Board Minutes: Increased Risks in Troubled Times
We recently discussed some of the risks faced by directors and officers during times of economic difficulties. One area of risk involves the fiduciary duty to a company's creditors that arises when the company enters the "zone of insolvency." Once the solvency of a corporation is in question, directors need to take account of the interests of creditors as well as owners as they assess the best course of action. This fiduciary duty poses many tricky issues, including the importance of ensuring that adequate and accurate board minutes are prepared and maintained for each meeting of the Board and of any subcommittee of the Board.
Board minutes provide an official record to show that the Board has taken the proper steps to meet its fiduciary duties. On the other hand, missing or inadequate minutes can open directors to liability claims. Board minutes are official documents that provide a record that can be reviewed by auditors, shareholders and (in the case of litigation) courts. Minutes can provide strong evidence to show that directors were deliberative in their decision making process and made decisions based upon adequate information. Minutes can also document that the directors followed appropriate procedures and that corporate actions were undertaken in accordance with all legal requirements applicable to the company.
As a general matter, minutes are a very condensed record of what happened at a board meeting. Accordingly, there should be mention of each matter that was discussed, and the factors considered should be recorded but do not have to be set forth in detail. While keeping proper minutes is a critical part of every company's corporate governance regimen, it becomes even more crucial once directors are under the heightened scrutiny that arises once a company is in the zone of insolvency. At that point, the Board will need to discuss how best to protect creditors' interests, and the minutes should reflect those discussions. Even if directors are diligently exercising their fiduciary duties, if the minutes do not show that the relevant discussions took place, the directors may find it difficult, after the fact, to prove that they acted responsibly.
The appropriate degree of detail for minutes is not easy to define. However, minutes should include enough detail to enable a third party, such as a court, to determine that the actions taken by the Board were reasonable and were made on the basis of adequate information. The minutes should not record the exact content of discussions or provide a transcript. Including more detail than necessary can increase the opportunities for a third party to second-guess the Board's actions, and therefore can increase the possibility of third party claims against the directors. Instead, general statements describing the issue put before the Board and the nature of the information provided to the Board about the issue, statements making clear that the Board discussed the options available based upon the information and the Board's fiduciary duties, and a record of the Board's action, such as the adoption of Board resolutions, should be sufficient. Of course, each Board will be facing a unique situation, so care should be taken to include the level of detail that the Board and company counsel feel is appropriate.
In the zone of insolvency, the Board should anticipate that every action that it takes will be pored over by creditors looking for an opportunity to assert a claim for breach of fiduciary duty. Paying attention to good corporate housekeeping and making sure that minutes are promptly, accurately and thoughtfully prepared can help to deflect third party claims.