Though the COVID-19 pandemic put in-person classes, business operations, and vacation plans on hold, there has been no pause of the duties of boards of directors to their respective companies. Board members should keep their fiduciary duties and the practical steps they can take to meet those duties top-of-mind as they guide their companies through the COVID-19 pandemic. We have highlighted board members’ duties and some practical tips boards of directors can take to meet their obligations to their companies during the pandemic.
Board Duties and the Business Judgment Rule: A Refresher
Under Delaware law-which most jurisdictions widely follow when it comes to directors’ duties-directors have a duty of care and duty of loyalty.
- The duty of care requires directors to make informed and deliberative decisions based on all material information they have reasonably available to them.
- The duty of loyalty requires directors to act (or decide not to act) in a disinterested and independent manner, with the honest belief that the action or inaction is in the best interests of the company and its shareholders. How will decisions made by board members be evaluated by courts if those decisions are challenged? Courts evaluating board decisions under Delaware law first look to the “business judgment rule,” which allows a rebuttable presumption that directors satisfied their fiduciary duties in making business decisions.
- If the presumption is rebutted-such as in cases of related party transactions or lack of director independence-Delaware courts apply the more exacting “entire fairness” standard, which normally shifts the burden to directors to prove the fairness of a challenged corporate transaction or decision.
- As part of the duty of care and duty of loyalty, directors have the duty of good faith, oversight and disclosure. They have to act in good faith, be diligent in overseeing the company, and disclose any conflicts of interest as well as anything that is in the best interest of the company to know.
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