The above-referenced turn of phrase was penned by Benjamin Franklin in admonishing his fellow Philadelphians to take heed of fire prevention strategies. Although the benefits discussed here are short of life-saving, attention to implementation and periodic review of your practices for the preparation and maintenance of board minutes and related materials can yield significant dividends in managing and mitigating litigation risk, including the risk of personal liability for directors. In addition to providing an accurate record of board decisions, to the extent that minutes evidence directors’ good faith, diligence, and absence of conflict (or appropriate handling of conflict), minutes can help support early termination of stockholder suits for breach of duty. Attention to board (and board committee) minutes is especially important given the increase in demands by would-be stockholder plaintiffs for corporate books and records to assist them in assessing potential claims and constructing their allegations.
Why This Matters
There are plenty of reasons to get this right. From a practical perspective, corporations need accurate records of actions taken for their own internal purposes, as well as to provide evidence of their actions to third parties. As a legal matter, state law mandates that a corporation maintain accurate books and records, including minutes of board meetings. Certain federal statutes, like the Foreign Corrupt Practices Act and the Investment Advisers Act of 1940, have similar requirements.
Recent trends in corporate litigation and shareholder activism underscore the importance of attending to these records. Under state law, stockholders generally have the right to seek corporate books and records if they have a “proper purpose” to do so. In Delaware, this is known as a “Section 220” action. Establishing a “proper purpose” to seek corporate books and records is a low bar relative to the standards that apply in other types of litigation. For a variety of reasons, such actions are being filed with greater frequency. Importantly, the Delaware courts have expressly encouraged stockholders to employ these “tools at hand” and seek these records before filing litigation, and these records can then be used to try to meet the plaintiff’s burden in overcoming the business judgment rule presumption that director actions were undertaken with care, good faith, and in the best interests of the corporation. The courts have also developed doctrines allowing corporate defendants to seek to dismiss claims early if the challenged action was approved by an informed stockholder vote (encouraging plaintiffs to seek books and records to test if a stockholder vote was “informed”). With minutes and other corporate records in hand, stockholders are better equipped to state claims that may withstand a motion to dismiss, including claims of inadequate oversight (with reference to the absence of evidence of good faith oversight in board minutes) or a failure to give stockholders adequate information (with reference to additional information in minutes). Note too that certain shareholder activists have also sought books and records for support in a proxy fight; although this practice was dealt a blow in 2019 when the Court of Chancery dismissed a request for books and records for this purpose, it noted in dicta that “in the right case” it might hold otherwise.
Effective Practices to Consider
How a company effectively undertakes and maintains its record-keeping – the “who, what, when, where, and why” – is entity-specific. There is no one road map to properly taking minutes and maintaining books and records. It is worth a short conversation with counsel to discuss how to best implement books and records processes at your organization, and to periodically review and assess those processes. Topics to consider include:
Pre-Meeting Objectives: Timely Circulation Of Materials
Directors rely on management and expert advisors for the information necessary for determining board actions. Directors are typically sent an agenda and presentation materials for their review before a board meeting. “Board books” often provide an update regarding events since the last meeting, the prior meeting’s minutes for approval, and an agenda of, and the detail relating to, the topics that are to be discussed and determined at the upcoming meeting.
Board materials are often voluminous – possibly several hundred pages of presentation decks and supporting materials. Generally, the majority of board materials should be circulated a week or so before a meeting to allow directors adequate time to consider the information provided. Often this is done by use of a “board portal,” through which directors can access information electronically using a unique ID and password, which provides additional security to ensure confidentiality.
The materials and presentations that are provided to the board and its committees should be thorough, timely, and relevant, and a record of these materials should be maintained and referred to in the minutes to help provide a record of the informed nature of board and committee deliberations and decisions.
Pre-Meeting Objectives: Director Obligations and Communications
Directors are expected to review the materials provided in order to fulfill their fiduciary duty of care and be prepared to engage in meaningful discussion about potential actions and forward-looking strategy in board and committee meetings. The goal is informed sharing of perspectives, identification of additional information that is appropriate, and discussion about the options and risks of proposed actions with fellow directors, management, and advisors.
