Coronavirus and due managerial care

The due managerial care standard must be adhered to by the statutory body members over the entire period of their offices but, in a crisis, it becomes even more important, considering the growing need for essential loyalty. This can be demonstrated, for example, by the duty to compensate any harm caused to a corporation by one’s withdrawal from an office in an unsuitable time, if assessed by a court as such. 

How to respond to the current situation? First, statutory body members must fulfil their duty of prevention: damage identification, prevention and mitigation. To identify damage in time, they must show increased interest in the corporation’s management, governance and financial performance on a continuous basis as well as higher control over the fulfilment of the duties of the other statutory body members and other persons to which the statutory body’s powers have been delegated (such as bookkeeping). To prevent damage, statutory body members must use all their knowledge and skills; this involves education (especially of an economic and legal kind) and experience in crisis management. If they do not have them, they are obligated to arrange for the adequate assistance of an expert, for example, to prepare in cooperation with a legal advisor a draft plan to resolve their company’s temporary inability to fulfil obligations towards business partners. 

The internal delegation of powers of a statutory body seems like a suitable measure to enhance the effectiveness of making decisions in emergency situations. The individual crisis management areas shall be distributed to individual members to allow them to make decisions separately. This will not affect the rules of representation of a corporation externally (according to a record in the Commercial Register) but may accelerate the process of adopting decisions within a collective body. 

Members of statutory bodies of joint stock companies and limited liability companies may also ask the general meeting for guidance on business management (involving the continuous administration of a corporation or its business establishment). Nevertheless, this request must be worded with due managerial care; no question on how to proceed in the current situation may be put forward. Such questions may only be discussed with professional advisors. The members must prepare concrete and balanced draft solutions (including the assessment of their implications) that will be presented to general meetings and subject to a binding vote. Currently, however, the importance of individual decisions may easily exceed the level of business management. Even though strategic management belongs to the powers of a corporation’s statutory body, members of limited liability companies or shareholders of joint stock companies may intervene through general meetings. This may even be highly desirable when making decisions on important changes to a corporation’s business focus. 

With respect to the unpredictability of current developments and considering the severe consequences of the violation of due managerial care (compensation of damage, among other things), we recommend that all important decisions of a statutory body be properly documented. It can also be expected that these requirements will further gradate, as the time for approving financial statements and related profit distribution approaches. It will be the responsibility of the statutory body members to evaluate whether to pay out profit in the amount approved by the general meeting while taking into account the rules embodied in the Corporations Act.