Due process in fast-paced decision-making
In times of crisis such as the current COVID-19 outbreak, businesses are required to make important decisions with very significant implications and consequences at an accelerated pace. This is currently the case in the Provinces of Quebec and Ontario where non-essential activities have been ordered to scale down or shut rapidly. Determinations as to whether these orders apply, how they apply and how to properly comply with them are being made by the hour.
While Canada is facing the relatively early onslaught of the crisis and it is still hard to imagine how and when our businesses and economy will emerge, there is growing evidence in China and Korea that there is a life after COVID-19 and that normalized business relationships will eventually resume.
By the time we emerge from this crisis, many commercial relationships will have been disrupted and decisions adversely affecting counterparties and stakeholders will have been made. It is reasonable to expect that parties and stakeholders who will have been adversely affected by decisions may seek reparation and challenge how some of those decisions were made.
Members of boards of directors and senior management must remain alert to their fiduciary duties as they make decisions / a “COVID-19 defense” will unlikely be available to shield them from liability.
Here is a brief reminder of these duties. Boards of directors are subject to common law and corporate law duties and it is important to keep such duties in mind in making decisions regarding all matters affecting corporation. Directors of a corporation have two general over-arching duties derived from common law and from applicable corporate law. These are:
(a) the so-called “duty of loyalty” or “fiduciary duty” to act honestly and in good faith with a view to the best interests of the corporation; and
(b) the so-called “duty of care” to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Duty of Loyalty
The duty of loyalty recognizes that the directors are the stewards of the Corporation and are required to put aside their own self-interest and be loyal to the interests of the Corporation over their own interests, contractual or other. In doing so, directors will be expected to act honestly, in good faith and, to the extent possible, free of any conflict of interest.
Best Interests of the Corporation
The duty of loyalty requires that directors act in the best interests of the Corporation. The courts have established that these are not limited to the best interests of shareholders and that directors must also take into account and duly consider the interests of other stakeholders (such as employees, creditors, customers, governments and the environment) to inform their decision; directors should make reasonable efforts, to the extent it is possible to do so, to examine alternative courses of action to minimize the detrimental effects of a decision on one or more of the stakeholder groups and where interests of one or more stakeholders may conflict with those of the corporation, the duty of the directors is to make a decision in the best interests of the corporation as a whole based on its assessment of all information gathered.
Duty of Care
To protect from liability, it is also important that the directors satisfactorily discharge their “duty of care” in evaluating and deciding on a course of action, as more fully described below.
The “Business Judgment Rule”
In reviewing the actions taken by directors, the so-called “business judgment rule” has been developed by the courts as the basic standard of judicial inquiry. This rule is essentially a presumption that, if called on to review a proposed corporate action, courts should generally defer to and not second-guess the business decisions made by directors when such business decisions have been made in a manner free of conflict, on an informed basis and in good faith.
The rule has been endorsed by the Supreme Court of Canada which held that deference is appropriate not only with respect to the manner in which competing stakeholder interests are balanced, but also to the board’s reasonable judgment as to which interest to take into account. It is important to note, however, that for a board of directors to benefit from the protection of the business judgment rule, it must ensure that it has made a fully informed decision and has otherwise satisfactorily met its duty of loyalty and duty of care. This is obviously particularly challenging in times of crisis when time is very limited.
Some of the practical steps which are typically recommended to assist the directors in satisfying their duty of care can be of particular help in times or rapid-decision making, such as:
(i) raising their level of decision-making preparedness by informing themselves more than normally of the corporation’s business and affairs, including the impact of the current crisis;
(ii) taking an active role and ensuring that the board is regularly informed of all relevant developments and directing management as appropriate; and
(v) seeking to have advice of legal or other professional advisors for important elements of any decision.
In reaching any decision, directors should follow a deliberate (even if time-compressed) review process in order to assist it in discharging its duties Whatever process is adopted by the Board, the directors should be in a position to demonstrate that they took an active role in the decision-making process and remained fully informed throughout the process. Accordingly, directors should be careful to document in a concise manner their processes and the bases for their decisions.
The process of making important decisions in times of crisis puts a lot of stress on boards and senior management. In our experience, referring back to the above “first principles” will invariably keep the directors on the right path and ultimately result in the best outcome.