While many directors use email to facilitate logistics (e.g., calendar invitations), all should be cautious about email use for substantive discussions. The same holds for other informal communications, including text messages. For starters, such communications should not be handled using private email or phone accounts. Company-specific email accounts or a board portal are a better means of ensuring the confidentiality and privilege of the corporate materials being shared. But these informal communications should be avoided for other reasons too: most importantly, that one-off communications are not a replacement for board-level deliberation, and can be easily taken out of context. Such informal messages are often subject to discovery in litigation and, thus, any such messages must be written with the proverbial “New York Times Rule” in mind: assume your email or text messages could be a headline one day.
The same considerations apply to director note-taking. The corporate secretary will memorialize the meeting, and directors should not take notes for that purpose. Such notes, if necessary, should only be made to facilitate a director’s review of the board deck or asking of questions during the meeting.
Meeting Minutes Process Pointers: Accuracy and Timeliness Matter
The corporate secretary (or an assistant corporate secretary) usually takes notes at the board or committee meeting, and often prepares, prior to the meeting, an outline of the items for discussion and deliberation, and potential resolutions, to assist in that process. Board minutes generally follow the order of the agenda and include information about the timing of the meeting and those in attendance. Consideration should be given prior to the meeting of any areas that are likely to involve privileged materials or discussions.
Because memories fade with time, minutes should be prepared and circulated to those who attended promptly, with an invitation to review and provide any comments. (Ideally, draft minutes should be circulated within a week or so of the meeting.) Typically, the revised draft minutes then circulate again to the board or committee members for approval at the next meeting.
While it can be difficult to circulate and review minutes when circumstances like a crisis require frequent meetings, having a tight process and time frame in place in the ordinary course will help to maintain timeliness in hectic times. A failure to timely prepare minutes may lead to questions regarding their accuracy. For example, in a 2007 decision, then-Vice Chancellor Strine commented that a board’s meeting in late December to approve ten sets of minutes dating from August through November was “tardy” and that the “omnibus consideration of meeting minutes is, to state the obvious, not confidence-inspiring.”
Meeting Minutes Process Pointers: Striking the Right Balance
Board minutes must reflect board action and should evidence the good faith, diligence, and lack of conflict underpinning the action. As the Court of Chancery noted in a December 2020 decision, “[o]ptimally board minutes would be comprehensive, definitive, and inclusive of all the materials, at least by reference, that the board considered prior to making its decision.” In other words, minutes should reflect board actions, and include information sufficient to evidence that directors were well-informed both in terms of substance and process, and acted as fiduciaries.
Drafting board minutes is an art, not a science. But several high-level guidelines should be kept in mind:
- Minutes should track the board or committee meeting agenda and, in areas where there is no decision called for, consideration should be given to providing evidence that the board or committee was faithfully exercising its oversight responsibilities. This is especially important in the areas of legal and regulatory compliance and risk management.
- Minutes should include by reference the complete universe of information upon which the board relied (g., board books, management presentations, and/or expert advice).
- Minutes should reflect the reason or rationale for critical decisions, and the range of factors the board considered in reaching those decisions. If not provided in the minutes (or included through reference to board materials, presentations, and/or expert advice), it will be more difficult to later prove the breadth of the board’s considerations.
- Minutes should clearly state the board’s final decision(s). Resolutions are often used to help describe the rationale and context for decisions (in Whereas clauses) as well as the specific parameters of the decision and related instructions to management or others on implementation. It is helpful to have resolutions drafted in advance for the board to consider for major actions, with the final resolution amended as required in the boardroom to track the final outcome.
- Because minutes and related materials may be later subject to production, it is advisable to segregate privileged information from the remainder of the minutes. This can be as simple as ensuring that information received from, or discussions with, counsel are in their own discrete paragraphs marked privileged, with references to the involvement of counsel, that can be potentially redacted later on. (Of course, care should also be taken in meetings to ensure that only those who need to be present are in attendance during discussions with counsel, or have access to privileged information, so as to avoid waiver of privilege.)
- If a segment of the meeting is held in “executive session” – a term used to describe a portion of the meeting held without members of management present – care should be taken to note who is in attendance and the general topics that are discussed. Often the director who leads this session will take very short notes and provide them to the corporate secretary. These sessions typically are not for the purpose of taking action but are designed to allow the non-management and independent directors to share perspectives on management’s performance and identify areas for further inquiry and feedback to management.
- While it is important that minutes provide an accurate and complete description of the board’s activity, minutes should not be a transcript. Often, minutes do not identify individual directors as speakers or include direct quotes or specific questions asked. Minutes should tell the complete story of a meeting, absent gloss or the writer’s personal perspective.
