By Mark Jackson and Harva Dockery, Norton Rose Fulbright
Overview
At every meeting of a company's board of directors, counsel faces the decision of what details to include in the minutes and how to memorialize the event in official records. The process is typically more art than science. When it comes to minutes, "best practices" does not necessarily mean consensus. It can range from collecting and preserving all notes taken at a meeting to mandating the destruction of everything but the final record.
This Quick Overview reviews the legal requirements underpinning minutes to provide a foundation for counsel when deciding which best practices to adopt. While the focus is on Delaware state law and public corporations, this Quick Overview discusses other law where appropriate, and its lessons apply more generally.
Statutory Law and Regulations
State Statutory Requirements
The statutory provisions for corporate minutes are spare. The only requirement to keep minutes under the Delaware General Corporation Law (the "DGCL") comes from §142(a): "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." 8 Delaware C. § 142(a). The DGCL also provides that records, including minute books, may be stored in any manner so long as the records can be converted into clearly legible paper form within a reasonable time and that clearly legible paper forms of such minute books shall be admissible in evidence and accepted for all other purposes as if they were originals. 8 Del. C. § 224. Other state statutes largely mirror Delaware's treatment of minutes. See, e.g., New York Bus. Corp. Law § 624(a) and California Corp. Code § 1500. These statutes offer considerable latitude to counsel: There are no specific instructions regarding how to record proceedings or what level of detail to include in the records.
Stockholder Inspection
Beyond the basic requirements, the most relevant statutory provisions relate to a stockholder's limited right to inspect the books and records of the company. Under the DGCL, any stockholder has "the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from," the books and records of corporations in which the stockholder has an ownership interest and, in certain circumstances, the books and records of any subsidiary of such corporations. 8 Del. C. § 220(b). Other states have similar mechanisms with important differences. See, e.g., N.Y. Bus. Corp. Law § 624(b) and Cal. Corp. Code § 1601. Stockholders also have certain inspection rights under common law.
In Delaware, a stockholder's right to inspect the books and records is subject to procedural and substantive requirements. Once a corporation receives an inspection request, it has five days to respond and may object based on a stockholder's failure to meet one or more of these requirements.
The procedural requirements include a specific form the request must take, although there are no limitations as to the time the stock must be held before a request can be made or the amount a stockholder must hold. The substantive requirements include the need for the stockholder to show a "proper purpose" for the stockholder's request. A proper purpose is one that is related to the stockholder's legitimate interests as such and can include an investigation into self-dealing or mismanagement by the board of directors. One goal of the proper purpose requirement is to prevent wasteful "fishing expeditions." Accordingly, one stockholder's inspection request alleging corporate mismanagement was recently rejected in Delaware for failure to demonstrate "some evidence of possible mismanagement as would warrant further investigation of the matter." Louisiana Municipal Police Employees' Retirement System v. Lennar Corp., C.A. No. 7314-VCG (Del. Ch. Oct. 5, 2012). The amount of evidence a stockholder must demonstrate varies with the facts and circumstances of each request.
Once a stockholder has made an appropriately formatted request for a proper purpose, the corporate documents requested must be "circumscribed with rifled precision." Security First Corporation v. U.S. Die Casting and Development Corp., 687 A.2d 563 (Del. 1997). Courts have narrowed the scope of inspection requests in this way as an additional bulwark against fishing expeditions. Privileged material and confidential information may also be withheld or subject to special limitations.
Thus, a Delaware stockholder may inspect corporate minutes provided he has some evidence of a proper purpose and tailors the request to documents related to that purpose. Because of the fast timeline of these requests, counsel must always consider a stockholder as a potential audience and user of minutes.
Federal Regulation
The Securities Exchange Act of 1934, as amended (the "Exchange Act"), also adds record-keeping requirements for reporting companies: Issuers shall "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Exchange Act Section 13(b)(2)(A). Reasonable detail in this context means "such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs." Exchange Act Section 13(b)(7). Additionally, "no person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account" as described above. Exchange Act Section 13(b)(5). These requirements increase the potential consequences for poorly maintained minutes but offer minimal guidance for counsel in drafting minutes.
