The COVID-19 pandemic has affected, and continues to affect, Canadian businesses in a significant manner. As this situation continues to evolve, directors should remain cognizant of their duties and responsibilities as corporations face a range of challenges, including liquidity issues.
Under Canadian law, directors generally have the responsibility to manage, or supervise the management of, the business and affairs of a corporation. In discharging these responsibilities, the courts will generally defer to the business judgement of the directors and not second guess reasonable business decisions that have a proper corporate purpose, are taken after having made a reasonable and informed investigation (including input from management and external advisors), lie within a range of reasonable alternatives and are made in good faith and in the absence of conflicts of interest, with the honest belief that the action is in the best interests of the corporation. In general, acting in the best interests of the corporation may require consideration of the interests of shareholders, employees, suppliers, creditors, customers, governments and the environment, among others. Further, in these circumstances the courts will defer not only to the manner in which competing corporate stakeholder interests are balanced (including the interests of shareholders, employees, suppliers, creditors, customers, governments and the environment), but also to a board’s reasonable judgement as to which stakeholder interests to take into account.
At all times, the business decisions taken by directors must be reasonable in light of all the circumstances known to the directors at the time (or that they ought to have known). Those circumstances include socio-economic conditions relating to the financial stability of the corporation, including the market conditions arising from the COVID-19 pandemic.
In Canada, a director’s duties do not shift to the corporation’s creditors when the corporation enters the “vicinity of insolvency”; rather, those duties are owed to the corporation at all times. However, in addition to common law and statutory duties, directors should also be aware of remedies and potential liabilities that may become of heightened concern as a corporation faces financial difficulties. These include, but are not limited to, an oppression remedy, in which creditors and others may seek an order against the corporation, its directors and other individuals to the extent an action taken is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any creditor; liability for share purchases or payment of dividends if a corporation is not able to meet applicable solvency tests; and liability in connection with the corporation’s failure to deduct, withhold, collect, remit or pay amounts as required under various federal and provincial taxing statutes.
For additional information, please see our publication on duties of directors here.
As businesses and boards of directors migrate the various and often unprecedented issues arising from the COVID-19 pandemic, we address key considerations for directors of Canadian public and private corporations:
Remain informed and responsive. Directors should be kept up-to-date by management and external advisors on COVID-19 developments affecting the corporation and its business and continuously assess any plans or risk management measures put in place by management. To remain responsive, boards should consider setting more frequent teleconference meetings or forming a committee specifically charged with monitoring and assessing COVID-19 developments.
Key person risks. Consideration should be given to scenarios in which the CEO or other key employees become exposed to COVID-19 and chooses or is required to isolate themselves and who would immediately step into their place on an interim basis. Boards should aim to mitigate this risk by implementing or updating their emergency succession planning in collaboration with the corporation’s human resources and investor relations teams.
Liquidity concerns/financial management. The board and management should continue to monitor the corporation’s liquidity, capital resources and financial stability and the corporation’s compliance with financial covenants in credit documents, and maintain an open dialogue with its lenders.
Continuous disclosure filings. In conjunction with management and external advisors, the board should consider the corporation’s public disclosure requirements as a result of COVID-19 and the availability of regulatory relief from those requirements. This may include the need to provide additional disclosure in the corporation’s risk factors, forward-looking information, MD&A, financial statements or other public disclosure documents as the impact of COVID-19 unfolds. Boards should also discuss with management and consider whether any earnings guidance requires updating or if earnings guidance should be withdrawn. For additional information, please see our publications on disclosure considerations here and announcements from the Canadian Securities Administrators here.
Annual general meetings. Boards should consider with management, subject to compliance with the corporation’s constating documents and governing law, whether to hold virtual or hybrid annual general meetings. The Ontario government recently announced an emergency order that temporarily amends the provisions of the Business Corporations Act (Ontario) related to annual shareholders meetings. For additional information, please see our publication on virtual AGMs here and our publication on the announcements from the Ontario government here.
Share accumulations. Management should monitor public filings and consult financial advisors about accumulations of the corporation’s securities by third parties, and related defensive measures and should also be mindful of the corporation’s own vulnerabilities to an unsolicited acquisition or activist shareholder campaign.
Securities trading. Boards should closely monitor securities trading policies and, if necessary, consider imposing additional blackout periods or imposing further restrictions on trading in the corporation’s securities by insiders who may have access to material non-public information regarding the impact of COVID-19 on the corporation and its business.
Supply chain/outsourcing disruptions. Ensure that management continues to review the corporation’s supply chain and has a contingency plan it can quickly implement to address disruptions that arise within its supply chain or third party service providers. This is likely a long-term issue as corporations consider their response to similar crises in the future. For additional information, please see our publication on supply chain stabilization solutions here.
Communication with regulators. For regulated businesses, continue to monitor any guidance provided from the regulator and consider any communications with them that may be necessary.
Opportunistic transactions. Boards may wish to consider with management if strategic acquisition opportunities exist or are likely to emerge that are inline with the corporation’s objectives.
Privacy and data security. Remote work arrangements may lead to additional stress on the corporation’s IT systems that can lead to the corporation being vulnerable to privacy breaches or cyber security attacks. For additional information, please see our publication on managing privacy and cyber issues here.
Executive compensation. Boards may wish to review and consider existing incentive plans and compensation arrangements to ensure that senior management is being fairly compensated and that proper incentives are still available to key members of their management team. Boards may consider adjusting performance targets under incentive plans or delaying setting incentive plan goals until the current uncertainty has subsided.
By Jeremy Pleasant, Jonathan R. Grant, Wendi A. Locke, David E. Woollcombe and Heather L. Meredith
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