring and Oversight in the COVID-19 Era

Consideration should be given to the following factors to safeguard a board in the discharge of its monitoring and oversight duties.

Establishing an Oversight System

Demonstrate Interaction between the Board and Officers

Specific Steps to ensure Caremark Oversight in a COVID-19 World

As always, feel free to reach out to Vorys for additional guidance and advice on mitigating risk in the COVID-19 era.

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VORYS COVID-19 TASK FORCE

Vorys has established a comprehensive COVID-19 Task Force, which includes attorneys with deep experience in the niche disciplines that we have been and expect to continue receiving questions regarding coronavirus. Learn more and see the latest updates from the task force at vorys.com/coronavirus