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Beyond Pandemic 101: Is there a Corporate Duty to Prepare?

Joseph P. McMenamin, M.D., J.D.

804-775-1015

www.mcguirewoods.com

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Grim Statistics

• H5N1 emerged in Asia in 2003 and has since caused ~250 deaths among ~400 infected (62.5% mortality) (WHO)

• Indonesia: ~115 deaths, ~144 cases (80%)

• China: 38 human cases; 25 deaths. 8 people have contracted H5N1 flu this year -- 5 of whom died.

• Vietnam: 106 infected, 52 killed since it first appeared there in late 2003. 5 in 2008; 2 so far in ‘09

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Grim Economic Impact: U.S.

• Tourism, entertainment, and food services ↓ 80 % • Transportation and warehousing ↓ 67%• Agriculture, mining, construction, manufacturing, finance,

education ↓ 10 %.• GDP ↓ 5.5 %: $683 billion• >10d disruption: 73 % of businesses close or suffer long-

term impact• Businesses in disasters: 43% never resume operations

– Of those that do reopen, only 29 % are still operating 2 y later

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Economic Impact, 2: Effective Response

• Ineffective crisis response: shareholder value ↓ ~ 15%

• Effective response: could potentially ↑ value by 7%

• Severe pandemic: profitability could drop twice as far without antivirals as it could with them (16.5 % v. 8%)

• So long as pandemic probability > once every 80 years, economic benefit of antiviral stockpiling exceeds cost

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Antiviral Options Programs

• Stockpiling solves undersupply, but is costly– Purchase price; storage; expiration

• Options programs: $6/y/employee– Dedicated supply, properly stored– Delivered within 48 h at WAC

• Still prescription drugs– ?liability issues

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Is There a Duty?

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Fiduciary Duties of Directors

• To “act for the benefit of [shareholders] on all matters within the scope of their relationship.”

• Care: Directors must make a good faith effort to investigate issues and deliberate sufficiently to make an informed business judgment– need to pay attention, ask questions, and act diligently and

reasonably to become and remain generally informed• Loyalty: place the interests of the company ahead of

personal goals

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Care: The Business Judgment Rule

• Presumption: directors who make informed business decisions act in company’s best interests

• Policy: “preclude a court from imposing itself unreasonably on [corp.’s] business and affairs.”

• Limits: a director who makes an “unintelligent or unadvised judgment”

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Limits on the Business Judgment Rule

• Applies to actual judgments only• Requires action on an informed basis• Little or no protection against claims asserted by

creditors in bankruptcy, as opposed to shareholders

• Officers not (?) protected

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Bad Faith: Rebutting the Business Judgment Rule

• “All actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders.”

• Failure of Good Faith: One who– intentionally acts with a purpose other than that of advancing the

best interests of the corporation

– acts with the intent to violate applicable positive law, or

– intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties

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In re Walt Disney, 907 A.2d 693 (Del. Ch. 2005)

• “Where a director consciously ignores his or her duties to the corporation, thereby causing economic injury to its stockholders, the directors’ actions are either ‘not in good faith’ or ‘involve intentional misconduct.”

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Evolution? Enron and Disney

• Motion to dismiss, pre-Enron: director defendants succeeded on basis of business judgment rule

• But: Delaware Supreme Court permitted the shareholder plaintiffs to amend their complaint

• Second filing, post-Enron: the trial court refused to dismiss the case on basis of business judgment rule– 46-page section of the opinion: court extensively reviewed

defendant directors’ decision-making process and the substance of the decision itself

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Disney, 3: Substance, not just Procedure

• Court explicitly evaluated each director’s judgment respecting the provisions of the contract offered the outgoing officer:– “With regard to [directors] [Sidney] Poitier and [Ignacio] Lozano,

… [Chancellor] Chandler …reached his decision [that defendants acted in the best interest of Disney] by judging the substantive wisdom of their actions. This is precisely what a strict interpretation of the business judgment rule is supposed to prohibit.” (emphasis added)

• David Rosenberg, 32 J. CORP. L. 301, 318 (2007).

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Duty of Care: Gross v. Simple Negligence

• Traditional: gross negligence standard– “without the bounds of reason and recklessly” or “so

far without information that they can be said to have passed an unintelligent and unadvised judgment”

• Ordinary negligence: applied as a standard when, because the Board fails to act, the business judgment rule is inapplicable

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Loyalty Claims

• Failure to act in the face of duty• Liability for ignorance• Liability for recklessness

– “knowing disregard of a substantial and unjustifiable risk”

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Key Disclaimer

• No case holds that directors are liable for losses occasioned by a failure to take steps to minimize the impact of a pandemic on their company

• any plaintiff bringing a claim against the directors for pandemic-related losses would be sledding uphill

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Our Favorite Government at Work

• “Implementing prophylactic antiviral drug strategies … will require the establishment of stockpiles in the private sector. This approach is consistent with the role employers play in protecting their workers and operations against other types of risk.”– HHS, Proposed Guidance on Antiviral Drug Use During an

Influenza Pandemic (June 6, 2008), http://aspe.hhs.gov/panflu/antiviraluse.html

• Singled out: “critical infrastructure”

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Pandemic Flu Business Letter, 12/6/05, HHS, DHS, Department of Commerce

• “Companies that provide critical infrastructure services, such as power and telecommunications, also have a special responsibility to plan for continued operation in a crisis and should plan accordingly. As with any catastrophe, having a contingency plan is essential.” (emphasis added)

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? Plaintiffs’ Theory: Directors Liable for Losses that Could Have Been Avoided• Care: directors’ duty to base actual decisions on informed

judgment– Because action was not taken, or at least not taken in good faith,

the business judgment rule does not apply– Ordinary negligence, not gross negligence, is the proper standard– Evidence: competing company, having adopted measures to

ameliorate the harm, fared better and lost less money• Loyalty obligations: conscious disregard of a foreseeable

risk– Business judgment rule is no defense

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Defenses

• No precedent for expanding Board liability so far• Business judgment rule• Not a Board item• Proof that stockpiling will work

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Countervailing Considerations

• 1) scarce data: seasonal, not pandemic flu– No controlled studies

• 2) resistance: consider the adamantanes– So far uncommon– Mutations weaken the bug– Resistance to Tamiflu ≠ resistance to Relenza

• 3) side effects: delirium, abnormal behavior?– Consider neurologic impact of flu itself

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