Responsibility of Directors and Officers under the Shadow of the Corona Virus

Responsibility of Directors and Officers under the Shadow of the Corona Virus

March 27, 2020

The Corona Virus bears many health and economic risks, but also creates a new playing ground and set of game rules that corporations and their managers have not previously faced. What negligence claims are directors likely to face and how will they protect themselves from these anticipated future claims?

In light of the Corona Virus crisis, regulators around the world published their view regarding disclosure obligations of reporting corporations whose operations could be materially affected by the crisis. The US Securities and Exchange Commission issued a notice extending certain reporting deadlines set by law for an additional 45-day period. In addition, according to the announcement, companies are expected to disclose to investors information about material risks that the Corona Virus crisis has on the state of their business.

The Israeli Securities Authority also issued a notice encouraging companies whose business operations are, or potentially, materially affected by the Corona Virus crisis, to ensure that investors are properly informed. Immediate disclosure is required to be made regarding any impact that the virus is or may have on business activity, including the board's estimation of the qualitative and quantitative impact of the Corona crisis on the corporation. A notice by the Israeli Securities Authority is important but does not solve all the risks to which companies, directors and executives are exposed as long as the crisis continues, and together with it, the uncertainty in the markets.

In Australia, the Australian Securities Exchange (ASX) has issued a compliance update regarding the Corona Virus, warning that a listed entity in financial difficulty remains subject to the same disclosure standards as any other entity. Listed entities that have issued earnings guidance are strongly encouraged to review their published guidance and, if it is no longer current, to update the guidance to the market or otherwise inform that market that the guidance is withdrawn. Material operational decisions, such as a decision to stand down a material number of employees or to close or suspend certain operations or facilities, must also be disclosed to the market. The Australian Securities and Investments Commission (ASIC) stated that it will maintain its enforcement activities and continue to investigate and take action where the public interest warrants that it do so against any person or entity that breaks the law. This includes an entity's breach of the market continuous disclosure obligations.

In an era where the number of claims against directors and officers is breaking records and the scope of their responsibilities is increasing, reference numerous cyber events, the me-too campaign, climate change, privacy claims and many more, it seems like just a matter of time before claims resulting from the Corona Virus are made against companies, directors and executives . In 2019 premiums for Public Offering of Securities Insurances (POSI) and Directors and Officers Insurances (D&O) worldwide, and specifically in the United States and Australia were raised significantly. It is very likely that the Corona crisis will result in a similar, perhaps even steeper increase, in these insurance premiums, both in Australia and the rest of the world.
We believe, therefore, that the Corona crisis may soon lead to claims against directors and officers for breach of disclosure obligations and, in particular, for non-disclosure of material risks to the corporation's business, management failure, breach of duty of care and more. In order to mitigate these risks, it is recommended that companies actively adopt risk management strategies. This is done by assessing the impact of the virus on a company's business activities and by taking active steps to address these affects by appointing business continuity teams, which should include senior management representatives together with representatives of the risk assessment and legal teams. Also bear in mind that any selective disclosure of sensitive information may also lead to other claims against directors and officers.

In addition, as notified by both the Israeli Securities Authority and the Australian Securities Exchange, public companies should inform investors by making immediate disclosure regarding the existing and future impacts that the Corona Virus may have on financial and operational performance (pursuant to Section 32A of the Israel Securities Law, 1968 the D&Os and the company may be exempt from liability for damage due to future looking information. While under the Australian law there isn't a similar exempt under Listing Rule 3.1 of the Listing Rules of the Australian Securities Exchange companies should disclose immediate and . future impacts to their operations).

Furthermore, due to the Corona crisis, many workers are likely to relocate to a home-based set-up and connect remotely to the corporate network via personal computers. The result of this move may be to expose the corporate network to the likelihood of cyber-attacks. Personal computers have weaknesses that hackers may leverage to gain access to enterprise resources. Whilst we do not know the full consequences of the Corona crisis and do not know fully how to deal with it, cyber threats are already a recognized danger clear to all. Therefore, it is recommended that an organization's information security personnel increase monitoring for potential attackers, instruct employees how to work in a cyber-safe manner and maintain ongoing surveillance and supervision.
Notwithstanding all of the above, it is still difficult to imagine exactly how shareholders and markets will continue to respond to Corona Virus related events. The responsibility of officers for acts and/or omissions perceived as negligent and even reckless is only one scenario requiring consideration. However, taking the above-mentioned steps and precautions may reduce the risks to which directors, officers and even the companies themselves are exposed.

It is important to note that every company today is exposed to different risks, both those associated with the nature of its activities, and now, specifically arising out of the affects of the Corona crisis. Given these risks, and the regulatory and compliance obligations that are imposed on a company by the stock exchanges on which it is listed, it is critical to engage the services of both an experienced insurance advisor and a legal advisor with extensive experience in the relevant fields, including corporate law, contracts law, labor law and the securities laws relevant to the stock exchange on which the particular company is listed.