The Role of Minutes in Protecting Companies and Their Directors
A prominent Delaware judge once said, “Writing good minutes is like flossing; nobody likes to do it, but it is essential.” Clear, well-prepared minutes offer numerous benefits to a company and its directors and can help shield organizations from a host of pitfalls.
While the dangers of failing to draft and maintain good minutes are typically greater for large, complex, publicly traded companies, the reasons for keeping good minutes apply to all businesses that have multiple owners and are governed by fiduciaries. If a private company board wants to minimize its liability and mirror the best governance practices of public companies, they would be wise to adopt robust minute-taking protocols. Here are some basic questions and answers designed to outline how to better protect your organization.
Do we really need board minutes?
In a word, yes. In most states, records of corporate proceedings are required by law and can help confirm the corporation’s separate existence for liability-shielding purposes. Together with other steps discussed below, minutes enable a company and its directors to speak with a “single voice” regarding matters that the directors approved or discussed and to document the exercise of their fiduciary duties. When done well, minutes can be instrumental in defeating shareholder challenges, as in the Caremark, Rojas and Dollar Thrifty cases. Conversely, minutes that document inadequate decision-making processes can be used as a weapon by plaintiff attorneys, as in the Van Gorkom, Disney and Marchand cases. Finally, there is also anecdotal evidence suggesting that quality governance documents can help attract capital or extract above-average acquisition premiums.
What level of detail should we use in our minutes?
Significant matters discussed at a directors meeting should, in general, be summarized with a moderate amount of detail, which is sometimes referred to as the “Goldilocks” approach. Choosing either a short- or long-form approach may increase certain risks.
For example, too much word-for-word detail regarding board deliberations may limit the options available to an attorney charged with defending the board’s actions. At the other end of the continuum, recent Delaware court decisions have shown that a lack of detail can undercut a litigator’s ability to demonstrate that the directors discussed a particular matter or discharged their fiduciary duties appropriately.
The Goldilocks approach allows:
- Litigators to point to a strong, but not preclusive, record of a comprehensive deliberative process.
- Directors to reconstruct their recollections prior to depositions without unduly restricting their ability to amplify the breadth of the board’s deliberations.
That said, there are circumstances in which a non-Goldilocks approach will work better. For example, a more detailed, long-form approach should be used to document a thorough review of (i) mergers or other actions governed by enhanced judicial scrutiny and (ii) other transactions that could invite litigation or other third-party scrutiny, such as dividend cuts or internal investigations. A long-form approach might also be useful to document complex compensation arrangements or expert advice furnished to directors. On the other hand, a short form drafting approach can be used when documenting the discussion or approval of simple, noncontroversial matters clearly within the purview of the “business judgment rule;” highly sensitive matters, such as personnel issues and strategy development; and routine, recurring management reports.
Note that a single set of minutes can use all three approaches, particularly where certain matters dictate the inclusion of more detail than other routine matters. In such cases, the length of each item in the minutes should generally correspond to its relative significance.
Although it is not generally necessary to identify which director provided input or raised questions, such identification might be necessary or appropriate when documenting the role of the chair in running the meeting and framing the discussions, noting dissenting votes or views, describing input that had a fundamental impact on a material decision-making process, or when such identification is specifically requested by a director with respect to his or her comments.
Should we oversee note taking by directors and recording secretaries?
Directors’ notes are cause for concern. The discovery by plaintiffs of such notes complicates the ability of minutes to act as the sole record of a board’s deliberations. Directors’ notes could be misinterpreted, create inter-director adversity, create evidence of distraction, or permit the plaintiffs to “shop” for the narrative they prefer. Once created, notes are difficult to discard, particularly where litigation may prevent directors from modifying or discarding their notes.
For these and other reasons, companies may wish to adopt policies regarding director note-taking that call for, among other things, automatic deletion of digital notes and destruction of paper handouts upon meeting completion or when draft minutes are furnished or approved.
Mainly as a result of the pandemic, many board meetings are being held over Zoom or other videoconferencing services. As a general rule, such meetings should not be recorded. If they are, such recordings should be discarded once draft minutes are furnished or approved. Meeting notes and preliminary drafts of minutes prepared by recording secretaries should also be destroyed upon approval of the minutes, even if the recording secretary is an attorney.
How quickly should the recording secretary distribute draft minutes?
Companies should strive to prepare and approve draft minutes as soon as possible, particularly when any matter discussed at a meeting raises substantial near-term litigation risk. Promptly prepared minutes will allow the company to quickly adopt a single narrative about the recently completed meeting and will also avoid problems of recall by the meeting participants and reduce the potential for conflicting narratives.
Should minutes be prepared for executive sessions?
A bare-bones summary of sensitive matters discussed in an executive session is usually sufficient. The summary should include just enough information to prove that a matter requiring the exercise of the directors’ business judgment was adequately reviewed, enable directors to reconstruct their memories if deposed, and record any definitive actions taken.
How should we handle privileged communications at a board meeting?
You can preserve privilege by drafting a short-form summary of the topic discussed or using separate “privileged” minutes for that portion of the meeting. On the other hand, if the priority is to document the directors’ adherence to privileged third-party advice, the directors might prefer outlining in the minutes the privileged advice received, even if this risks destroying the privilege.
Minutes are only one part of the overall process of calling, holding and documenting board meetings and these are some, but not all, of the most common questions regarding the subject. If you are unsure how to proceed, it is important you consult with your counsel.
Ken Najder is a partner in Jones Walker LLP's Corporate Practice Group. He represents public and private companies regarding a variety of corporate and securities law matters.
The opinions here are the author’s alone.