In an article in the Fordham Journal of Corporate and Financial Law, “Minutes Are Worth the Minutes: Good Documentation Practices Improve Board Deliberations and Reduce Regulatory and Litigation Risk,” former Chief Justice of the Delaware Supreme Court, Leo Strine, discusses—convincingly—the importance of good “corporate minuting and documentation processes.” (See also this post presented on The Harvard Law School Forum on Corporate Governance.) Strine acknowledges upfront that the topic is “decidedly not sexy,” and “the favorite task of no one involved in the process.” Drafting minutes, he suggests, is the “equivalent of eating your least favorite vegetable, either you do it hastily, as infrequently as you can, or, if you can get away with it, not at all.” (Perhaps the leitmotif of this piece might be Strine’s evident hostility to vegetables. Later, he characterizes minutes as “the spinach that must be eaten.”) But, in his view, it is an “unquestionably essential, corporate governance task.” He contends that good quality minutes can reduce litigation risk. And he brings us the receipts, highlighting numerous Delaware cases “where the quality of these practices has determined the outcome of motions and cases,” underscoring the “importance of quality and timely documentation of board decision-making, the material benefits of doing things right, and the considerable downside of sloppy, tardy practices.” But that’s not all. He also invests the documentation process with a larger purpose: he contends that an effective process of crafting and reviewing minutes by the board, together with its counsel and advisors, can serve as an integral part of the board’s deliberative process in arriving at a sound decision based on its considered business judgment. With both of these benefits in mind, the article identifies several effective and efficient practices. Strine offers a lot of wise counsel that readers may want to heed.
To motivate us to meet the challenge of drafting, discussing, editing and finalizing minutes and board resolutions, notwithstanding the tedium, Strine directs us to the Delaware Judiciary. In recent decades, he says, where corporate minuting and documentation practices
“have inspired confidence, by providing a thorough, contemporaneous, and consistent record of the basis for the board’s decision, the Delaware courts have given greater weight to the minutes as evidence and to director testimony consistent with those minutes, been more likely to dismiss complaints that incorporate them, and have found those formal materials sufficient to satisfy stockholder demands for books and records. By stark contrast, where corporate minutes have failed to cover key topics, been approved long after the meetings they document, do not reference advisor presentations, and otherwise undermine the court’s confidence that they accurately document the material factors that motivated the board’s actions, then they have been given little weight as positive evidence favoring the directors’ position in litigation. Poor minuting practices have also opened the door to wide-ranging production of emails, texts, and managerial level documents in response to stockholders’ requests for books and records.”
Material factors and key documents. Strine begins by describing what the courts expect to see in board minutes—and what they don’t expect. According to Strine, the court expects minutes to address the material factors, such as the material legal compliance risk under Caremark, and to incorporate the key documents, such as advisor presentations, that the board considered in making its decision. And, in cases cited by Strine, good quality formal board minutes have led courts to “reject[] claims for sweeping electronic discovery into emails and texts because the formal record of board minutes, advisor presentations, and resolutions involving a lengthy strategic M&A process were sufficient to the petitioner’s purpose of investigating whether a claim for breach of fiduciary duty could be brought.” But, he makes clear, minutes are not transcripts.
Strine observes that the failure to incorporate advisor presentations in minutes and “have them work together to create a reliable and consistent record of the board’s deliberative process deprives the board and management of credible memory aids and opens up their testimony to credibility attacks.” (He looks askance at shredding of these presentations.) Quality minutes, on the other hand, “have helped corporate defendants convince the court that the board’s actions were motivated by proper considerations—the key issue in terms of the fiduciary duty of loyalty—and resulted from a reasoned deliberative process—the key issue in terms of the fiduciary duty of care.” Quality minutes that incorporate and are consistent with “investment banker advice or the results of a deep management inquiry into a difficult compliance issue, and document that the board’s deliberative process was careful and its decision was justified by proper business considerations,” can help to “buttress the credibility of the board and materially increase the likelihood that the court will not second-guess the board’s business judgment.” Here, Strine cites examples of cases where, despite legal violations with “serious economic, regulatory, and reputational harm to the company, the documentation in corporate minutes and incorporated advisor presentations that the board had in fact made a good-faith effort to monitor the risk in question has resulted in the dismissal of Caremark claims against the board.” In other instances, however, the failure of minutes to include consideration of an important compliance risk “has supported a pleadings-stage inference that the board failed to engage in good-faith monitoring efforts,” allowing a Caremark claim to proceed.
At the motion-to-dismiss stage, Strine suggests, which typically occurs prior to discovery, the “objective record that the corporate minutes, resolutions, advisor presentations, and SEC filings create is…the key factual foundation plaintiffs use to frame their complaints.” When defendants fail to convince a court to dismiss a case, the plaintiffs then have “access to wide-ranging discovery into corporate records going well beyond formal minutes and advisor presentations,” which can compound credibility problems, not to mention increasing the likelihood of a larger settlement. For example, in a deposition, “when a director or advisor testifies that factors not mentioned in the minutes were in fact considered,” the question becomes why, “if that factor was important and actually a subject of serious discussion,…was it not included in the minutes?” While omissions of this kind are not conclusive, Strine maintains, they do “increase the risk of an adverse ruling.”
