Our thoughts on corporate governance during the Covid-19 pandemic
By Dr Adrian Vella
NB. The views expressed in this article are those of the author and do not necessarily reflect the views of any other person or institution. The author may be contacted at A.Vella@SheltonsGroup.com.
The response to the Covid-19 pandemic, has been, initially at least, a medical one. For weeks, we have been exposed to ever grimmer reports on infections, incidence, and unfortunately, mortality rates. As weeks pass by however, with the pandemic progressing unabated, there has been a decoupling in the reporting, with the focus percolating gradually, but inevitably, from the medical to the economic – the two being inextricably interwoven. Countries, multi-nationals, airline carriers, internationals chains and small businesses all assess the economic costs of the pandemic, in terms of economic contraction, deficits, debt restricting, redundancies and unemployment rates, rescue packages etc.
As businesses start to settle into the new reality, it is important to encourage a policy of governance that reflects the new ways of doing business under this pandemic. Here are our thoughts on some essential considerations that will need to be made by business owners and managers alike.
Irrespective of Covid-19, the role of directors remains a fiduciary one
The Companies Act prescribes that the directors are entrusted to the promotion of the well-being of the company, in which they serve office, and are bound to act honestly and in good faith in the best interests of the company. Directors are bound to exercise a degree of care, diligence and skill in over-seeing the operations of the company.
Where the board of directors are required to supervise the management of the business, the board should ensure it has sufficiently updated information to perform their supervisory function effectively. The board should be able to intervene when they believe management are making material decisions. This should be so not only in spite of the current situation, but should be especially so because of it.
Are the Articles of Association of the Company Covid-19 compliant?
Decision of the board of directors can be resolved by meetings or resolutions in writing. With the current restrictions to travel and movements caused by the Covid-19 pandemic, even such mundane requirements may prove daunting. The circulation of notices for the convening of a board meeting – a task typically delegated to the company secretary – can be a challenging process, underscored by inevitable delays.
Directors are bound within the remits of the Companies Act and the Memorandum and Articles of Association of the Company. Directors cannot act beyond the parameters of law and the company statutes. Where no such restrictions apply, directors may however, seek to mitigate the logistic challenges brought by the Covid-19 pandemic through the implementation of the following measures:
(i) Agree to significantly reduce the notice period for the calling of a meeting of the board of directors; and
(ii) Where no such meeting can be convened due to travel restrictions, or delays in the receipt and transmission of notices by post, the directors can agree to resolve matters by the execution of documents in separate counterparts, whereby each instrument shall be executed by different directors individually, with each copy considered to be an original, and all of which together shall constitute one and the the same instrument.
Overcoming logistical challenges caused by Covid-19 whilst ensuring continuity
Directors cannot, because of the limitations set forth in the Memorandum and Articles, by which they are bound, derogate from the logistic and time constraints which is hampering their ability to discharge their duties. They may however, still take a pro-active role, by requesting the general meeting to consider propositions which may alleviate such hinderances, even if such remedial measures be of a temporary nature. Changes to the Memorandum and Articles of Association, is the privilege of the general meeting. However, the directors are entitled, and indeed this is a matter incumbent in their fiduciary obligations, to flag any impediment to their ability to undertake their office. Such propositions may include:
(i) A reduction of the aforesaid minimum notice period for the calling of board meetings, if any;
(ii) Amendments to the notice period allowing for notice to be served by electronic means of facsimile, in lieu of notices in hardcopy; and
(iii) Crucially, the insertion of clauses within the Articles of Association that allow for the rightful convening of board meetings via telephone and video-conferencing means in lieu of hardcopies.
Furthermore, where even these measures are deemed insufficient, the general meeting may consider alternative measures such as:
(i) Consider amendments to the legal and judicial clauses by readjusting the necessary quorum;
(ii) Review the instances, or thresholds, set forth in reserved matter clauses, which require a joint resolution to be passed by both the board of directors and the general meeting;
(iii) Implement bespoke clauses governing the swift and orderly appointment of directors in case of casual vacancies caused by death, removal or incapacity of the same; and
(iv) Delineate clear clauses regulating the transfer of shares causa mortis in the event of the demise of the shareholders.
Such measures however, must be considered wisely and thoroughly. Whilst the company should, through its organs, the board of directors and the general meeting, ensure that logistic hurdles stifling its operability are overcome, changes should not be undertaken in such a manner as to dilute or, even worse, disrupt the checks and balances of correct corporate governance.
