In order to keep the courtroom from invading the boardroom, saying less is often better. As discussed in an earlier issue of Acredula, the topic of corporate minutes continues to attract attention from our readers. Moreover, it continues to hit home for many organizations. That is because today’s business climate places heightened scrutiny on corporate governance and the actions of board members in both for-profit companies and tax exempt organizations. Therefore, what is captured in your organization’s minutes is a potential script for the plaintiffs’ bar.
Minutes have two purposes: to inform and to protect. In accomplishing these purposes, you must consider three questions when preparing minutes:
- “Who is the intended audience for these minutes?”
Minutes should meet the information needs of the audience without creating undue liability. With meetings of a board of directors or other governing body, the intended audience is the shareholders, owners, or members. With a meeting of a committee of the board or other governing body, the intended audience is the board or governing body itself (or whoever may rely upon the committee or to whom the committee is responsible).
- “Who may rely on these minutes for purposes of protection of the business judgment rule?”
The business judgment rule protects not only the body whose proceedings are reflected by the minutes, but also any other bodies or persons who may rely on decisions of that body. In many jurisdictions, protection of the business judgment rule requires a decision with a duty of care and a duty of loyalty in making that decision.
- “Who else may review these minutes?”
For almost every organization, “who else” includes government investigators who may be furthering an investigation, and plaintiff’s lawyers who may be preparing a cross examination. In addition, an important element of minutes is that they provide an opportunity for the organization to create a record of compliance with its legal obligations. This then begs the question—what should be reflected?
The key items that should be reflected in corporate minutes include:
Compliance with certain procedural matters. For protective purposes, minutes should state the date, time and place of the meeting, as well as who was in attendance. This information will address compliance with both notice and quorum requirements. Typically, this information is addressed in an introductory paragraph. In addition, for evidentiary purposes, it is helpful to reflect who presided over the meeting and who was responsible for the minutes of the meeting, either in the introductory paragraph or by signatures at the end of the minutes.
When a special meeting of the board is called, the minutes should include a notice of purpose – identifying the matters being considered – as well as time, date and place to be in compliance with notice requirements.
Identification of general matters considered. For protective purposes, especially when a meeting is called for specified purposes or with an agenda, the minutes should identify in general terms the matters considered. For example, “The directors considered the various documents presented for consummating the merger of X into Y.” However, for the reasons discussed below, it is generally not advisable for minutes to reflect detail regarding the considerations or the discussions involved.
Decisions made. For both informative and protective purposes, the decisions made are the most important content of the minutes. A record of the decisions made is not only the information needed by most audiences, but is also necessary in many jurisdictions to invoke protection of the business judgment rule.
Decisions may be either:
- To take, or to authorize, the taking of some action
- Not to take, or to authorize, the taking of some action.
Minutes should reflect either type of decision. A decision to take or authorize some action typically takes the form of a “resolved” clause. A decision not to take or authorize some action is more often than not less formal and can be reflected by simply stating that the board decided to decline the action.
Recording of votes. Generally, minutes are not legally required to reflect who or how a board member voted on any particular decision. Except for abstentions and minority votes discussed below, a simple statement to the effect of either of the following should suffice: “the directors adopted the following resolution” or “the directors decided to decline the following resolution.”
What if I abstain from voting? The laws of many jurisdictions require disclosure of any financial or personal interest of any member of a body in any matter being considered by that body. Further, many jurisdictions require that the interested member abstain from voting in any decision with respect to that matter.
For protective purposes, the minutes should reflect an abstention when it is due to a financial or personal interest. However, the minutes should reflect only the abstention and not the underlying particular financial or personal interest.
What if I vote “no” on an issue? Courts of many jurisdictions hold that members voting on the non-prevailing side of an issue may request their vote be reflected in the minutes. In addition, many statutes actually require negative votes on the non-prevailing side of an issue be reflected in the minutes.
Under Ohio law, directors are presumed to have voted for any action taken unless they vote “no” or their written dissent from the action is filed during the meeting or within a reasonable time after the adjournment with the secretary of the corporation.
For these reasons, you will want to have a negative vote reflected in the minutes. However, courts have generally not required the minutes to reflect a member’s reasons for a negative vote even if requested. The following statement is all that is needed in the minutes: “Mr. X requested that his negative vote be reflected in the minutes.”
