COVID-19: Critical Corporate Governance ConcernsFriday, 13 March 2020
In the last three months, we have seen the worldwide outbreak of COVID-19. Response measures currently include the closure of schools, crèches, childcare facilities, higher education institutions, museums, galleries and tourism sites, as well as cancellation of mass gatherings and crowded events. Travel restrictions have been implemented. Operational and personnel repercussions have already been felt by many businesses and further disruption can be expected.
Outlined below are some of the key corporate governance concerns arising from the outbreak and the government restrictions implemented in response to it, including directors’ duties, insured risks and contractual considerations.
What must directors do?
Businesses, as employers, owe duties to their employees to maintain the safety, health and welfare of their employees at work. For this reason, directors and senior management are expected to review the changing situation continuously, implement Government advices in order to minimise transmission and develop continuity plans during the disruption.
Directors of Irish companies should be mindful that the legal position is that they owe their duties solely to the company but must also perform their obligations with regard to the interests of the company’s employees and members.
Directors that have or must soon convene an annual general meeting (AGM) should have regard to methods for reducing the risk of transmission of infection posed by attendees and, depending on the number of attendees, have regard to current public health advice to organisers of large events or gatherings. Where notice of an AGM or an extraordinary general meeting (EGM) has already been served, it may be possible to adjourn or postpone the meeting in the manner permitted by the company’s constitution.
Certain types of companies, including private companies limited by shares (LTDs), may avail of a procedure under the Companies Act 2014 to dispense with the need to hold a physical AGM in a particular year. Companies without this option ought to limit the agenda to the minimum necessary and utilise any permitted methods that limit the number of members required to attend in person such as voting by proxy or, where appropriate and feasible, electronic participation. The choice of venue should also permit sufficient space to minimise physical contact between attendees.
Among the duties that directors owe to the company are to act in good faith and in the best interests of the company and to exercise care, skill and diligence in their conduct. Directors should consider and take account of relevant commercial risks (for instance where a business is operating in, dependent on supply chains in, or has close trading links with significantly affected countries, staff shortages and production delays) and responses to COVID-19, and be in a position to demonstrate that they have been proactive and responsible in discharging their duties.
The degree of risk and its likelihood of eventuation should also be considered by directors when preparing the company’s directors’ report for a financial year, which must include disclosures of the principal risks and uncertainties facing the company.
Is my business insured against disruption?
Policyholders should take stock immediately of insurance coverage to mitigate losses related to the outbreak in the interim and longer term. Detailed consideration should be given as to what events are covered, either directly or indirectly, as well as any limitations, extensions and exclusions. It is crucial to check the extent of cover in each policy and, where unclear, to clarify it with your broker. Some key heads of cover to look for in your insurance portfolio are set out below:
Business interruption insurance is a form of cover that provides for loss of business income on the occurrence of certain events and is usually purchased together with property insurance. These policies typically cover income lost as a result of damage to or physical loss of property so the terms of such a policy should be reviewed carefully for their application to the current situation where interruption has been caused by the outbreak of infectious disease. That said, some property policies for certain sectors such as hospitality, entertainment and retail, may include cover for loss of income where there has been an outbreak of ‘notifiable’ infectious disease on the property or within a specified area or where the property is subject to restrictions imposed by a public authority. A notifiable disease is usually understood as one that medical practitioners must by law notify to health authorities. COVID-19 has been such an infectious disease since 28 February 2020. However, you should review all policies to confirm the situation and your coverage.
Contingent Business Interruption
This cover is an optional supplement to business interruption insurance and usually relates to physical damage to property, albeit of a customer or supplier, so, as above, the specific policy wording must be reviewed.
Public-facing businesses, particularly those in the hospitality, education and healthcare sectors, may face future claims of exposure and infection from customers or clients. Any such claim must demonstrate the causal connection between their infection and the business’ negligence which will likely be very challenging. Businesses nonetheless ought to ensure their existing public liability policy provides sufficient coverage against such claims while also taking proactive steps to implement public health guidance on mitigating transmission of the disease.
Employer’s liability insurance can provide cover for businesses which become liable for damages, costs or expenses to their employees as a result of injury sustained in the course of employment. Policy wording should be checked for extension of cover to disease and duties imposed on the insured such as preventative and precautionary measures and compliance with statutory requirements and health authority advice.
Where staff are working from home, employers continue to have obligations in relation to their health, safety and welfare. This means that employers can be liable for injuries sustained in the course of an employee’s work even if sustained in a location beyond the ostensive control of the employer. Businesses that expect part or all of their workforces to work from home should carry out a risk assessment of the work activities involved and any possible risk reduction measures. A Working from Home Policy should be developed and implemented if one is not already in place that can establish appropriate boundaries between work and home activities during this period. Insurance cover should be checked for any exclusions or extensions in relation to working from home.
Event cancellation coverage may apply to cover losses for events cancelled or adversely impacted by closure of venues, travel restrictions, quarantines and curfews.
Travel cover is now in a state of flux following the escalation of the outbreak to ‘pandemic’ by the World Health Organisation (WHO) on 11 March 2020. A number of underwriters have announced that cover for future claims has been withdrawn or the availability of policy products has been suspended. Additional cover for travel disruption or airspace closure may also not be available on future purchases of policies.
Directors’ and Officers’ (D&O)
Coverage under D&O policies should be assessed against potential claims by customers, or investors as a result of losses incurred or in relation to their public disclosure obligations.
Businesses ought also to be aware that notice requirements in policies can be strict and so these should be regarded and followed assiduously should a claim be made.
Warranty and Indemnity (W&I)
A further consideration for parties currently involved in or contemplating an M&A transaction, Warranty and Indemnity (W&I) insurers will expect that both buyers and sellers have assessed the current outbreak and investigated its likely impact on the business, through assessing its effect on contracts, possible disputes, supply lines, financial position and workforce.
Can we execute contracts electronically?
Most contract types can be executed by electronic means, including by the use of systems, such as DocuSign, and this may prove useful in remote working scenarios. There are certain legal instruments which can't be executed in this way such as transfers and leases of real estate. There is also a practical difficulty for Irish companies which have to execute Deeds by physically affixing their common seal. One solution is for the company to consider giving a power of attorney to named individuals who can then instead execute a deed as attorney on behalf of the company (without the need to affix the common seal physically).
Are our contracts still valid?
Many businesses are wondering whether the rapid spread of COVID-19 and the disruption caused by measures to contain it constitute an event that discharges a party or both parties of their obligations under a commercial contract. Careful consideration should be given to the extent of such clauses as a party that incorrectly invokes a force majeure or MAC event could be liable for damages to the other party for repudiatory breach of contract. See our separate briefing on COVID-19’s implications for commercial contracts.
For further information or more detailed advice on the impact of COVID-19 on your business, please contact any member of the ByrneWallace Corporate Governance and Compliance Group or your usual ByrneWallace contact.
Please note that the content of this summary does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. The COVID-19 situation is evolving rapidly and this update is provided on the basis of information available as at 13 March 2020.