Case Law
Little jurisprudence dealing with corporate minutes exists. Fortunately, in the last decade Delaware courts have had the opportunity to touch on the subject in two high-profile cases.
In re The Walt Disney Company Derivative Litigation
The Walt Disney Company's protracted legal battle over payments it made to an executive launched corporate minutes to the center of a substantial dispute. Disney stockholders brought a derivative suit against the company's directors and officers alleging breaches of their fiduciary duties related to the hiring and firing of an executive president of the company who received approximately $130 million upon termination after 14 months of work. In re The Walt Disney Company Derivative Litigation, 906 A.2d 27 (Del. 2006). The stockholders claimed, among other things, that the directors did not fulfill their duty of care when they approved the employment agreement that triggered the payout.
Critical to the stockholders' arguments was the treatment of the employment agreement and hiring process in the company's minutes, which failed to demonstrate much deliberation or document review. In fact, the minutes reveal that the employment agreement was one of several items on the agenda for a short meeting where the directors did not review any related document other than a term sheet presented by a director with knowledge of the negotiations.
The Delaware Supreme Court found that the minutes and broader record-keeping process used by the directors, while not "best practices", provided sufficient evidence along with certain testimony that the directors met their fiduciary obligations. That is, the record in the end demonstrated the directors adequately informed themselves of matters related to the executive's employment. Notwithstanding the positive outcome for the company, the court noted that "had [best minutes practices] been followed, there would be no dispute (and no basis for litigation)" over whether the directors met their fiduciary obligations.
Thus, the Disney litigation demonstrates both the few legal requirements for keeping minutes and significant practical costs of failing to do so. The court did not address any failure of the company or its officers to keep minutes under statutory, federal, or state common law, and ultimately the company was able to show that its directors fulfilled their responsibilities without the help of useful minutes. But the company had to endure almost a decade of costly litigation and negative publicity to reach this result. Properly kept minutes could have avoided the hassle entirely.
In re: Netsmart Technologies, Inc. Shareholders Litigation
While the directors at Disney approached the liability threshold for keeping inadequate minutes, the directors at Netsmart crossed it. Stockholders at Netsmart sought to enjoin the company's merger on account of an allegedly flawed sale process. In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del. Ch. 2007). The stockholders claimed, among other things, that Netsmart's directors did not adequately review the options that were best for the company and instead chose to focus on options that benefited the directors themselves. The minutes of the company were crucial to determining the level of care shown by the directors. Unfortunately for the directors, the record was poor. Minutes were not taken at "informal" board meetings where the directors claimed they considered certain sale options, and where minutes were taken, they did not reflect much deliberation. The Delaware Chancery Court went so far as to cast doubt on the veracity of the company's record. Where a committee of the board approved all of the minutes for over five months at a single meeting held after litigation commenced, the court noted that "that tardy, omnibus consideration of meeting minutes is, to state the obvious, not confidence-inspiring."
The court ultimately found that the directors had likely breached their fiduciary duties in the sale process and enjoined the merger. The Netsmart decision offers an example of the consequences of poorly taken minutes. The directors in the case were helpless to prove their deliberation and, as a result, they faced potential legal liability and a failed merger.
Conclusion
Ultimately, the best practices for taking minutes will depend on the company and the context surrounding it. Nevertheless, counsel should understand the legal framework behind the practices. A variety of practices has developed because the law in this area is so flexible, but the practical consequences of inadequate minutes, whether an issue through stockholder inspection or litigation, can be enormous.
Additional Resources
- Browning Jeffries, Shareholder Access to Books and Records: The Abrogation Debate, 59 Drake L. Rev. 1087 (2011)."
- Hamermesh, Lawrence A., Twenty Years after Smith v. Van Gorkom: An Essay on the Limits of Civil Liability of Corporate Directors and the Role of Shareholder Inspection Rights, 45 Washburn L. J. 283 (2006)."
- Grace Jr., H. Stephen and Haupert, John E., Governance Lessons from the Disney Litigation, Business Law Today, Vol. 20, Issue 9 (2011)."
- Godfrey, Cullen M. "Mike", A New Standard for Corporate Minutes, Business Law Today, Vol. 17, Issue 2 (2007)."
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