Factors considered in making decisions. Minutes should reflect factors considered in making decisions only if needed by the intended audience or, if advisable, for showing compliance with the duty of care. In certain situations, legal counsel for the body may advise that minutes list certain factors considered in decisions if appropriate to reflect the exercise of due care.
The laws of most jurisdictions allow a body to consider general categories of factors, such as interests of the organization’s employees, suppliers, creditors and customers; the community and society; and the economy of the jurisdiction and nation. Any statement of such considered factors should be no more detailed than necessary to identify those general factors.
Minutes should reflect a board’s reliance upon the advice, opinion or report of other advisors, including legal counsel, a committee or an officer. At times, directors are faced with decisions that require special knowledge or expertise, which the directors themselves do not possess. Because members of a governing board may not have the time or resources to personally investigate every matter that comes before the board, many governing statutes permit the board to reasonably rely upon information presented by officers, employees, board committees and independent professional advisors in the board’s decision-making process. In such cases, the minutes should reflect such reliance with a simple statement that the board “took such action in reliance upon the advice of . . . .”
Privileged discussions. At times, discussions at a meeting, especially with legal counsel regarding legal rights or obligations, are privileged. Those discussions should not be memorialized in minutes. The following simple sentence will suffice: “The board participated in a privileged discussion on the subject matter with counsel.” The minutes should reflect counsel’s presence in any such session because discussions between board members and counsel are not discoverable, and saying less will protect directors against charges of misconduct.
Minutes should be the only record. Under the laws of most jurisdictions, the minutes of a proceeding are the official record of that proceeding. In such cases, minutes should be the exclusive recording of the proceeding. Members of a body who take notes at a meeting should, as a routine practice, destroy those notes after satisfying themselves that the minutes accurately reflect the proceedings. Many organizations collect all written material, including notes, at the conclusion of the meeting, and as a routine or customary practice, this has been accepted by courts of most jurisdictions.
The minutes of the corporation are considered the best evidence of what transpired at the meeting. Under the best evidence rule, other evidence — such as someone’s notes or memory — is generally not admissible to prove what happened at the meeting unless it can be shown that the minutes have been lost, destroyed or are otherwise unavailable. However, personal notes or memory can be used to impeach the competence or integrity of a witness. An experienced trial attorney can effectively call into question competence or integrity by asking a witness to explain differences between his or someone else’s notes and the minutes or the witness’s memory.
The key items to review prior to approving corporate minutes
Minutes can not only inform the board, but can also make the board more or less vulnerable to potential claims from shareholders and others. That is why it is essential to read the minutes carefully prior to approving them.
Once certified to be true by the secretary, minutes constitute prima facie evidence of the facts stated and, therefore, all actions recited as having been taken and all elections and appointments are deemed valid until proven otherwise. Further, a person who is not a shareholder and who acts in reliance on certified minutes is deemed to have acted in good faith, regardless of whether the minutes’ recital turns out to be accurate. So, ensuring the accuracy of the minutes is critical.
When reviewing the minutes, consider the following:
Factual inaccuracies. terial misstatements in the minutes. However, when the agenda is crowded, there can be pressure to let seemingly unimportant misstatements remain unchanged. This is a mistake. When in a litigation context, opposing counsel proves that a meeting in fact adjourned 15 minutes before the time stated in the minutes, that fact may not be important in and of itself; but it can cast doubt on other statements made in the minutes.
Confirm dates when actions occurred. Any attempt to make an action effective on an earlier date should precede the date with the phrase “as of” (e.g., “This consent is signed as of January 1, 2011). While this may raise grounds for challenge of the action’s effective date, it will not result in the making of a false entry, subjecting a director to potential liability under Ohio corporate law.
In today’s era of heightened scrutiny, it is crucial to keep the intended audience in mind, along with other possible readers, such as government investigators and trial attorneys.
The minutes should give enough detail to show compliance with notice provisions and entitle reliance under the business judgment rule. Additionally, minutes should reflect only the decisions made, including both those to take and not to take action. Doing so will keep the court room from invading the boardroom.
Finally, carefully drafted corporate minutes should inform the intended audience and protect against giving a cause of action to the other. The best approach to accomplish both — saying less is often more.
