Yvette Ostolaza is a member of Sidley Austin's management and executive committees, the managing partner of the Dallas office, a global co-leader of the litigation practice and a member of the firm's COVID-19 task force. She devotes a large part of her practice to advising boards on compliance issues and internal investigations. Since December, she's also been an independent director on Lionsgate's board.

With more than 2,500 publicly traded companies calling Texas home, COVID-19 and the related economic crisis are keeping board members extra busy with emergency meetings to address unforeseen finance and liquidity emergencies, supply-chain problems, insurance claims, activist investor headaches, and a range of challenges caused by shelter-in-place orders.

Texas Lawyer spoke recently with Ostolaza about what boards and board members can do to manage litigation risk while the COVID-19 pandemic is still active.

How do you ensure that board directors are making informed decisions consistent with their duties given how fast things are moving?

Yvette Ostolaza: In normal times, directors typically maintain a nose-in but fingers-out posture regarding the day-to-day operations of a company. That is, in a well-functioning company, management generally takes the lead on operational questions, and the board's role is to make sure that management's decisions are well-supported and aligned with the interests of investors. However, given the speed at which the business environment is changing as a result of the COVID-19 pandemic, a board should be prepared to take extra steps in order to make sure it is receiving up-to-date information. During times of crisis, maintaining channels of communication with management becomes even more important, and the board should not be afraid to assert itself in order to make sure it receives a complete picture of both the operational decisions being made, and the reasons for those decisions.

In light of these demands, we are seeing boards meet more regularly. Among other things, boards are engaged in shaping COVID-19 responses and assisting management in driving necessary changes to address a rapidly evolving business environment.

We have found that maintaining clear lines of communication and decision-making are especially important during times of crisis. This is an area where a board can add value. With clear lines of communication and appropriate visibility into operations, boards can work collaboratively with management to make sure that all angles and best practices are being evaluated. When an unexpected issue arises, making informed, rational decisions can be difficult. The board has the ability to really think through these issues in advance and to take steps to clarify responsibilities and next steps—a process that companies adapt to changing circumstances quickly and efficiently.

It also helps for boards to develop and implement crisis response plans. It's always easier to think through these emergency issues in advance and, at the board level, division of responsibility is key. For example, in a crisis it is important to be able to communicate with key members of management and with other board members to make sure that relevant information is flowing to the right place. Management and the board should work together and remain available to address issues as they are coming up.

What should board members be doing to manage litigation risk in the wake of this pandemic?

We've learned from past event—whether it was 9/11 or the economic collapse of 2008—that there are actions that boards can take to manage risk. We're already seeing claims from plaintiffs lawyers that first-quarter financial disclosures were not sufficient regarding the impact of COVID-19 in China and that is something we are likely to see in the United States as well. One potential first step is to examine whether current disclosures are still accurate in light of recent events. Companies are verifying that financials reflect the current situation, including applicable risk factors that may need to be disclosed. That's an example of something that can be done right now and that will meaningfully reduce potential litigation risk.

Liquidity is another concern across many sectors. For boards, there are considerations around if and when to draw on lines of credit and whether to stockpile cash. Similarly, when it's time to renew insurance, boards should examine whether coverage on the D&O side is at appropriate levels and whether the company should take advantage of other policies that might not have been purchased in the past. When making these decisions, it is important that directors make sure they are looking at the full picture and taking necessary steps to acquire and understand all the information that they are being presented to make sure they are properly discharging their fiduciary duties.

With travel restrictions, global supply chain disruptions and a general drop in demand, many companies are faced with difficult questions related to adapting contractual obligations to respond to the new business environment. What should they do in these situations?

In light of the sweeping effects of COVID-19, the business environment has been in a state of rapid flux. Given these changes, some companies are reviewing their contracts to both minimize the risks of noncompliance and to consider options for adapting those contracts to account for unanticipated commercial challenges. This can be a fact-intensive analysis and depends on the environment facing a particular business. Many contractual obligations are essential to continue operations and, in those cases, companies should do what they can to encourage performance while also protecting their rights in the event of a breach.

In contrast, certain contracts may no longer make sense in light of changing commercial priorities. In particular, energy-related industries have been significantly impacted by recent events and are reevaluating many aspects of their business to preserve value. While most businesses are not used to breaking contracts, to the extent particular agreements no longer make sense from a commercial perspective, it may be worth considering whether to terminate or modify those contracts.

In this regard, litigation can represent a tool to enable a company to mitigate risks related to contractual noncompliance. Even if litigation is not successful, it can often take years before any enforceable obligation to pay damages arises in a court action.

Similarly, litigation can be used to create leverage that might not otherwise exist to potentially enable a mutually beneficial settlement. Although the decision not to comply with a contract is a difficult one, it is important to bear in mind that it represents one option, among many, to maximize value and allow companies to adjust to the post-pandemic world.

What should businesses be doing in terms of managing risk to the extent it can be covered by insurance? What should businesses be doing in terms of managing risk to the extent it can be covered by insurance?

We've learned from other crises to expect increased litigation risk, and the unprecedented COVID-19 pandemic appears particularly likely to generate increased litigation. Companies are being confronted with federal, state and local ordinances that lack clear guidance for implementation and directly impact their core businesses. Moreover, a rapidly changing set of commercial priorities has required the implementation of new policies and procedures carrying with them new sources of potential exposure.

As one example, the current implementation of teleworking on a large scale carries with it a significant increase in the risk of a data breach or a related cyber event. As a result, a company may need to adjust insurance coverage to make sure adequate protection is in place for such breaches. These types of policies are important even in the usual course of business, and, under current circumstances, are likely to become even more essential given the proliferating risks businesses are facing in the short term. In all events, management and boards making these decisions should make sure they are fully informed and that they understand the risks/benefits associated with particular insurance coverage levels across the business in order to make the best decision possible.

Yvette Ostolaza can be reached at [email protected].