This is particularly relevant in the context of companies with multiple share classes. Likewise, statutory underpinnings relating to the protection of minority shareholders rights, must be preserved and safeguarded at all times.
Personal liabilities and duties of the directors
It would be restrictive to assess the duties of the directors solely with the remit of the company statutes, howsoever revised or reworded. Directors are also entrusted to the company’s proper administration and management. Such administration inevitably translates to overseeing compliance to their contractual duties, timely settlement of fiscal dues and filing of statutory forms and instruments within prescribed time-frames. The board of directors would, therefore, be well advised to evaluate, assess and resolve on the following matters:
(i) Extend the logistical remedies to include banking instruments and channels. Directors should take pre-emptive or remedial measures seeking to curtail the issuance of cheques with settlements by electronic means. They should ensure that the company has unfettered access to its bank account via internet banking or remote channels, evaluate the issuance of a corporate debit card to facilitate settlement and assess the composition of its authorised bank signatories.
(ii) Seek legal and professional advice, as to any statutory deadlines which the authorities, may, due to the Covid-19 pandemic have extended to companies. The Government of Malta has, by way of illustration, authorised the deferral of VAT filings and the Malta Business Registry has waived penalties for the late filings of annual returns and audited financial statements for a grace period.
(iii) Consider legal advice on contractual obligations entered into, or about to be entered into by the company, in the context of whether the Covid-19 pandemic may be deemed as constituting ‘force majeure’, and the costs, in terms of remedies, legal fees and disruption of operations that such invocation would trigger.
(iv) Assess the scope through which certain instruments may be executed validly through the use of electronic signature and validation therefore in line with Regulation No 810/2014 on electronic identification and trust services for electronic transactions in the internal market (“the Regulation”). Some instruments, for example, may only be executed by public deed. Others may require the deposit or serving of judicial acts in Court, a matter that may be significantly curtailed due to restriction by access due to the pandemic. Knowledge of the form and restrictions to the rule, would allow the Company to take pre-emptive measures.
(v) Seek assistance in terms of any wage supplements or other grants to which the company may apply if adversely affected by the pandemic. A restriction or slowdown in the Company’s operations may require the board of directors to consider and implement redundancies. The rules applicable to redundancies are in turn subject to strict legal guidance, regard being had to any collective agreements, specific wage regulation ordinances, as well as over-arching principles governing the protection of vulnerable workers. The directors should be well minded to seek professional advice on labour and employment law.
(vi) Mitigate the losses of the company by taking pre-emptive or corrective remedies. This is linked to the liabilities attaching to the board of directors for wrongful trading. Directors need to ensure that they minimise company losses through the re-negotiation of contractual agreements, as well as ensuring that the liquidity reserves of the company are sufficient and commensurate to its operations. Directors are therefore well advised to request management accounts on a significantly more frequent basis, thereby ensuring that the company remains a going concern and that their actions are not leading the company towards the path of insolvency to the detriment of creditors.
(vii) Assess internal company remedies. These may include a request for shareholders’ loans, the liquidation of assets for the creation of reserves or a call up of shares. Inversely, if the company is over-capitalised, it may be fruitful to consider also the reduction of share capital to off-set trading losses. Other corrective remedies may include debt restructuring in agreement with creditors, or the use of securitisation vehicles;
(viii) Consider the creation of contingencies and company reserves to mitigate the adverse effects of an economic contraction for the company. Directors need to act honest and prudently to circumvent personal responsibilities emanating from wrongful trading and be always guided by fairness and probity. It is strongly advisable for the directors, in parallel to the aforesaid steps, to also seek the guidance of their respective auditors. Specific focus should be placed on any impairments on the assets of the company and the recoverability of trade receivables. This may allow the company to implement remedial actions as necessary to circumvent or minimise the impact of a qualified opinion by their respective auditors. This is particularly relevant in the context of listed companies, which directors are also guided to act prudently and diligently in terms of the issuance of profit warnings and other mandatory disclosures.
(ix) Undertake a thorough risk management exercise with an in-depth review to the company’s procedures, particularly in the fields of cyber-security risk, liquidity risk, disclosure controls, internal audits and management risks. Mitigating factors to lessen or stave off the impact or probability of adverse incidence, should be resolved and closely monitored for further tweaking.
The discharging of duties by a director is always onerous and never one to be taken lightly. The burden cannot be compounded when one is asked to resolve matters against a backdrop exacerbated by incertitude and instability.
Reach out to our team of professionals for assistance and advice, by writing to us at MT@SheltonsGroup.com. We are at your fullest disposal.