by Macy Shubak
For many entrepreneurs, the idea of preparing minutes of board meetings seems like a thankless chore, especially when there are only two or three directors. It may be tempting to skip this corporate formality if the purposes for it are not understood. Also, many entrepreneurs wonder what magic language should go in them to make them “legal.”
Reasons for Preparing Board Meeting Minutes
There are several reasons for preparing good corporate minutes:
- State Law Requirements and Corporate Bylaws. State laws generally require corporations to prepare and keep minutes of board meetings. According to Delaware state law (a state where many companies are incorporated), “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.” The Wisconsin Statutes do not require corporations to take board minutes unless requested by a director, but most corporation bylaws require the corporation to maintain adequate minutes of board meetings.
- Reduce Personal Liability Exposure. Preparing and maintaining proper corporate minutes may help reduce the risk of personal liability. Directors have a fiduciary duty of care, meaning that they have to show that they sufficiently analyzed the alternatives before making a decision. They also have a fiduciary duty of loyalty, meaning that they must act in the best interest of the corporation and its shareholders, above any of his or her own interests. Maintaining good corporate minutes can help to establish that the duties of care and loyalty have been fulfilled. Also, by having good corporate records, there may be less chance of a third party “piercing the corporate veil” by claiming that the corporation is nothing more than a sham of the owners who disregard the separateness of the entity and should not receive the benefits of limited liability protection.
- Third Party Requirements. Another reason to keep minutes is to provide evidence of approval of transactions involving third parties (e.g., banks, investors, and strategic partners). In addition to being a state or bylaws requirement to approve significant transactions, some third parties require evidence of such approval as a condition of closing.
- Reduce Likelihood of Certain Types of Litigation. In a 2006 case, the Supreme Court of Delaware described best practices for approval of an action by a board committee and concluded that the company could have avoided decade-long litigation if proper minutes had been recorded for every meeting with detail regarding the information that was used to make the decisions.
- Creation of a Historical Record. A bonus of preparing minutes is that the company will accumulate a searchable, historical record of all of the significant actions taken by the company. By either gathering signatures electronically or by scanning and combining the final, signed minutes into a searchable PDF binder, they will be easily searchable and ready for delivery to future investors, bankers, and auditors who require them for a transaction or audit.
Appointment of Secretary of the Meeting
Minutes are traditionally prepared by the corporate secretary as prescribed by most bylaws, but the duty can typically be delegated to another officer or employee, or a lawyer or paralegal from the company’s law firm. The chairman of the meeting can typically appoint a person as “secretary of the meeting.” The secretary of the meeting should take thorough notes during the meeting and convert them to formal minutes as soon as possible after the meeting. Using a laptop with a template for corporate minutes may facilitate capturing the necessary information.
Format of Minutes
Many meeting secretaries struggle with the proper format for corporate board minutes. The company’s attorney or paralegal should be able to provide a template for minutes or attend the meeting and take minutes. Below are the most common components of corporate board minutes:
- Attendance – Name the directors that were present as well as any officers, employees, investors, and advisors who are present by invitation. Indicate any who participated by phone, video conference, or other electronic means of communicating (most states permit this as long as each of the directors can hear or otherwise interact with one another in real time). Note the names and times that people entered or departed the meeting.
- Date, Time, and Place of the meeting – Include information as to the date, time, and place of the meeting. If the meeting was conducted by telephone or videoconference, indicate that as well in lieu of the location.
- Notice and Quorum – State that notice was either properly given according to the company’s bylaws or waived. Confirm that a quorum exists according to the requirements of the company’s bylaws.
- Chairperson and Secretary – Indicate which individuals served as the chairperson and secretary of the meeting.
- Approval of Previous Minutes – If applicable, the minutes should reflect review and approval of the minutes from the prior meeting.
- Business Agenda Items – Summarize topics covered during the meeting in chronological order, citing who gave presentations and who led discussions. Clearly state resolutions approved, regardless of whether they were written by counsel and circulated in advance or whether they were proposed at the meeting. It is typically not necessary to indicate who moved and seconded a proposal. Depending on the state where incorporated, it may not be necessary to identify those dissenting, unless they request that their dissent be noted in the minutes. If no resolution was adopted, but the board authorized or gave guidance to management to take further steps, indicate those.
- Reports of Board Committee – If the Board has set up committees, such as audit, compensation, nominating and governance, summaries of reports and presentations should be included in the minutes.
- Adjournment – Include a sentence regarding the time the meeting was adjourned.
- Signature – The secretary of the meeting should sign the minutes after they are approved by the Board or committee, as the case may be.
- Attachments –Refer to any documents approved and attach them as exhibits to the minutes (e.g., stock option plan, executive employment agreement, lease). If the documents are rather lengthy or it is cumbersome to attach them, at the very least indicate in the minutes that the documents were circulated to the board and, if applicable, that they were circulated in advance of the meeting.
Promptly following the meeting, the secretary should circulate the draft minutes to the directors for review while the meeting is fresh in their minds. At the next meeting, the directors should formally approve the minutes, after agreeing on any suggested corrections. If the minutes are not properly approved, they may not stand up as evidence in court. One Delaware vice chancellor of the court had this to say about a company who suddenly caught up on their minutes and approved several at once: “That tardy, omnibus consideration of meeting minutes is, to state the obvious, not confidence inspiring . . . .”
Style of Corporate Minutes: Level of Detail
Boards take different approaches on what level of detail to include in minutes. The style of minutes of a small charitable organization or social group meeting (you do this and I’ll do that) can be too informal for a startup corporation. On the flip side, a transcript of who said what at a corporate board meeting is overkill.
The main goals of corporate minutes are to clearly memorialize the actions taken at the meeting and to demonstrate that the directors fulfilled their duties of loyalty and care in reaching those decisions. Generally, when describing discussions, the level of detail should reflect the importance of the matter. It is possible to demonstrate due care without revealing details of the back-and-forth in the boardroom. Some ways to show due care include stating: (1) the amount of time a topic was discussed, (2) that an outside expert gave a presentation to the board, and (3) that relevant materials were distributed in advance for consideration. Companies that have a contingent of dissatisfied shareholders may be counseled to include more or less detail, depending on the specifics of the situation. Many companies take a middle-of-the-road approach as to the level of detail in minutes and seek their legal counsel’s advice during unique situations.
Preparing Minutes Becomes a Habit
Preparing and maintaining proper board meeting minutes may seem like corporate drudgery, particularly when you are part of a small corporation. Once you have a format and get into a routine, however, preparing minutes and getting approvals soon becomes second nature.
by Macy Shubak |