Insight Content of Board of Director Minutes

“The attitude is that it’s OK to lie by omission in board minutes. It’s the way it gets done, and the problem is that we have become accepting of this.”

— Charles Niemeier, member, Public Company Accounting Oversight Board, Wall Street Journal, February 6, 2004.

A bedrock assumption is that minutes of meetings of boards of directors and committees of boards of directors are accurate and complete. For example, under Idaho law, “[T]he minutes of the board of directors’ meeting are prima facie evidence of the matters recorded therein.” Silver Bowl, Inc. v. Equity Metals, Inc., 93 Idaho 487, 491, 464 P.2d 926, 930 (1970). Nevertheless, this assumption is widely disbelieved but rarely challenged. There are no express rules regarding the detail of board or committee minutes, with the content determined largely by tradition. See Idaho Code Section 30-1-1601, ABA Official Comment 1.

The law does, however, provide considerable guidance regarding how the content of minutes may serve to protect directors. In general, directors are protected from liability if they perform their duties, and appropriately drafted minutes will evidence the directors’ performance of their duties.

Directors have the duties of care and loyalty, and the courts will defer to the directors’ performance of their duties under the business judgment rule. The business judgment rule is a presumption that in making business decisions, directors acted (i) on an informed basis (ii) in good faith (iii) in the honest belief that the action was in the best interests of the corporation and its shareholders and (iv) with the care that a person in a like position would reasonably believe appropriate under similar circumstances. The business judgment rule is both (i) a presumption that directors fulfill their duties and (ii) a process by which directors fulfill their duties. Properly drafted minutes demonstrate that the directors followed the correct process.

The minutes should evidence the process of director deliberation. The director deliberation process has two aspects: (i) requirements relating to the decision and (ii) requirements relating to the decision-maker. These elements are encapsulated in the Idaho Business Corporation Act, Section 30-1-831, which governs for-profit Idaho corporations, and implicit in the Idaho Non-profit Corporation Act, Section 30-3-80, which governs Idaho non-profit corporations.

The elements relating to the deliberation process affecting the decision are:

1. Obtain information that is appropriate to the topic and in the detail appropriate to the topic.
2. Assess the credibility of the presenter of the information.
3. Assess the credibility of the information.
4. Consider the alternatives, including alternative opinions.
5. Articulate a reason for deciding to select one alternative.
6. Articulate the reason the decision is in the best interest of the corporation and its shareholders.

Of the six elements relating to the decision, the most important is the consideration of the alternatives. If the directors considered alternatives, then the directors most likely addressed the other elements in the process of their deliberations.

The elements relating to the deliberation process affected by the decision-maker are:

1. Identify facts showing that each director is independent and objective.
2. Confirm each director acted in good faith.
3. Identify any director with conflicting interests and confirm each director acted only in the interest of the corporation and shareholders.
4. Identify any personal benefit to be received by a director, and determine if the benefit is unfair.
5. Verify that each director is informed to the extent that the director reasonably believes appropriate under the circumstances.
6. Identify facts showing each director has a history of being informed and overseeing the corporation.
7. Confirm there are no “red flags” that would alert a reasonably attentive director to make further inquiries.

If the director deliberation process follows the above elements, then the presumption of the business judgment rule remains intact that the director acted on an informed basis, in good faith, and in an honest belief that the action was in the best interest of the corporation and its shareholders and was made with care.

An essential purpose of the minutes is to document the directors’ performance of their duties, and this means documenting the directors’ deliberations. Minutes are not transcripts of board discussions, but summaries. Once the legal elements of the directors’ deliberations are understood, determining the content of the minutes is simple because the content of the minutes should parallel the legally required elements of the deliberations.

Thus, the minutes will have three major aspects: (i) the setting of the deliberations – the who, what, when, where, and why – which is often summarized in the introductory paragraph; (ii) the information documenting the deliberation process, which information is a summary of the six elements relating to the decision; and (iii) the information documenting the attributes of the decision-maker, which information is a summary of the seven elements relating to the decision-maker. These elements track the processes that support the presumption of the business judgment rule.

Minutes of board of director meetings are more than a record of actions taken; they are also a record of deliberations. The documenting of the deliberations is necessary for all major and significant board decisions – such as mergers and acquisitions, hiring or terminating senior management, approving strategic plans, litigation, and other actions. The extensive documentation of the deliberations is less necessary for minor or routine actions, such as approval of prior minutes, approval of receipt of reports, and other actions. In the circumstances in which a board of directors is making a significant decision, the deliberations of the board should follow the process that preserves the business judgment rule, and the minutes recording the deliberations should document that process.

Thomas Chandler is chair of Hawley Troxell’s Corporate Practice Group. He has counseled many corporate boards of directors, including boards of directors for public, private, and nonprofit corporations, regarding a wide variety of issues relating to director duties and liability, conflicts of interest, shareholder disputes, and general corporate governance.

If you would like more information about this topic, or other legal issues, please contact a member of our Business Group or call 208.344.6000.