CDF E-Alerts

Corporate Minutes in Practice

Corporate minutes of the meeting of the Board of Directors and Committees are receiving more scrutiny in the post-Sarbanes era. There are many reasons for the heightened importance of corporate minutes:

• Auditors are often reluctant to proceed with their quarterly review without seeing final, near-final drafts, of minutes of all Board and Committee meetings.
• Disclosure controls and good corporate governance practices encourage the quick preparation of minutes.
• Boards and committees are monitoring progress on a wide variety of initiatives and have focused on good corporate housekeeping as one indicia of effective board and committee process.
• The new Form 8-K reporting requirements mandate reporting within four business days of events for which disclosure is required, board action sometimes is the key triggering event for disclosure and a quick review of board actions by the disclosure team of a public company may allow the timely determination that an event requiring disclosure has accrued.

Minutes have also been the focus of at least two recent Delaware Chancery court decisions. In a hearing before Vice Chancellor Lamb in OmniCare v. NCS HealthCare, Inc., (“Omnicare”) C.A. 19800 (October 16, 2002), Vice Chancellor Lamb reviewed discovery claims relating to both lawyer’s notes and draft minutes. Further, in re Walt Disney Company Litigation, C.A. 15452, 2003 WL 21267266 (Del. Ch. 2004), (“Disney”) the court considered the minutes as evidence of board action. In light of the increased focus on corporate minutes, draftspersons may wish to consider some guidance from the recent cases in developing their practice for the preparation of minutes.

Notes of the Attendees Are Discoverable

In a discovery hearing in the OmniCare case, Vice Chancellor Stephen Lamb considered the issue of whether notes taken by NCS’s corporate secretary had to be produced. The secretary was also NCS’s outside counsel. The Vice Chancellor held that “notes taken at meetings, whether taken by directors or taken by someone acting as secretary, are properly discoverable.” Transcript at 13. The Vice Chancellor further held that notes otherwise privileged could be redacted.

Final Minutes Avoid Need to Produce Drafts

Vice Chancellor Lamb also addressed draft minutes in the 2002 OmniCare hearing. Vice Chancellor Lamb held that it is “appropriate to limit the review of . . . drafts to the final minutes as they are approved by the board, except of course in circumstances where there are no final minutes and the exigencies of litigation require that the latest draft that is available be produced subject to whatever caveat may be necessary to its final authenticity.” (emphasis added) Transcript at 14. In OmniCare, the Chancery Court concluded that as final versions had been produced, the draft minutes were properly withheld on the grounds of attorney client privilege. The Vice Chancellor reached this conclusion even though the final minutes had been prepared after litigation had commenced. If the final minutes had not yet been approved by the Board at the time of discovery requests, the question lingers as to whether earlier drafts would have been required, although the thrust of Vice Chancellor Lamb’s statements seem to suggest that only the latest draft minutes would be required to be produced.

Relative Length of Treatment of Subject in Minutes May Impact View of Board or Committee Process

One can see in the court’s decision a concern as to the Board’s actions, or lack thereof, on the record as reflected in the minutes of the relevant meetings:

The Old Board met immediately after the committee did. Less than one and one-half pages of the fifteen pages of Old Board minutes were devoted to discussions of Ovitz’s hiring of Disney’s new president. Actually, most of that time appears to have been spent discussing compensation for director Russell. No presentations were made to the Old Board regarding the terms of the draft agreement. No questions were raised, at least as far as the minutes reflect. At the end of the meeting, the old Board authorized Ovitz’s hiring as Disney’s president. No further review or approval of the employment agreement occurred. Throughout both meetings, no expert consultant was present to advise the compensation committee or the old Board.

Lessons on the Practice of Preparation of Minutes

Some lessons can be derived from these two recent Chancery Court decisions as well as from the heightened importance of corporate minutes in the post-Sarbanes era. Below are some practical guidelines counsel might consider in developing a practice regarding the preparation of Board and Committee minutes:

1. Minutes may be the focus of plaintiffs seeking to establish breach of the duty of care, the duty of loyalty or the duty to act in good faith.
   See both the Disney and Omnicare cases for examples of this.
2. Minutes can affirmatively establish the process observed by directors in informing themselves and otherwise observing their duties, even though the substance of discussions by the directors may not be set forth in the minutes.
   Again, see the Disney decision where the court notes the omission of indicia establishing due inquiry or a process of deliberation.
3. Minutes should be prepared as promptly as practicable after each meeting to facilitate timely review by the Board and management as well as the auditors.
   See the decision of Vice Chancellor Lamb at the Omincare hearing.
4. Notes of attendees, including counsel, management, and directors, may be discovered to the extent they do not address privileged matters.
   This was Vice Chancellor Lamb’s holding the Omnicare hearing.
5. To the extent the company’s practice is to retain only the minutes once prepared, the secretary’s notes need not be retained.
   This is not intended to encourage destruction of evidence, but rather to acknowledge a company’s routine house keeping practices.
6. Counsel’s notes on privileged matters should, to the extent possible, be separated from notes taken as secretary.
   This is a corollary of the point reaffirmed by Lamb – privileged notes may be redacted, but the privilege must be established.
7. The minutes should reflect the process (e.g., reports of identified topics and responses to questions from the board) by which the board or committee informed itself on topics important to the company, without undue discussion of matters considered of less significance by the Board or Committee.
   See the Disney decision.

Provided By:
Diane Holt Frankle© 2004
Gray Cary Ware & Freidenrich LLP