Timing. Strine also stresses the importance of promptness: failure to document what was done at the last meeting and review it at the next meeting “impoverishes the deliberative process itself, not just the record,” depriving the parties involved of the opportunity to “reflect[] on their decision-making process to date and whether there are other considerations the board should be addressing going forward.” He advises that counsel should establish an iterative pattern of promptly preparing draft minutes, encouraging directors to review them “carefully in concert with the advisor and management materials for the prior meeting, and in light of the relevant materials for the meeting at which the minutes will be considered for approval,” creating “a tool for thinking more deeply about the material issues the board is working on and making sure the process takes into account all the factors it should.”
What’s more, he observes, the Delaware courts are skeptical of—including even refusing in some cases to “give evidentiary credit” to—minutes approved in “one fell swoop” at the end of deal and “not the product of a timely, diligent real-time effort to document in good faith of minutes the board’s deliberations.” The problem is not just the potential for faded memories, but also that “a reasonable inference arises that the minutes were crafted with hindsight bias and reflect an attempt to make whatever outcome eventually happened look favorable by shaping the record of the board’s past narrative to position the board to look the best to a regulator or a court.” To illustrate, he provides one example where the “minutes were approved after the company had filed its preliminary proxy statement relating to the transaction and plaintiffs used that preliminary proxy to write their complaint. At that stage, the minute writers and the board not only knew the outcome of the process but had access to the plaintiffs’ arguments why the board’s decision was improper.” In that case, the court denied the minutes “any presumptive weight.”
Limiting books and records requests. Strine observes that, recently, there has been an increase in books-and-records demands, as well as an expansion of these requests to include director and management texts and “management-level drafts and informal communications regarding matters that either did or, in some instances, did not go to the board.” Strine contends that the existence of “formal, board-level documents that adequately cover what the board did, when, and the basis for its actions” can affect the “scope of access that is awarded to petitioners.” That is, if a company can “timely produce the minutes, resolutions, and advisor presentations for a transactional process or special investigation, the Delaware courts have made clear that those formal documents” will typically suffice. On the other hand, he contends, “when the formal record is full of gaps and it is plain that the board and management conducted much of their decision-making outside the boardroom, by means of texts and emails, the Delaware courts have granted access to that information because that information was in effect the books and records essential to determine what the board eventually did and why.”
In addition, citing Simeone v. The Walt Disney Co., Strine contends that “[g]ood minutes and formal board documents can convince the court that the petitioner has no proper basis for obtaining books and records at all.” In addition, he suggests that both regulators and plaintiffs’ counsel can sometimes be dissuaded from bringing enforcement action or suits when provided with a quality record.
Best practices. Strine then identifies a number of best practices, summarized below:
“Have a General Protocol for Minuting Meetings and Be Thoughtful When Deviating from that Protocol.” Strine disfavors techniques such as combining after-the-fact descriptions and pre-drafted sections and “lumpy mixture[s] of long- and short-form minutes without a consistent approach.” Both these techniques, he suggests, can leave directors looking less than credible. Rather, he recommends a professional and consistent approach: for smaller companies with fewer resources, that might be a “general commitment to high-quality short-form minutes that scrupulously record key information (such as the length of the board meeting, who was present, and the action taken) and summarize succinctly the considerations the board took into account but do not attempt to be exhaustive or characterize the views or statements of any particular director,” allowing exceptions for situations that require a longer form, such as an internal investigation or a special committee. All management and advisor presentations for particular meetings should be stored with the minutes, he advises.
Companies that use long-form minutes for all meetings should devise specific criteria for minute-takers, including proscribing the use of specific language from specific directors, as opposed to “identify[ing] a subject that was discussed and the material considerations that arose.” In Strine’s view, minutes “that refer to some, but not all, directors imply that those not mentioned did not speak or participate actively, and that is not always the case. The more that minutes look like an attempt at a transcript, the less room there is for participants to credibly testify later on other questions or issues that were raised in the meeting but not reflected in the minutes.” Don’t forget to “record important information…such as the individuals presenting information or leading a discussion and the names of all the advisors present during the meeting.”
“Transform the Minuting Approval Process into an Active, Iterative Part of the Deliberative Process.” Strine seeks to avoid making minute approval a purely mechanical process. To that end, he recommends that the process for approval of minutes “could benefit from the general counsel or corporate secretary directing the participants to the most crucial parts of the minutes, describing the most important decisions to ensure the participants—managers and directors—focus on whether the minutes accurately capture the decision taken, and, as important, fairly summarize the major factors the board considered. This highlighting process should include reference to key documents considered in the meeting.” In addition, Strine advises that consideration of the minutes of the prior meeting should be used “as a launching point for the current meeting’s consideration of that issue. By having minute approval be conducted in this more active, engaged, and relevant manner, it changes from a rote matter of perfunctory hand raising into an active consideration of the process to date and a useful starting point for the next stage in the deliberative process.”
