It depends. The size of your corporation and the issues raised at the annual directors’ meeting may vary your approach to drafting the meeting minutes. Annual minutes containing brief resolutions of board action are still the recommended approach, especially for one or two person entities. However, In re The Walt Disney Company Derivative Litigation has caused some practitioners to consider a more detailed record.
In re The Walt Disney Company Derivative Litigation was a 10-year court battle, which resulted from a board approved $130 million termination agreement for outgoing president, Michael Ovitz. The plaintiff-shareholders argued that the board breached its duty of care by approving Ovitz’s employment agreement with seemingly little discussion or deliberation. In re The Walt Disney Company Derivative Litigation, 906 A.2d 27 (Del. 2006).
The board ultimately prevailed, but the shareholders’ claim survived for so long because the compensation committee minutes did not provide a sufficient record of informed action on the issue. Ultimately, there was only a page and a half of the board’s minutes devoted to Ovitz’s employment agreement. Id.
The case brought to light the “business judgment rule,” which presumes the board acted independently with due care, in good faith and in the belief that its actions were in the shareholder’s best interests. A court will not substitute its judgment for the board’s and will not evaluate the board’s actions with hindsight. Id.
Central to the rule is a sufficient record of board action to support the directors’ decisions. In its opinion, the Disney court said there would have been “no basis for litigation,” if the compensation committee had created an adequate record in the meeting minutes, and if the board had followed “best practices” in drafting detailed minutes to show its deliberations. Disney, 906 A.2d 27 (Del. 2006).
Despite the fall-out from the Disney case, there is no need for a small corporation with one or two shareholders, officers and directors to document every-day business decisions in its annual directors minutes. Matters such as salaries, pension plans, purchasing supplies and products or hiring/firing low or midlevel employees can be considered routine and thus, excluded from the directors’ minutes.
But when the corporate action is more substantial or outside the ordinary course of business, it should be included in the annual minutes. Any of the following are important enough for a recorded board action:
Issuing stock to shareholders
Purchasing or selling real estate
Taking on a substantial loan or line of credit
Any other action with key legal and financial consequences that you feel should be backed with a paper trail.
The above conditions can be recorded in a resolution of the board. The resolution does not have to be a detailed word-for-word transcript, but a brief record of the board’s final action on the issue will suffice. The short resolution lessens the risk of misconstruing the minutes at a later date, avoids disclosing embarrassing comments made by directors in future litigation and lessens the opportunity for cross-examination.
Other advantages of limiting directors’ minutes to brief resolutions include:
The minutes are easier to draft and more likely to be accurate;
They are less likely to include subjective information; and
There will be fewer disputes about their accuracy.
Small entities are less exposed to shareholder derivative actions like the one in Disney, and less likely to have to invoke the business judgment rule as a defense. The popular and practical approach for small corporations is to have a brief record of board action in the annual minutes. Lengthy, detailed minutes are still the minority method, even for larger corporations.
In the end, your corporation may want to vary the detail of its annual directors’ minutes depending on the importance of the issues discussed and voted upon by the board.