Significant economic, regulatory and political uncertainties in 2020 should prompt board of directors members to evaluate, and take steps to mitigate, potential downside risks facing their businesses. Certain challenges commonly associated with economic downturns, such as a reduction in access to public and private capital markets, may be difficult for corporate boards to fully hedge against.
To prepare for these challenges, directors should be familiar with general legal and practical principles associated with operating in a low liquidity environment.
Evaluate Evolving Conditions
Directors should ensure that informational systems and controls are reviewed and established to ensure that management provides timely, accurate and complete financial and operational information to board members. Corporate directors should carefully review any information provided by management and insist upon clear and unambiguous answers to any questions raised by such review and consider whether the timing and content of board updates should be modified to address the evolving situation.
Any early signs of financial distress should be addressed with appropriate operational and reporting changes, and may merit an evaluation of available restructuring options with independent advisors.
Understand Fiduciary Duties
While directors are undoubtedly aware of their fiduciary duties, they should also consider that a weak economic environment may enlarge the group of stakeholders with standing (and motivation) to bring a derivative claim for breach of fiduciary duty.
In Delaware, for example, creditors gain standing to bring such a claim when a company becomes insolvent as judged by the company's balance sheet. Against the backdrop of such suits and the shifting group of stakeholders to whom corporate directors may become responsible, they should rely on external counsel to provide advice on the scope of their duties.
An important defense against allegations of breached fiduciary duty lies in scheduling regular board meetings and keeping well-developed records showing the board's consideration of various alternatives and input from advisors.
Review Access to Capital and Existing Restrictions
To decrease the likelihood of a liquidity crunch or crisis, corporate directors should understand the contractual restrictions imposed on their business's ability to raise capital. These include limitations arising from lending agreements or agreements with shareholders.