As a general principle, directors must exercise their mandate with due care and diligence, the yardstick being what would be expected from a careful and diligent director in the same circumstances. Business decisions must always be taken in the best interest of the company, taking into account the interests of all shareholders - like employees, customers, creditors and suppliers. Within that context, it will therefore be the primary responsibility of the directors to take the necessary measures to mitigate the business, financial and human risks caused by COVID-19.
Directors need to constantly assess the risk of damage to the company in order to immediately take the appropriate measures in order to avoid, or at the least, limit any damage. These measures must be regularly reassessed to ensure their effectiveness in this rapidly changing situation. Staying well-aware of developments within the company and of the rapidly evolving situation within the whole community and of the changes in applicable regulations is therefore a prerequisite for directors within this unprecedented crisis context.
If directors do not carefully assess and proactively address - with appropriate responses - the potential impact of COVID-19, they could be held liable. Of course, it should be noted that, when assessing director’s liability, a court will have to respect the director’s margin of discretion regarding his/her decisions and can only sanction obvious faults manifestly falling outside the margin. This so-called marginal control entails that the assessment should be based on the information available at the time the decision is taken (not a posteriori).
Both financial and non-financial risks (such as reputational loss) must be scrutinized. The directors should focus, inter alia, on the following industry-agnostic issues, it being understood that all companies must also address challenges specific to their industry and regulatory environment:
Health and Safety
Companies should of course focus on protecting the health and wellbeing of their employees (and their families), customers, business partners and the public at large. More than ever, directors should verify and ensure compliance with all applicable safety measures and should remain up to speed as to the (COVID-19 related) changes in applicable regulations. Directors should consider how to mitigate the financial and operational impact of Covid-19 measures, including, in quite some cases, the closures of premises and the organization of telework.
The potentially significant business interruptions caused by the pandemic might require companies to take measures to improve the liquidity situation in the near-term. The directors have to ensure that, taking the consequences of COVID-19 into account, the company is neither unable to pay nor over-indebted, and - as the case may be - take adequate measures to address potential liquidity issues as much and as soon as possible. There are already a string of measures to ease the financial situation of Belgian companies that have been taken or announced by the Belgian government. Directors must inform themselves and assess whether it is in the interest of the company to use one or more of these measures.
Financing and commercial agreements
Directors should carefully review the company’s contractual financing and commercial documentation to assess whether COVID-19 could e.g. lead to an event of default, a relieve of payment or otherwise impact its agreements. A proactive analysis of the contractual requirements, especially the ability to rely on force majeure, the MAC/MAE conditions and the terms of notice deadline, is strongly recommended. Boards will have to carefully assess the risks related thereto and possible mitigation strategies.
Many deals are likely to be disrupted due to market uncertainty and volatility caused by COVID-19. Purchasers might seek to renegotiate the terms of the transactions, for example by seeking to rely on MAC/MAE conditions or by reopening discussions on purchase price where the value of the target has (or is about to) decrease(d).
Failing to properly consider any relevant risk could lead to serious consequences for directors. COVID-19 must therefore be a focus for directors who should (i) carefully assess the risks for their companies, (ii) seek advice on their legal rights and obligations, (iii) proactively bring an appropriate corporate response to these risks, whilst ensuring business continuity as much as possible.