Law firms that specialize in suing directors will scrutinize nearly every major transaction, public offering, stock drop, restatement, and press release filed by public companies. For instance, according to Cornerstone Research, stockholders file lawsuits challenging the majority of public company transactions valued at more than $100 million, with an average of three lawsuits per transaction. An effective defense of these almost-inevitable lawsuits can begin long before they are filed. With a few simple steps, directors can reduce the burden of these lawsuits and protect themselves from the most common tactics utilized by stockholders’ attorneys.
1. Vet conflicts early and often. Perhaps the easiest way to avoid fiduciary duty liability is to avoid situations where you have conflicting interests in a transaction or other board decision. Due to various protections under Delaware law, directors are rarely held liable for poor or ill-informed decisions if the directors are not self-interested (unless they are grossly negligent), and articles of incorporation almost universally protect directors from monetary damages for such decisions. By contrast, Delaware fiduciary duty law imposes exacting standards for directors who participate in board decisions when they have a material self-interest in that decision. Thus, any major board initiative should begin with a full analysis of each director’s potential self-interests, and this analysis should be updated throughout the initiative. Of course, this analysis requires you to stay organized with your outside business interests (e.g., your employer’s customers, suppliers, and competitors) and personal financial situation (e.g., ownership interests). Recusing yourself can be the stitch in time that saves nine.
2. Treat all board communications formally. The documents that often cause the most trouble in litigation are informal e-mails between two directors. Even if e-mails contain nothing objectively negative regarding the board decision at issue, such e-mails can raise questions about the board’s deliberative process, especially if the issue raised in an e-mail was not discussed with the full board. A skilled plaintiff’s counsel can often interpret a casually written message in an unintended manner. In most instances, if a director raises any concern outside of a board meeting, the full board should resolve that concern and memorialize the process in a contemporaneous document (e.g., the minutes). If you have said anything in an e-mail that is inconsistent with your ultimate vote on an issue—even if you were just playing “devil’s advocate”—you should be prepared to square your communications with your vote. In other words, make sure your concerns are resolved through the deliberative process before making your decision.
3. Maximize efficiency in pressing circumstances. Perhaps underestimating how quickly and diligently directors and their advisors can work in exigent circumstances, plaintiffs’ attorneys often allege that board decisions were too rushed. For instance, in one of the more infamous Delaware fiduciary duty decisions, a financial advisor did not send any valuation materials to a board of directors until 9:42 p.m. on the night that the directors met to vote on a merger. The board met at 11 p.m. and approved the merger that night. Tight deadlines are often unavoidable, but directors can take steps to maximize the efficiency of the process. For instance, request early drafts of meeting materials, make your advisors work around-the-clock when necessary, and don’t wait until the board meeting to ask questions. At the end of the day, you need to be able to honestly state that you had enough time to fully consider any issues or concerns and come to a reasoned decision. Use your resources efficiently to get to that point.
4. Make your advisors an asset, not a liability. The quality and independence of a board’s advisors is a direct reflection on the quality and independence of the board’s process. This scrutiny begins when a board (or committee) selects its outside advisors. Stockholders may cry foul if directors simply accept management’s recommended advisor, especially if any member of management may have a self-interest in the relevant transaction.
To avoid these common allegations, interview multiple advisory firms, thoroughly inspect their potential conflicts, and negotiate for a fee structure that aligns the advisor’s incentivizes with the best interests of the stockholders. Stockholders also regularly allege that advisors are “deal cheerleaders” who bend their analysis to support the board’s wishes. To rebut these allegations, insist that your advisors objectively analyze the relevant issues, and ask them to obtain the board’s approval for any significant assumptions, methodology decisions, and other subjective portions of their analyses. To the extent possible, you should also resist your advisors’ efforts to load their work-product with disclaimers. Above all, carefully analyze your advisors’ work-product, ask questions, and do not rely on their opinions until you understand and approve of the efforts and reasoning underlying those opinions.
5. Ensure that the meeting minutes fully reflect the process. We cannot overstate the importance of minutes in litigation against directors. First, judges and juries typically place more weight on contemporaneous records of a board decision than after-the-fact testimony. Second, depositions often happen several months (if not years) after a challenged board decision, and minutes are an important tool for refreshing directors’ memories. Ask the board secretary to draft minutes promptly after a board meeting so that you can review them while the meeting is still fresh on your mind. When reviewing minutes, make sure that they accurately reflect a summary of the issues discussed, the specifics of any decisions reached, and a list of all attendees (plus mid-meeting arrivals and departures). Not every single statement made during a meeting can or should be part of the minutes, but it is important for the minutes to reflect every topic discussed at the meeting. Ask yourself: “If I’m questioned about this meeting at a deposition next year, will these minutes help me answer questions and show the court that we fulfilled our duties?”
