In order to keep the courtroom from invading the boardroom, saying less is often better. Discussed in an earlier issue of Acredula, this topic received more attention from our readers than any other, and it continues to hit home for many organizations.
The post-Sarbanes-Oxley era has placed heightened scrutiny on corporate governance and the actions of board members in both public and private companies. Therefore, what is captured in your organization’s minutes is a potential script for the plaintiffs’ bar. Minutes have two purposes -- to inform and protect. To accomplish this purpose 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. For closely held corporations, “who else” may some day include investment bankers deciding whether the organization is a candidate for a public offering; venture capital companies considering whether to make an investment; or institutional lenders considering whether to make a loan.
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?
1. Compliance with certain procedural matters
For protective purposes, minutes should state, typically in an introductory paragraph, (i) the date, time and place of the meeting to reflect compliance with notice requirements and (ii) who was in attendance to reflect compliance with quorum requirements.
Some meetings - for example, special meetings of a corporation’s shareholders - require notice of purpose as well as time, date and place. Reflecting that purpose in the minutes is evidence of compliance with notice requirements, and, as discussed below, the minutes can do so simply by identifying the matters considered.
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. A person other than an officer, such as the organization’s chair or secretary, who has authority under the organization’s governing documents may preside or take minutes at a meeting in which the officer is not present. If this is the case, the minutes should reflect so with a simple declaratory statement to the effect that “X served as acting chair to preside at the meeting” or “Y served as acting secretary to take minutes of the meeting.”
2. 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.
3. 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, or
- 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, such as:
RESOLVED, that each of the following merger documents . . . is hereby approved and adopted in the form presented together with such changes as may be approved by the officer executing the same on behalf of this Corporation, which approval shall be conclusively evidenced by the execution and delivery of the same by such officer.
A decision not to take or authorize some action is more often than not less formal than a “Resolved” clause:
The directors considered and decided to decline approval and adoption of the merger documents presented.
4. Recording of votes
Generally, minutes are not legally required to reflect who voted and how he or she 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 . . .”
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. A simple statement to the effect of the following will suffice: “Mr. X abstained for reasons stated at the meeting.”
What if I vote “no” on an issue?
Courts of many jurisdictions hold that members voting on the non-prevailing side of an issue considered by a body, may request his or her vote be reflected, and if so, minutes should reflect that requested minority vote. Many statutes require negative votes on the non-prevailing side of an issue be reflected in the minutes. For example, Delaware’s corporation law gives a director the right to “cause” his or her dissenting vote to be “entered” in the minutes.
Under Ohio law, a director is presumed to have voted for any action taken, unless they vote “no” or his written dissent from the action is filed either during the meeting or within a reasonable time after the adjournment with the secretary of the corporation. Therefore, you will want to have a negative vote reflected in the minutes.
Courts generally have not required that the minutes reflect the member’s reasons for his or her vote even if requested. As with the abstention for compliance with the duty of loyalty, a simple statement to the effect of the following will suffice: “Mr. X requested that his negative vote be reflected in the minutes.”
5. 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. For example, minutes should reflect any factors that the intended audience wants to have considered. An example of minutes recording the discussion of an item on the agenda should be as follows:
“The board next considered the design department’s recommendation of “X” over “Y.” Following a presentation of the issue by Mr. Smith, there followed a general discussion and the board voted unanimously to accept the proposal.”
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 investigate personally every matter that comes before the board, many governing statutes permit the board to rely reasonably 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 . . . .”
6. 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.
7. 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.
8. Prior to approving the minutes read them carefully.
Minutes can not only inform the board, but can also make the board more or less vulnerable to potential claims from shareholders and others.
If a dissident shareholder is considering bringing a claim against the corporation, the least expensive form of discovery, which does not require the filing of a complaint, is to demand to see copies of the minutes. Thus, initial decisions as to whether to initiate litigation may be based upon a review of the minutes.
When certified to be true by the secretary, minutes constitute prima facie evidence of the facts stated, and 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 before the Secretary certifies them is critical.
When reviewing the minutes, consider the following:
- Factual inaccuracies.
Every director knows enough to correct material misstatements in the minutes. However, there can be pressure when the agenda is crowded 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, 2007). 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 post-Sarbanes-Oxley era of heightened scrutiny, there is an anticipated rise in government investigations due to the return to bipartisanship in Congress and many states. Therefore, 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.