Why Proper Company Minutes Are Actually Important
Preparing corporate minutes is akin to the “red-headed stepchild” of corporate governing tasks. Minutes are usually only given a cursory (if at all) review by board members. Yet greater emphasis on corporate record keeping and shareholders heightened expectations of directors and intense scrutiny of director conduct in litigation are breathing new life into the importance of corporate minutes. Why? Because courts continue to view the minutes of meetings as the best evidence of what took place. Such a determination could (by no means is limited to) include whether a directors behavior complied with their duties of care and loyalty. The “defensive” drafting of corporate minutes by a skilled professional should be part of every company’s operations.
In response to corporate abuses at Enron, Tyco and other companies, militant shareholders in both public and private companies are increasingly trying to hold management and directors accountable for their actions (not a bad thing at all). The bottom line of any of this type of activism is that directors and officers are held to elevated expectations and greater scrutiny of their performance.
In making decisions on behalf of the company, directors (and officers) are held to two duties: one of care and the other of loyalty. If directors and/or officers comply with these duties, the decision is protected by “the business judgment rule,” a standard of court review where courts will defer to a decision unless there is palpable evidence that the parties have ignored or breached their duty of care or loyalty. Directors may also breach their duty of oversight by failing to make a decision at all; that is, by not acting to hold management accountable for their actions.
Key board decisions, such as whether to sell the company or issue or redeem stock present the possibility that the board may not be acting in the best interests of the shareholders but instead to entrench itself in power. The Delaware Courts sent a message in In re The Walt Disney Co. Derivative Litigation case by not dismissing claims that the board members were grossly negligent in approving key executive compensation agreements. While the directors were eventually exonerated the series of decisions in the Disney litigation highlighted the importance of corporate minutes.
The Necessity of Maintaining Accurate Minutes
Corporations are required by law to keep accurate books and records, and specifically to prepare and maintain minutes recording the proceedings of any meetings of directors and shareholders. Regularly maintaining corporate minutes is also a key component of observing corporate formalities, which is essential to recognition of the corporate form. Failure to observe these formalities can result in creditors “piercing the corporate veil” and imposing liability on the shareholders for corporate obligations.
Minutes are prepared not just for internal use but also for review by third parties such as shareholders. In addition to shareholders, those who may seek to review corporate minutes include underwriters in connection with due diligence reviews for capital raising transactions and buy-side counsel in connection with sale, merger or acquisition.
In re NetSmart Technologies, Inc. Shareholders Litigation is a poster child for poor minutes preparation practices in connection with a critical decision such as the sale of the company. The case illustrates how courts focus on relevant minutes to determine whether the board complied with the heightened standards that apply to significant corporate transactions, such as a merger, the need for consistency between the minutes and the disclosure documents describing background events in such transactions, and the importance of preparing and approving minutes promptly (and properly) while events are still fresh in the minds of the directors who were present.
Responding to overtures from private equity buyers, the NetSmart board formed a special committee to oversee a rapid auction process among identified private equity bidders that led to execution of a cash merger agreement with the winning bidder. Shareholders complained that the agreement was the result of a defective sales process because it excluded strategic buyers and that the proxy statement omitted material information. The Court noted that once the board determined to sell the company for cash, it had a duty under Revlon to secure the highest price realistically achievable given the market for the company. Concluding that the plaintiff’s had established a reasonable probability of success on the merits of two of their claims that the board had failed this standard, and the court preliminarily enjoined the shareholder vote on the merger to provide time for the defendants to amend the proxy statement to respond to the plaintiff’s disclosure claims.
The court was highly critical of the company’s minute-taking practices. It pointed to a May 19 meeting, described in the proxy statement as an informal board meeting because no minutes were taken, where a determination was made to attempt to sell the company and to focus on private equity buyers without an active canvass of strategic buyers. The court noted that no minutes were taken at a July 13 meeting to consider an acquisition proposal, also referenced in the proxy statement, held by a special committee created by the board. Thus, if the board had, in fact, considered carefully and rejected the option of opening the sale process to strategic bidders, the absence of minutes clearly recording such deliberations greatly impaired the directors’ ability to make that argument.
As you can see properly drafted minutes are an important part of owning or running a corporation and should not be dismissed as merely a lawyer’s fetish. Ask yourself a question; are the potential consequences of failing to keep accurate, well drafted minutes worth taking a chance on? Would you bet your company on it?
May 14th, 2010 at 11:37 am
I am glad to see this post on meeting minutes. Often, people starting a business or running an organization don’t view minutes as important practice.
Just like J.P. Fernandes wrote in this post, “Preparing corporate minutes is akin to the “red-headed stepchild” of corporate governing tasks.” This is true. It is menial and monotonous brush your teeth yet it is very important in health preventive which can save you from potential diseases and skyrocketing health bill. Having a meeting minutes done properly will help the organization in long run.
I have served as parliamentarian to organizations in the past. Often, I would find an organziation writing the minutes in wrong way. Doing minutes wrong can hurt the organization. Doing minutes wrong is a signal to me that the organization is not running the meeting properly. It is possible there may be a flaws in their organizational structure that needed to be fixed.
If I am new to the organization, the minutes will be a place for me to start. The minutes will tell you what the organization is. I use Robert’s Rules of Order as a parliamentary law. I can attest that under this parliamentary law the minutes are to be review and corrected before the next meeting. After the minutes are accepted as the corrected. The minutes are filed or booked for record. With governing organization that approved have weight to it. The minutes will tell me what motions have been made. Along with its date and motions, I can understand the organization’s core value, current events, and the character of people.
Other important thing J.P. Fernandes mentioned, “Because courts continue to view the minutes of meetings as the best evidence of what took place.”
I personally have used old minutes to resolve a debate. My first experience in using minutes as an evidence is when I study parliamentary procedure in college. The class is neat since it running in a meeting format using parlimentary procedure. Thus, every class session, the minutes are recorded. This professor who taught have reputation of photo memory. He wouldn’t use a paper to record student attendance. It is all in head. I received an e-mail from this professor that I now have 3 cuts. If I make one more cut and my grade will start to drop. I thought it was strange since I didn’t miss this class session. I reply to the professor that I was in the class that day. He replied that I wasn’t. I contact my classmate who act as a recording secretary that day for a copy of minutes and shown it to my professor the roll call that day. In the end of semester, I finished with good grade.
The lesson of this story is a minutes can help or hurt you. To conclude what J.P. Fernades was to state that minutes done professionally are very important. Minutes is an evidence in eye of court. Minutes also can serve organization as a great management tool by reviewing its history, to identify the pattern of organizatioal behavior, and to leave a trail for the next successor to take over.
May 14th, 2010 at 1:58 pm
Joe, thanks for the support. More importantly, thanks for illustrating the real world implications of not following what is a rather simple procedure. It does not take a lot of time nor money even if an attorney does it. However, when you took your professor to task even though he had this mystical “photographic memory” which must have been out of focus that day the minutes were the evidence that saved your grade.
Imagine in something that seems so benign in high stakes corporate-shareholder litigation or deal. I have a saying, you either pay me $500.00 now or $5,000.00 later, it does not matter to me because your money is going to become my money either way.