“Ideally, Minutes for the Prior Meeting Should Be Approved at the Very Next Meeting.” Of course, the prior recommended practice depends on having the minutes for last meeting complete in time for approval at the next meeting. Strine also contends that the next meeting is the “most credible time” for approval of minutes of the prior meeting, given that memories are then freshest. Once again down on vegetables, Strine describes minutes as “the spinach that must be eaten. If they are fresh, sautéed nicely and digested promptly in small portions, they are more palatable than if they are eight boxes of frozen spinach, defrosted in a microwave, and gagged down in a slimy mess all at once. And impatient CEOs and directors are more likely to tolerate the spinach if its role is transformed into a healthy part of an effective, iterative, and efficient deliberative process.”
“Ideally, Key Minutes Should Be Approved at Meetings, Not by Written Consent.” Strine advises that review and approval of minutes by written consent “is not ideal and can contribute to there being no reasoned discussion by directors of whether the minutes cover all the necessary issues.” Approval by written consent can also raise “appearance problems” in litigation, a problem that can be “compounded if an omnibus resolution is used to approve a large bunch of minutes at the end of an important process.” If minutes do need to be approved in a group, Strine suggests, “that makes it even more important that the board meet in earnest when approving those late-arriving minutes, that the legal advisors go through them carefully, make sure that the board is engaged and asks questions, and considers the minutes in concert with the materials that were considered at the meetings.” When approval is sought by written consent, he continues, “it is important to emphasize to directors the importance of careful review, and to encourage the directors and officers to comment on the circulated minutes and not just rotely approve what is sent. In particular, in the context of a high-stakes transactional process or investigation, active director and officer focus on ensuring the minutes cover the material issues that were the subject of the board’s deliberations is critical.”
“Make Sure Minutes and Advisor Presentations Cover Key Evolving Issues and Tie Up Loose Ends.” Strine observes that often, directors ask important questions and seek follow-up at meetings, but sometimes that is not reflected in the record, which can impact the credibility of witness testimony. Strine believes that prompt preparation of minutes and inclusion as part of the materials for the next meeting make it “more likely that areas for follow-up will be documented in the draft minutes, and that the materials for the next meeting will refer to the areas where the board asked for follow-up.” Rather than just a “rote update of a canned slide deck,” the board materials should be prepared with a “fresh eye.” In his view, that would “also track what is most likely to produce a reasoned process in which the active business judgment of the board comes together with the active best input from management and advisors to create a basis for making sound decisions and for documenting that basis in real time accurately and credibly.”
“Use Approved Minutes to Craft Important Documents Such as Preliminary Proxies and Committee Reports in the Most Careful, Credible Manner.” Optimally, Strine advises, the background section of a preliminary proxy relating to an M&A transaction should be drafted by reference to a set of approved board minutes and advisor presentations. The minutes should “provide a solid, chronological foundation for the key narrative of material events,” and, if directors have been involved in approval of the minutes, they will be more likely to provide informed comments on the proxy. The opposite of best practice, according to Strine, is to have board minutes approved after the company has filed a description of events with the SEC, “because it looks like the preliminary proxy has driven the writing of the minutes.”
“Realize the Connection Between Quality Documentation Practices, Integrity In Corporate Decision-Making, and the Judicial Perception of Both Corporate Fiduciaries and Corporate Lawyers.” Here, Strine puts a positive spin on the current state of corporate decision-making and lawyering. According to Strine, even among those cases that actually come to court, there is “quite low percentage of cases where corporate boards and managers have been found to have engaged in conscious wrongdoing or yielded an economically unfair outcome to the public stockholders.” What the public often does not see are lawyers acting with integrity in counseling their clients: “the many, many instances in which a potentially harmful, self-interested action has been avoided, when a conflicted party has recognized its proper responsibilities to others, when a company has increased its compliance efforts to protect consumers or the environment, or removed an officer whose conduct or performance was not up to snuff.” He continues that “those companies that have board documentation practices that enforce rational decision-making by making sure that the basis for all important board decisions are well-documented, and thus underscoring that it is vital that any decision be justified by reference to the best interests of the company and all its stakeholders, are the ones most likely to avoid costly litigation or regulatory proceedings,” or are best-positioned to resolve any proceedings that do arise.
Conclusion. In his conclusion, Strine articulates his perspective on this board process: that
“by seeing the crafting and approving of minutes, resolutions, and other decisional information as integral to an iterative, active process of thinking in a business-like way about important issues, a more lively and active deliberative process emerges in which it is more likely that all reasonable perspectives will be vetted and that the board’s eventual decision is well-grounded. Using this approach will result not just in lower legal, regulatory, and reputational risk; it will also lead to better business decisions, more ethical behavior, and a stronger company that is well-positioned to create sustainable value for its investors and treat all its key stakeholders with respect.”
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