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COVID-19: A Checklist for Items Requiring Review by Directors and Officers to Comply with their Fiduciary Duties


As the spread of the recent coronavirus (“COVID-19”) has caused unprecedented economic disruption across industries, the directors and officers of companies are faced with an ever-increasing need to comply with their fiduciary duties under the ordinary course of business.  To navigate through these uncertain times, we provide below a checklist of issues that may require careful review by the directors and officers from their fiduciary duty standpoint.  The companies are advised to seek further legal assistance in understanding the issues that may apply specifically to them under their respective circumstances and when their directors and officers would be held in breach of their fiduciaries duties.

  • Health and Safety Measures: Directors and officers can take preventive measures to mitigate any potential legal risks arising from COVID-19 situation by checking whether the company’s health and safety policies are providing sufficient protection to not only their employees but also external parties such as customers and vendors.  In addition, under unpredictable circumstances, directors and officers should give particularly more attention to (i) whether the company is in compliance with laws and regulations related to employment, occupational safety and disease prevention, and (ii) any potential liability resulting from the negligent act of their employees. 

  • Risk Management in Business Operations: Directors and officers are expected to assess the potential impact of COVID-19 on the company’s business in the form of employee quarantine, shutdown of work places, unstable supply chain, and sudden decrease of customer demand.  Based on such assessment, directors and officers need to develop a risk management playbook to effectively deal with emergency situations.  For example, directors need to review whether the company can potentially be in breach of sales agreements due to delayed or canceled deliveries and, if so, need to secure alternative source of supplies while reviewing whether the company’s breach of its contractual obligations can be excused under force majeure clause.

  • Risk Management in Investment: Directors and officers will need to assess the risks associated with any investment opportunities contemplated by the company, such as factory expansion and mergers and acquisitions, by taking into account the rapid and fluid developments in the financial and real markets.  Even with investments which are either ongoing or the company already decided to proceed with, it may be necessary to review whether the returns expected from such investments would still materialize amid changed circumstances. 

  • Close Communication with Stakeholders: In case of emergency situations (e.g., supply chain disruptions, workplace or factory shutdowns), directors and officers need to help reduce the anxiety amongst the employees and external parties such as customers and suppliers, communicate with them constantly, and prepare joint strategies for crisis management in order to swiftly respond to any such emergency situations.

  • Secure Financial Stability: Given the increased uncertainty in the global financial market due to the spread of COVID-19, directors and officers need to (i) review whether it would be necessary to have prior consultations with the company’s financial institutions and/or creditors regarding ways to help ensure the company’s financial flexibility and continued business operation, such as borrowing, leveraged recapitalization, additional funding and/or loan exchange, and (ii) prepare a financial management plan in order to effectively manage risks and respond to unpredictable circumstances. Furthermore, in case the company’s financial condition deteriorates due to the spread of COVID-19, directors and officers must review in advance whether the company may be in breach of contract or subject to event of default as a result of its failure to abide by its obligations, e.g., maintain key liquidity ratios.

  • Establish Swift and Efficient Decision Making Process: Directors and officers need to check if the company has established an internal decision-making, monitoring, and internal control processes that can ensure prompt communication of important information to the management under emergency situations.  Also, as it may be necessary to make prompt decisions through a special committee or board of directors in case of emergency situations, companies are advised to establish in advance an internal decision making system that allows for such process.

  • Review Compensation System for Management: If the compensation and benefits to be paid to the management are based on the ordinary assumption of the company’s earnings and sales growth and does not take into consideration any unexpected crisis, a company needs to reevaluate its management compensation scheme and, to the extent necessary, may consider the performance evaluation of the management based on their contribution to overcoming the ongoing crisis. 

  • Transparent Disclosure and Communication with Investors: The company needs to be transparent about the business and financial risks resulting from the spread of COVID-19 and provide company's future plans to address such risks.  In case of emergency situations, the company may be required to publicly disclose the risks arising from such situations in accordance with the relevant laws and regulations – for example, listed companies may be required to publicly disclose any such risks in the “Management Discussion and Analysis” section of their financial statements.  However, even if no legal disclosure obligation is triggered, it would be prudent for a company to voluntarily disclose any major risks considering its relationship with investors and creditors and, to make such disclosure, companies may utilize other methods such as sending CEO’s letters or posting information on the websites.  

As mentioned above, directors and officers have a critical role to play in helping their companies navigate through these unprecedented difficult times due to the outbreak of COVID-19.  In light of this, they need to assess any risks that may have a significant impact on the company’s operations, develop risk-management strategies, and respond effectively to the current crisis in order to fulfill their fiduciary duties.