COVID-19 UK: D&O Liabilities And Risk Management Relating To Coronavirus

In this note we look at the exposures that directors and officers (D&Os) may face as a result of the COVID-19 crisis, in addition to setting out some considerations they should be taking into account during these times.

Being a director in this day and age is increasingly challenging. In the UK, directors face a wide range of exposures which may make them subject to an official inquiry or investigation, or having to defend themselves in civil or criminal proceedings, in which their conduct and decision-making is examined. In this age of increased senior management accountability, the board and its members are, more and more, expected to adequately recognise, manage and mitigate risks. This is set against a backdrop of heightened shareholder awareness, engagement and activism, the omnipresent reputational risk and strengthened corporate governance requirements to consider risks which do not necessarily translate to a direct financial risk.

The coronavirus presents unique challenges for D&Os. Given how quickly the virus is spreading, how inconsistent the approaches of governments have been, and the already significant impact it has had on the financial markets and global economy, it is very difficult for D&Os to ensure that they are responding effectively to the crisis. While the early stages of the coronavirus outbreak appeared to hit those companies which had international supply chains encompassing China as well as airlines, the situation has developed at such a pace so as to impact domestic supply chains due to travel restrictions and social distancing/isolation. The latter has in turn led to a reduction in demand for a wide range of products and services such that the outbreak has the real potential to impact companies of all sizes operating in virtually all industries.

With that in mind, do D&Os pre-emptively take action, which may turn out to be premature or unnecessary? Do they wait and see and risk not being able to adapt quickly enough once the coronavirus situation worsens? What is the financial impact of supply and/or demand changes currently, and how do these look going forward based on a range of scenarios? What protections should be put in place for employees? How can customers be reassured and their needs continue to be serviced? What should they disclose to regulators and shareholders? Are they able to even fully assess the impact the virus may have on their business given that it is ever-evolving?

While everyone's primary focus at this time is on the health and wellbeing of individuals and all D&Os are struggling with a fast-changing situation such that one would hope that the frequency of D&O exposures will be limited, in the event that D&Os make errors in their business continuity planning, there are a number of possible claims they may face, which we focus on below from an English law perspective.

Shareholder derivative claims

In solvency, directors owe their duties to their company. These are codified in the Companies Act 2006 (CA 2006) sections 171-177. The duty to promote the success of the company (section 172) and the duty to exercise reasonable care, skill and diligence (section 174) are the most likely duties to be called into question, with claimants potentially alleging mismanagement/negligence in directors' responses to the coronavirus crisis if loss to the company occurs. For example, one can envisage claimants arguing that directors: failed to have in place disaster contingency plans; inadequately implemented contingency plans; failed to exercise the contingency plan at all or in a timely fashion; failed to adapt plans in the light of new information; had an overreliance on a particular supply chain; failed to take into account/follow government protocols. Such failures could lead to business disruption and stock price drops, resulting in losses to the company.

A derivative claim is an action brought by one or more shareholders against the company's directors, seeking redress on behalf of the company for a wrong committed by those directors. If successful, the relief is granted and any damages are awarded in favour of the company itself, not the shareholder. Section 260(3) CA 2006 provides that a derivative claim may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of a company. Permission of the court is required in order to pursue a derivative action: such permission has only been granted in a small number of cases since the provisions came into force in October 2007, as the hurdle is set quite high by the courts. Given procedural difficulties in establishing such claims, we are of the view that directors will need to have seriously breached their duties in order for such a claim to proceed, let alone succeed. As such, we consider that the derivative claim risk is relatively low in comparison to other risks directors may face as a result of the coronavirus crisis.

It should of course be borne in mind that there are a number of avenues to relief from liability for breach of duty (which apply beyond derivative proceedings, including in an insolvency context): these include ratification by the company (section 239) and court ordered relief in circumstances where the directors can show that they have acted honestly and reasonably and have considered all circumstances such that they ought fairly to be excused (section 1157).

Risk management considerations (non-exhaustive)

Hold regular meetings/briefings on the coronavirus crisis and take detailed minutes of decisions and action plans. Continually review contingency and operational resilience plans and update as necessary as the situation develops. Consider what internal or external resources may need to be brought in to help keep the board informed. Investor claims

A greater risk is claims by investors following share price drops. There is and will continue to be greater scrutiny on company disclosures regarding the impact of the coronavirus on the company and it will be very difficult for companies to draw the right...