How Corporate Officers and Directors Can Mitigate Future Shareholder Disputes

“You don’t want to be complacent. You always want to be ahead of the curve.” Dr. Anthony Fauci, M.D., Director of National Institute of Allergy and Infectious Diseases

The response to the coronavirus pandemic is truly unprecedented. No company or board could anticipate that local, state, and federal officials would take draconian action like shutting down schools, restaurants, bars, and gyms and strongly encouraging people to shelter in place. What companies and boards can expect, however, is that this crisis will spawn legal challenges to the tough decisions boards and companies are forced to make. Indeed, SARS and Ebola spawned a variety of claims alleging against corporate officers and directors. Among these were claims that corporate actors failed to take appropriate precautions in protecting companies from the economic fallout from SARS and Ebola, mislead investors with respect to companies resources and abilities to capitalize on products and drugs sold to combat such diseases, and failed to adequately disclose the “most significant factors that make an investment in the registrant or offering speculative or risky,” as required by the U.S, Securities Act Item 105 or failing to “identify any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way” as required by Item 303. 

Boards and senior management can look to these lawsuits, some of which are listed below, for best practices in their response to COVID-19. Boards and senior management can also look to SEC guidance with respect to updating their disclosures, which can be found here. In particular, the SEC’s Chairman Jay Clayton has asked companies to “provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.” 

Officers and directors should take the following steps to identify the impact of the coronavirus and mitigate risk: 

• Advise investors of your plans for dealing with the economic disruption caused by COVID-19. By now, most companies have, by necessity, developed contingency plans for dealing with COVID-19. As Chairman Clayton states, companies should “provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.”

• Do not neglect financial reporting. As the SEC recommends, now more than ever, companies should work closely with their audit committees and auditors to ensure their financial reporting is as robust as practicable and that financial reporting is accurate.  

• Take Advantage of Section 21E Safe Harbor. Remember the Exchange Act provides for safe harbor for certain forward-looking statements, so long as the forward-looking statement is “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” Such statements can be an invaluable tool to protecting companies against future shareholder litigation.

• Avoid Selective Disclosures. Companies must guard against selective disclosures and disseminate information as broadly as practicable. The SEC advises that “Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.”

• Insurance. Companies should review insurance policies to determine possible coverage in the event of a business disruption, and comply with all applicable notice requirements.

In summary, board members and corporate officers should take additional steps now in order to mitigate their risk of suffering negative impacts from the coronavirus. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization. 

Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. 

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