6. Know the boundaries of the attorney-client privilege. The attorney-client privilege is not a guarantee that all correspondences with counsel are shielded from discovery. For instance, contrary to many directors’ (and attorneys’) beliefs, the attorney-client privilege does not protect every e-mail on which an attorney is copied. Rather, an e-mail is generally privileged only if the correspondence is sent in furtherance of requesting or providing legal advice. Parties in litigation are often required to redact the “legal advice” portion of e-mails and produce the remaining portions. Thus, an e-mail (or a portion of an e-mail) concerning purely business issues might not be shielded from production. Additionally, communications with certain persons that would ordinarily be privileged, including in-house and outside counsel, may not be privileged under certain circumstances. Further, even if a document is undisputedly privileged, litigants sometimes waive the attorney-client privilege for strategic reasons, such as when the board asserts that it made a challenged decision in reliance on advice from counsel. While it is vital to have open and honest communications with your counsel, it is also important to remember that those communications may be shown to an opposing party. If there is something you would not write down in a non-privileged e-mail, then consider calling your attorney instead of sending an e-mail.
7. Use a board-specific e-mail address. By exclusively using a non-personal e-mail address for board-related correspondences, you can significantly reduce the odds of personal e-mails (or e-mails concerning your other business endeavors) becoming subject to discovery. Too often, we see directors using their “day job” e-mail addresses for their directorial correspondences; this can lead to situations where your employer’s confidential information must be copied, reviewed by your outside counsel, or (worse yet) produced to the opposing party in litigation. The same holds true for personal e-mail addresses, which some directors use for their family’s bank statements and board-related e-mails. The best way to potentially avoid this situation is to proactively segregate board-related e-mails to a different e-mail account. Some companies create e-mail addresses for their directors. If yours does not, consider creating an e-mail account and conducting board-related business solely from that address.
Craig Zieminski and Andrew Jackson are litigation attorneys at Vinson & Elkins LLP. They specialize in representing companies and their directors in lawsuits alleging breaches of fiduciary duties, partnership agreement duties, merger agreements, and federal securities laws.
Meeting minutes of the board of directors, which usually are prepared by the corporate secretary, can play a crucial role in a government investigation or civil litigation relating to a decision or indecision of the board of directors or the knowledge of an individual director. In some instances, the minutes could establish an important defense for directors, while in other instances the minutes may subject directors to unnecessary criticism or worse. Directors should ensure that the corporate secretary follows these guidelines.
Unlike the meeting secretary, directors neither are obligated nor are advised to take individual notes during board and committee meetings. Individual director notes are unnecessary because the secretary’s official minutes will contain a record of the meeting. Additionally, director note-taking is risky. Directors’ notes likely would be discoverable in litigation, and notes that seemed clear in the days after a meeting may not be clear several years later after memories have faded. Absent a clear interpretation, adversaries will attempt to impose their own meanings on the notes. Furthermore, if multiple directors take notes, discrepancies may exist with other notes or the official meeting minutes.
Although individual circumstances may vary, below are some general guidelines that corporate secretaries of U.S. companies should follow when they take official notes and prepare meeting minutes for the board of directors. If a company is incorporated outside the United States, different guidance might apply.
Record the essential information. The corporate secretary should record essential information such as the date, starting and ending times, location, attendees (e.g., directors, management, experts, and legal counsel), presence and maintenance of a quorum, meeting chair, materials distributed in advance of the meeting, topics discussed, and decisions made in a formal meeting of the board. In some cases, the secretary should note the length of particular discussions and deliberations, especially if a particular discussion is an important part of the meeting. Directors also should ensure that the notes taken by the corporate secretary do not editorialize, as commentary could be misconstrued by an adversary if discovered in litigation.
Clearly identify separate meetings and tasks. Because notes and minutes are incomplete by nature, the more organization and structure they contain, the easier they will be to understand and interpret in the event that they are scrutinized. Secretaries should use the meeting’s agenda as a guide for organizing and labeling their notes and the minutes, and should indicate transitions from one topic to the next, including presentations by management, counsel, or advisory firms and executive sessions.