How Meeting Minutes May Impact Subsequent Litigation
Well- or poorly-drafted minutes can play varied roles in later litigation. For example, we have previously discussed in this blog so-called Caremark claims (examples here, and here), where directors are accused of failing to properly oversee the company by either (i) failing to implement a corporate reporting system; or (ii) creating such a system but consciously failing to monitor or act on it. Plaintiffs are thus often trying to prove a negative – that a board did not discuss a particular topic or issue. Board minutes are the best proof of the information directors considered (including information incorporated by reference) and their deliberation and consideration of the issues. Well-drafted minutes can thus play an important defensive role because they can evidence directors’ deliberations on challenged topics.
While Caremark claims are notoriously difficult for a plaintiff to plead, in the past few years some have survived a motion to dismiss in situations where the plaintiff used the Section 220 process to obtain board minutes, and then used the absence of material in those minutes about the issue at hand to support an inference that the matter did not receive appropriate board attention. The Delaware Supreme Court’s June 2019 decision in Marchand v. Barnhill is one example where failed oversight claims were allowed to proceed. The case arose in the aftermath of a listeria outbreak in an ice cream manufacturing plant that caused three deaths. In considering the board’s oversight function, the court noted that “[b]oard meeting minutes from [a three month period] reflect no board-level discussion of listeria” even though management was allegedly aware of and working to mitigate the problem at the time. Additionally, it did not appear that any board committee was involved in oversight related to the listeria outbreak. From this, and other lack of evidence of board involvement, the court inferred for purposes of denying defendants’ motion to dismiss a lack of board consideration regarding the “mission critical” issue of food safety.
A lack of evidence of board attention in minutes likewise played a role in the recent Hughes v. Hu case, where plaintiff alleged that the board failed to oversee and remediate material weaknesses in the company’s financial reporting system. The plaintiff stockholder defeated a motion to dismiss, in part due to inferences drawn from a books and records production in which plaintiff requested minutes from meetings “at which specific topics were discussed.” The Court concluded that during periods for which the company “did not produce any minutes,” the plaintiff was “entitled to the reasonable inference” that no meetings occurred “at which those topics were discussed.” Complete and accurate minutes help to ensure that a board’s deliberations are properly memorialized for this kind of after-the-fact review.
Another incentive to invest in the proper preparation and maintenance of books and records is that in a stockholder books and records request, the scope of what might need to be produced can vary depending on the quality of the company’s formal records. The Delaware courts have indicated that in the absence of formal records, the production of informal communications (e.g., emails) to reflect board action may be appropriate. As the Court of Chancery noted in a December 2020 decision addressing a request for books and records:
If a corporation has traditional, non-electronic documents sufficient to satisfy the petitioner’s needs, the corporation should not have to produce electronic documents. But when a petitioner . . . reasonably identifies the documents it needs and provides a basis for the court to infer that those documents likely exist in the form of electronic mail, the respondent corporation cannot insist on a production order that excludes emails even if they are in fact the only responsive corporate documents that exist and are therefore by definition necessary.
Of course, record-keeping doesn’t fix or impact whether a board discusses a particular issue. But record-keeping can ensure that a board’s deliberations are properly memorialized so that they can be considered in the future, without reference to extraneous materials.
Post-Meeting: Ensure Proper Maintenance of Records
Having taken the time to prepare board decks and minutes of meetings, it is critical to ensure they are properly maintained. This is the responsibility of the corporate secretary, who should maintain a copy of every item sent to the board in an official record. Each company maintains its books and records differently, and should ensure that it does so in accordance with its record-keeping policies and IT protocols to ensure safekeeping and continuity. If a board portal is used to disseminate information or facilitate director email communications or note taking, it should be part of this assessment (including the adoption of appropriate retention and deletion policies). An important related point, as suggested above, is that this process must maintain all pertinent materials. This means that board decks and any other materials that are referenced in board minutes should be maintained with finalized minutes. Such supporting materials reflect the information the board considered, and provide important context for understanding the minutes and resulting board action.
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The implementation of effective books and records practices can reap dividends in the years to come in ways that are often difficult to foresee. Take a few moments today to review and assess whether your record keeping practices are appropriate, and reach out to counsel to discuss any questions you may have about how your practices might be improved. Such periodic review could save significant time and energy down the road.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.