BUSINESS AND COMMERCIAL LAW
A New Standard for Corporate Minutes
“ One of the officers shall have the duty to record the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose.” This sentence from Section 142 of the General Corporation Law is the only reference to the requirement for corporate minutes contained in the Delaware statutes. There is a lack of significant jurisprudence dealing with corporate minutes, and there are very few treatises on the subject. Nonetheless, following the adoption of the Sarbanes- Oxley Act of 2002 and the recent Delaware Supreme Court case dealing with the Walt Disney Company’s termination payments to its president, Michael Ovitz ( In re The Walt Disney Company Derivative Litigation, 906 A.2d 27 (Del. 2006)), the significance of corporate minutes and their contents have taken on a whole new level of importance.
A corporation’s directors owe a fiduciary duty to the corporation on whose board they serve. Among other issues raised in the Disney case was whether Disney’s directors fulfilled that fiduciary duty by properly exercising their constituent duties of care and loyalty. The duty of care, the main issue in the case, requires directors to exercise the level of care that a person in a similar situation would have exercised under the same or similar circumstance. Plaintiff shareholders argued that Michael Ovitz’s board-approved employment agreement—which provided for a termination benefit totaling $130 million after he had been on the job for a mere 14 months—must clearly have resulted from a breach of the duty of care by corporate directors.
When evaluating the actions of directors, courts have adopted a standard of judicial review known as the “business judgment rule.” Generally stated, the rule presumes that the board acted independently, with due care, in good faith, and in the honest belief that its actions were in the shareholders’ best interests. There are two aspects to the rule. First, courts will not substitute their judgment for the board’s, and second, the board’s action will not be evaluated with the benefit of hindsight but based on the information that was available at the time a decision was made. Thus, if the board’s action was not clearly irresponsible at the time it was made, the business judgment rule should be a complete defense to any claim that the board violated its fiduciary duty.
To the extent that directors’ actions are subject to review, the Disney case now demonstrates the need for a record to have been established supporting the judgments made by those directors. In most jurisdictions, including Delaware, minutes are considered to be prima facie evidence of actions taken by the corporation, and in others, minutes are presumed to be credible. Additional evidence will be permitted only when minutes are incomplete or ambiguous.In the Disney case, the critical event was a meeting of the company’s compensation committee that approved Ovitz’s employment agrement as the new president of Disney. Ovitz was leaving a lucrative talent agency business, and he wanted a five-year contract with significant termination protection if he were forced out without cause. The compensation committee meeting was short, and many other items were on its agenda. The court found that “all that occurred during the meeting regarding Ovitz’s employment was [one of the members] reviewed the employment terms with the committee and answered a few questions.” No draft of the employment agreement was given to the committee, and the only information about the agreement recorded in the minutes was an incomplete summary.
Thus, the minutes of the compensation committee were not sufficiently detailed to sustain the presumption that the business judgment rule had been satisfied. An earlier Delaware Chancery Court opinion in the case noted that before Disney’s full board approved the Ovitz agreement, it did not get a report from its compensation committee, and only a page and a half of the board’s minutes covered Ovitz’s possible employment. There was no mention of any questions by the board about the details of Ovitz’s salary, stock options, or the consequences of his possible early termination.
Notwithstanding the ultimate favorable outcome in the Disney case, the Delaware Supreme Court opinion clearly signaled that future suits will be dealt with more rigorously. The decision compared the Disney board’s actions with the court’s view of “best practices” that should have been reflected in Disney’s minutes. Best practices would have included receiving a spreadsheet showing various payouts based upon various alternatives and scenarios, including early termination; the spreadsheet should have been explained by an expert or other knowledgeable party iden- tified in the minutes; and the spreadsheet should have been an exhibit to the minutes.
The Delaware Supreme Court then noted that had this scenario been followed, there would have been no dispute over what information was furnished to the compensation committee members or when it was furnished. Although the committee’s process did not fall below the level required for a proper exercise of due care, it did fall short of what best practices would have counseled. The court included a telling parenthetical phrase. It said that if the com- pensation committee had devoted more attention to process and building an adequate record through the minutes of the meeting, there would have been “no basis for litigation.” Directly owing to the absence of a complete record, the Disney litigation lasted for a total of ten years, including a 37-day trial on the merits of the plaintiff shareholders’ claim.
In a 2007 Delaware Chancery Court case, In re Netsmart Technolo-gies, Inc. Shareholders Litigation, 924 A.2d 171 (Del. Ch. 2007), Vice Chancellor Leo Strine strongly signaled that a board’s minute-taking process will be receiving even closer scrutiny. A special committee of Netsmart’s board considered the possible sale of the company over a period of months in 2006. When a shareholder’s derivative suit questioned the adequacy of the special committee’s actions, the Chancery Court noted that a December 21 meeting of the special committee approved minutes of ten previous meetings dating back to August 10, and stated “[t]hat tardy omnibus consideration of meeting minutes is, to state the obvious, not confidence inspiring. . . .” The clear implication is that corporate minutes should be prepared, reviewed, and approved when events of meetings remain fresh on the minds of directors. Minutes should not be relegated to some pro forma afterthought completed at a later date.
There is now clear direction regarding what corporate minutes need to contain. Materials presented to the board in support of its decisions should be attached as exhibits to the minutes or at least clearly referenced with copies of such materials retained for future review. Although minutes, by their nature, are not intended to be verbatim accounts of meetings, they should be sufficiently detailed to explain all that occurred during the course of the meeting. Presentations to the board should be well summarized, and discussions among directors should also be included. A mere recitation that “discussion ensued” may no longer be an adequate demonstration of the board’s level of review and informed deliberation.
In major corporate transactions such as mergers and acquisitions, every director should assume that the board’s decision will become the basis for a lawsuit. Failure to document the decision with appropriately detailed minutes risks the time and expense of a lengthy trial and, worse, the possibility of a finding that the business judgment rule has not been satisfied.
For More Information About the Section of Business Law
- This article is an abridged and edited version of one that originally appeared on page 47 of Business Law Today, July/August 2008 (17:6).
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- Books and Other Recent Publications: A Manual of Style for Contract Drafting, 2d ed.; Practice under Article 9 of the UCC; SEC Executive Compensation Disclosure Rules; Hereof, Thereof, and Everywhereof, 2d ed.; Model Business Corporation Act, 2007 ed.; Portable Bankruptcy Code and Rules, 2008 ed.; New Bankruptcy Code, 2d ed.; Intangible Assets Handbook; Intellectual Property Deskbook; In-House Counsel’s Essential Toolkit; Corporate Director’s Guidebook, 5th ed.; Bankruptcy Deadline Checklist, 3d ed.; Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley; Model Asset Purchase Agreement with Commentary; The Practitioner’s Guide to the Sarbanes-Oxley Act; The M&A Process: A Practical Guide for the Business Lawyer.
Cullen M. Godfrey is the chief legal officer of the Texas A&M Health Science Center. He may be reached at firstname.lastname@example.org.