Identify in notes when an attorney is present during a conversation. Directors’ interactions with lawyers usually are protected by the attorney-client privilege or work-product protection, which may shield the content of those discussions from being turned over to an adversary. Boards also should consider including the general counsel in meetings that could involve a discussion of legal issues. If a lawyer is present during any portion of a meeting, the minutes should indicate the lawyer’s name and law firm, and the portions of the meeting for which the lawyer was present. Generally, the minutes for these interactions should indicate only that such discussions occurred and the general topics discussed.
Identify and describe the board’s deliberative process. Recording the general fact that the directors discussed or deliberated about an issue is critically important. However, what a particular director said about a particular issue is usually less important. For that reason, and to avoid errors in attribution, the secretary’s notes and official minutes generally should use collective or passive-voice descriptions (e.g., “the directors discussed the matter” or “a discussion ensued”) as opposed to attempting to record individual viewpoints and the directors who expressed them. Because directors may express passionate views about an issue, the secretary should exercise good judgment in determining what to record.
If notes are taken by hand, they should be clearly, legibly recorded, and should not include shorthand. Illegible meeting notes and notes taken in shorthand can be difficult to interpret when the secretary refers to them while drafting the official minutes. Provided typing is not disruptive to the directors in the meeting, directors should ask corporate secretaries to consider taking notes on a secure computer. Clarity and accuracy are crucial because a difference of opinion between directors regarding the events that occurred at a meeting ultimately may be resolved by reference to the secretary’s notes. In the litigation or regulatory enforcement context, unclear notes may result in meeting minutes that lack an obvious, objective interpretation and are susceptible to being misinterpreted by an adversary.
Encourage the secretary to maintain a standard practice of note taking. Secretaries generally should establish and maintain a standard practice for taking notes, retaining meeting materials and individual notes, and preparing meeting minutes. Deviating from a standard practice could raise negative inferences from a regulator or court.
The secretary should distribute the draft minutes for directors to review as soon as practicable. During their review, directors and secretaries should be mindful of any important events that occur between the meeting date and the finalization of the minutes. If a director believes the minutes omit important information, then the director should discuss orally the matter with the secretary. E-mails regarding the minutes between the secretary and directors, or among directors, should be strictly discouraged.
Discuss with counsel whether to retain notes and draft minutes. There may or may not be a legal or corporate requirement for the secretary to retain his or her meeting notes or draft minutes. After the official minutes are approved, the secretary should discuss with company counsel whether there is a requirement to maintain these materials and ascertain the length and nature of the requirement. If there is no requirement to maintain the materials, the secretary should discuss with counsel whether and how to discard them.
Bradley J. Bondi and Bart Friedman are partners with Cahill Gordon & Reindel LLP. They advise financial institutions and global corporations, boards of directors, audit committees, and officers and directors of publicly-held companies in significant corporate and securities matters, with particular emphasis on internal investigations and enforcement challenges. Michael D. Wheatley, a litigation associate at Cahill, assisted with this article.
While the government remains shutdown, the Securities and Exchange Commission (SEC) remains open, and Chairman Mary Jo White opened the final day of the National Association of Corporate Directors Board Leadership Conference with an overview of what the commission has been focused on and where its attention will be directed in 2014.
As a former director who served on an audit committee, White understands the weight of the responsibilities placed on the shoulders of boards—particularly surrounding disclosure requirements. While the core purpose of disclosure is to provide investors with relevant information they need to make informed voting decisions, over time the list of disclosures has grown and become more specific, causing some to raise flags about disclosure becoming too intricate. “I’m not suggesting investors haven’t benefitted from this information—much, if not all, of it could be relevant and necessary, even though some insist investors don’t take advantage of it,” White said. “I am asking if investors need and are served by the detailed disclosures companies currently provide to the SEC. It can lead to info overload.”
Methods of improving disclosure are perennial topics, and White says there is still more to be done from her perspective. “But before we can move to improvements, we need to know why we have the information we have in disclosure today,” White explained, noting that the JOBS Act requires the SEC to review current disclosure requirements and consider how to modernize and simplify them for emerging growth companies. She said the staff is finalizing these rules and expects to make them public soon.
White also noted that some disclosure requirements may be past their prime. “Some requirements that were appropriate in the past may not reflect how investors use this information today,” she said, using the example of when annual reports were what investors looked to for historical closing prices and now this information is available almost immediately online.
“While much of what some term the ‘disclosure overload’ is a result of regulation, there are other sources,” White said. Due to investor demand, some companies made the decision to disclose more information than required to reduce risk of litigation claims of insufficient disclosure. “We think these additional disclosures are a good thing, but we should be careful not to have too much of a good thing,” White said.