CHAPTER 03 Navigating Financial Distress: Key Considerations for Directors
Spotlight: Best Practices – Remaining Informed and Engaged
2 Know your duties. Directors should understand to whom their duties are owed, and how this could shift if the issuer enters the zone of insolvency or becomes insolvent. Typically, best practice is to obtain the advice of external legal counsel concerning those duties early on in the process, as applicable to the particular circumstances of the issuer. 3 Understand when courts will defer to your business judgment. Directors should understand the business judgment rule and what is meant by “reasonable” in the context of the business decisions and circumstances the business is facing. 4 Keep yourself informed and communicate often. Directors should stay informed and be kept up to date by management and trusted external advisers. Lines of communication should remain open between the board and key stakeholders, which may require more frequent meetings and the formation of a special committee to oversee decisions regarding financial distress and next steps. 5 Understand your organization’s governance. Directors should be familiar with the governance systems and protocols in place and ensure their adequacy. Minute books, corporate records, financial reporting and payment systems must be kept current and operational.
Directors’ duties, and the standards by which board decisions are measured, do not change when a corporation is facing financial distress. Decisions made by directors who devote sufficient time to making fully informed decisions (including with the benefit of advice from appropriate legal and financial advisers), on a reasonable basis and without conflict, should continue to receive deference under the business judgment rule. However, for boards of issuers on the verge of or in financial distress, performing those duties can become much more challenging, especially given the urgency such situations typically demand. The following are the top 10 practices for directors of financially distressed companies, which we discuss in greater detail throughout this chapter. 1 Understand when you may be held liable. Directors should familiarize themselves with the remedies and sources of liability that apply when organizations experience financial distress. These sources include environmental liability and pension plan liability, as well as liabilities under corporate, tax, securities, and insolvency laws.
41
Davies | dwpv.com
Powered by FlippingBook