The recent turmoil in the global markets has created significant uncertainty for many companies and raised questions for their directors about how that uncertainty affects a director's role and duties. In talking to our clients about these issues, several questions routinely arise.

• How does my role as a director change during times of uncertainty?

Let's start with what does not change. A director's role is still to manage the business of the corporation for the benefit of its stakeholders, which can include overseeing management, helping set strategy, and offering expertise. Whether you are an inside director (employee or officer) or an outside director (nonemployee or independent), your fiduciary duties remain the same—to inform yourself of the pertinent facts, act with the requisite care, and work to maximize value of the entire enterprise. The duty of care requires that directors exercise the care of a reasonably prudent person under similar circumstances and in the manner reasonably believed to be in the best interests of the corporation. And the duty of loyalty requires that directors act in good faith and refrain from self-dealing, usurping corporate opportunities, or receiving improper personal benefits in connection with their role as a director.

While a director's role does not change in times of uncertainty, how a director fulfills those responsibilities may change. Directors should maintain contact with management and the rest of the board and keep informed of significant developments within the company, which may require more frequent communication than during less turbulent times, but without overburdening management. The practices laid out below may provide additional ideas for particular steps that boards may want to consider taking at this time.

• What if the market uncertainty puts my company's future financial condition at risk? How does the financial condition of my company affect my fiduciary duties?

For corporations incorporated in Delaware, directors' fiduciary duties always run to the company, rather than to any particular group of stakeholders. Delaware law has rejected the notion that directors' fiduciary duties change if the company is approaching the "zone of insolvency," making clear that a director's duties remain the same whether a company is solvent, in transition, or even insolvent. The business judgment rule protects non-interested directors who make decisions on an informed basis, in good faith and with the belief that the action was taken in the best interest of the company, and it applies equally to "solvent, barely solvent and insolvent corporations."

While a company's insolvency does not change a director's duties, it can alter the pool of stakeholders who might assert a claim against the director for breaches of those duties. When a company is solvent, shareholders are the ultimate beneficiaries of any increase in value and may therefore be able to bring derivative claims on behalf of the company for any breach of fiduciary duty by its directors. However, when a company is insolvent, the company's creditors are the ultimate potential beneficiaries in order of their priority, and therefore its creditors may be able to assert derivative claims for a breach of fiduciary duty.

Outside of Delaware, the answer is often the same, but it is important to understand how your company's state of incorporation may affect your duties if the company is transitioning toward insolvency or becomes insolvent. Texas, New York and California courts, for example, generally follow and frequently cite to key Delaware case law in deciding these issues and similarly reject the notion that a director's duties change with insolvency. But those courts do not follow Delaware law completely and may reach different results on questions such as when a creditor may bring a derivative claim against the directors of an insolvent corporation.

• What else should my board be doing given the current market uncertainty?

As always, the actions that any particular board should be taking will depend on the company's and board's specific needs at the time. However, the following practices are ones that all boards could consider:

• Continue to meet regularly to keep apprised of any key developments, even if that means meeting telephonically or using videoconferencing software to maintain social distancing.
• Continue to review the company's financial reports and pay attention to any potential insolvency indicators.
• Maintain accurate records of the information reviewed by the board.
• Continue to exercise oversight duties by ensuring that key risks have been assigned to board-level committees, and make sure those committees are documenting their work.
• Review D&O policies to ensure that there is adequate coverage, including "Side A" coverage that protects directors in the event the company becomes insolvent.
• Review D&O policies to understand what events may trigger carrier notification obligations and ensure that appropriate notification is provided.
• Monitor stockholder ownership increases and consider having a poison pill "on the shelf" in order to be prepared to prevent a stockholder from accumulating control without the payment of a premium to all stockholders.
• Ask the important questions, which could include: |
  • What are the short- and long-term financial impacts of the current economic downturn to the company?
  • What is the status or general condition of the company's employees and facilities?
  • How are the increased burdens on management in response to the COVID-19 crisis being managed and monitored?
  • Are facilities being closed, or are the company's operations being changed to implement social distancing?
  • What effect have these events had on the company's customers and supply chain?
  • Has the company considered and, where appropriate disclosed, the risks associated with COVID-19 and, if relevant, a decline in commodity pricing?
  • Should the company change or withdraw any guidance that it issued to shareholders regarding its next quarterly earnings release?
  • Is the company communicating regularly with shareholders?

• What if I or someone else on my board also has duties to another affected party, such as a stockholder or creditor?

 It is not unusual for individual directors to have concurrent duties to others beyond the company—for example, to a shareholder that designated the director to the board, to the company's subsidiary or a related entity for which the individual is also a director, or to another separate entity on whose board that director also sits. Boards that include such directors should already be well-versed in when a conflict of interests may arise and what to do in such a situation. Some may have policies to address those situations. Because times of economic crisis may increase the possibility of a conflict between the beneficiaries of a director's dual duties, additional care and consideration should be taken to identify and appropriately manage such potential conflicts. And boards that have not previously had to worry about such issues may need to consider them now, as new directors may be added to their ranks that could have such potential conflicts—for example, a director designated by a debtholder.

Not every situation that touches on the interests of another beneficiary of a director's duties results in a conflict. Delaware law is clear that if there is alignment in the interests of the beneficiaries to whom the dual fiduciary owes duties, then there is no conflict. Boards that have analyzed these issues in the past and found no conflict should be sure to continue to assess that question, however, as times of crisis and economic disruption might change the analysis. A director with duties to the company and to another entity might have found in the past that the two parties' interests were aligned—or not intertwined at all—but may now be faced with a decision as to which those interests diverge.

If such a conflict of interest does arise, a variety of actions could be considered to address it depending on the circumstances, including abstention, recusal, the formation of a special committee, shifting the director to a board observer position, or possibly even the director's resignation.

Emanuel Grillo chairs Baker Botts' financial restructuring practice and Robin Spigel is a partner in the financial restructuring group.They represent secured and unsecured creditors, Chapter 11 debtors and borrowers, and both sellers and purchasers in distressed mergers and acquisitions. John Lawrence and Amy Hefley are both partners in the firms' litigation practice and represent clients in front of courts and government agencies in a broad range of complex commercial, business, trade secret, securities and shareholder litigation, and other business torts.