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Directors and Officers Liability: Board Minutes Are An Important Litigation Tool


Directors and Officers Liability Board Minutes Are An Important Litigation ToolGoing Beyond Just Internal Recordkeeping with Your Board Minutes

Your company’s directors and officers are conscientious and reasonable, but in today’s litigious landscape, even they can be faced with a state or federal lawsuit.  As we discussed in one of our blogs last month, tighter regulation and federal oversight, emerging risks, and high-profile cases have put the spotlight squarely on the shoulders of directors and officers, resulting in increased litigation. There are a number of protocols directors and officers can implement, including the board minutes taken at meetings. In fact, according to the National Association of Corporate Directors (NACD), board minutes are not only essential to internal recordkeeping but they should also stand up to judicial scrutiny if necessary.

According to a recent white paper, Corporate Board Minutes: A Director’s Guide, published by the NACD (with input from the Society of Corporate Secretaries and Governance Professionals), incomplete or inadequate minutes can serve as the basis for prosecution for obstruction of justice, with some expressing concerns that minutes may act as road maps for litigants. “Minutes that fail to show due diligence in a board’s decision-making process reflect either poor minutes or poor process—and both can be detrimental to directors defending themselves from liability. On the other hand, minutes capable of demonstrating the process behind well-informed board decisions may be key evidence in any board’s defense. Directors should not fear “beefing up” minutes with details from meetings if they are doing their jobs competently.”

Board minutes should include the date and location of the meeting; the names of directors present, absent and excused; a description of topics discussed; material terms and rationale for any matter approved or disapproved by the board; whether any directors abstained from voting; and the name of the individual responsible for preparing the minutes.

The minutes should reflect that the board engaged in thoughtful deliberation of each matter but should not provide a verbatim record or attribute specific words or points of view to particular directors. They also should reflect that the board contemplated both sides of each matter (pros and cons, benefits and risks), as well as alternatives to the action proposed. Directors should disclose any conflicts of interest they may have in connection with a decision under consideration, and the minutes should reflect that interested directors abstained from voting.

Moreover, the individual who takes the minutes should promptly prepare and circulate a draft of the minutes for review. Minutes approved by the board should be retained for the life of the corporation. After the board approves the minutes, the corporate secretary should destroy all notes and drafts of the minutes.

In addition, directors and officers should be aware that any personal notes taken during the meeting are discoverable in litigation and could be used against them by disgruntled shareholders. Personal notes are an inherently imperfect record, as they may contain statements that can be misinterpreted or taken out of context, and they may capture only part of a discussion and not fully reflect the deliberations of the board, depending upon when in the course of the board’s discussions the notes were taken. As a result, it’s suggested that directors are restricted from taking notes.

Axis Insurance Services provides Directors & Officers Liability insurance to protect your company and executives in the event of a lawsuit. We insure different types of organizations, including public companies, private companies, nonprofits, educators, public officials and others, and can secure an insurance program that will address your corporate and individual needs. Give us a call at (877) 787-5258.

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Blogged on: April 3, 2013 by Mike Smith
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