Thursday, August 20, 1998

 

Taking care of Y2K risks

 

By Jennifer Sullivan, Ottawa Sun

  Further to my colleague's article last week on protection from Year 2000 liability, I will discuss the liability of corporate directors and officers for Year 2000 problems.

 

Year 2000 could wreak its own personal havoc on directors and officers of a corporation. Under both federal and provincial legislation, directors and officers are required to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skills that a reasonably prudent person would in comparable circumstances.

 

If a director or officer fails to fulfil those duties, he or she could be held personally liable. Although directors and officers may rely on others in discharging their responsibilities, they must do so reasonably.

 

The obligation to manage the corporation ultimately belongs to its directors and officers. They are not in a position to ignore the Year 2000 problem.

 

If the corporation for which they are responsible is harmed by Year 2000 risks which have not been mitigated either by remedial programs or insurance, directors and officers may find themselves facing lawsuits from the shareholders to whom they are answerable, and, depending upon the industry, regulatory action.

 

Given these obligations, someone with appropriate seniority and knowledge of the corporate operations should be given the task of conducting an exhaustive survey of corporate operations for Year 2000 risks. These include not only internal software systems, but also reliance on third parties, such as trading partners, third- party payroll systems and material suppliers.

 

Directors and officers must make responsible inquiries regarding the corporation's Year 2000 issues, oversee the development and implementation of a Year 2000 conversion plan, and monitor its progress on a regular basis.

 

At minimum, management must identify the most critical system defects and see that they are given proper attention.

 

Management will also have to assess carefully the nature and extent of Year 2000 information that needs to be disclosed to meet the requirements of securities legislation, as well as adverse notes in financial statements.

 

As part of the planning, management should consider the tax consequences of various approaches to solving the problems. Replacing systems may be treated as a capital investment, whereas repairs might be an expense.

 

As far as insurance goes, existing directors' and officers' (D&O) liability insurance policies may be broad enough to cover liability claims arising out of a failure to ensure that a corporation is Year 2000 compliant.

 

However, it is important to read the D&O policy carefully for a clause excluding liability for claims arising out of Year 2000 non-compliance.

 

The bottom line is that directors and officers must pay close attention to Year 2000 problems before it is too late.

 

Take action now rather than later and get legal advice before Year 2000 problems arise.