Directors’ Duty under UK Law to Promote the Success of the Company during the COVID-19 Pandemic
As the outbreak of Coronavirus (COVID-19) puts the corporate world under strain, those in positions of corporate control must navigate the pressure to mitigate COVID-19’s impact, while also remaining compliant with duties owed to their corporate undertaking. While numerous Governments are suspending the operation of duties concerning corporate insolvency, the remaining duties imposed on directors remain operable.
A nuance to director’s duties in the United Kingdom is the expansive statutory delineation of s 172, which endows numerous considerations for directors when acting to promote the success of the company for the benefit of members. Given the unique circumstances of the present-day commercial sphere and the more humanitarian demands being put to businesses, having a statutory foundation upon which to base non-traditional business strategies may assist effective decision-making and financial reporting.
The initial three considerations enshrined within s 172 are (a) the likely long term consequences of any decision, (b) the interests of employees and (c) the need to foster business relationships with suppliers, customers and others. These factors are of particular relevance for firms who sought justification for voluntary shutdown of businesses prior to the wider governmental shutdown.
Shutting down operations in part mitigates the risks to the labour force’s health, a relevant consideration under s 172 (1) (b) and the risks to the long-term prospects of the firm were the labour force put at risk, relevant under s 172 (1) (a). Furthermore, under s 172(1)(c) restricting business operations may limit the social contact between their customers in commercial or retail settings, thereby reducing the risk of exposure on the firm’s premises. Finally, firms may implement commercial restrictions to mitigate risks within their own direct operations but consider under s 172 (1) (c) the risks posed to all parties involved in their supply chain. Likewise, the risks posed to customers and supplies alike can be understood as impacting the long-term performance of the immediate company, meaning that any restrictions, even where contrary to short-term market demand, may be justified by mitigating long-term commercial disruption.
Leaving aside internal risk management, which has been become largely reliant on Government guidelines, certain firms have shifted business operations to production of personal protection equipment (PPE) and other medical or sanitary wares. British companies, including Brewdog Plc and smaller scale distilleries, commenced the production of hand sanitiser, some doing so with compensation. Following political pressure, firms with engineering capacity—Unipart, Rolls Royce, JCB—are likewise considering heightened production of ventilators for distribution to health services.
Where production changes become quasi-humanitarian in tone and companies internalise cost in the interim, directors may seek justification through s 172(1)(d) and (e), these being the impact on the community and the desirability of maintaining high business standards respectively. Accordingly, directors can seek to frame these quasi-humanitarian efforts in long-term reputational terms, thereby engendering prospective communitarian goodwill.
Furthermore, as political pressure mounts, boards may evaluate reputational factors not simply in terms of market reputation, but also in terms of Governmental co-operation. This is particularly so where companies face increased intervention by public authorities through the Civil Contingencies Act. Comparatively, in a recent memorandum the Trump administration has attempted to exert control over the distribution of ventilators by the multinational conglomerate 3M. Cautious of such intervention occurring within their own enterprises, companies may shift business operations to such an extent to signal their compliance and co-operation with public authorities, thereby disincentivising the wholesale overrule of board discretion.
Within jurisdictions with vaguer duties to act bona fide in the best interests of the company (Delaware, Australia, Ireland), directors may still engage in such quasi-humanitarian efforts. Nevertheless, utilising s 172 to steer directorial judgment may assist effective decision-making, and furthermore guide financial reporting, which mandates s 172 director’s statements. Given that the tenor of 2020 reports will be likely dominated by COVID-19, UK directors will benefit from the homogenising structure of s 172 when making such disclosures in the coming months.
Philip Gavin is a PhD candidate at the School of Law at Trinity College Dublin.
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