Choose your words carefully: board minutes matter: in an earlier issue we presented tips from...

A community bank's board minutes are record of actions taken and matters considered during the board meeting. The minutes matter because people outside the bank-examiners, auditors, judges, lenders, and law enforcement agencies-will make inferences about the conduct of the board and the bank

Those inferences may cause a judge to dismiss a breach of fiduciary duty lawsuit against the directors because the minutes prove that the board acted in good faith and on a fully informed basis. On the other hand, the minutes may persuade a bank examiner to initiate an enforcement action because the record suggests that the directors failed to exercise their supervisory responsibilities under the Bank Secrecy Act. Keeping a good written record matters.

But why is it so hard to write good board minutes? Banks with poorly drafted minutes may have a corporate secretary who has never been coached on the guidelines for good minute writing. Understanding how the content of board minutes can affect the bank's legal exposure and the basic rules for writing a good corporate record will improve the quality of your bank's minute book.

A legal necessity

Delaware corporate law, as an example, recognizes that a board of directors will memorialize board meeting activities in minutes and will make those minutes available to a shareholder upon proper demand. Likewise, bank regulators expect the institution to keep accurate minutes and to make those minutes available for their inspection during a normal examination or at such other time as they may request.

Despite the legal necessity for board minutes, there is very little legal authority explaining how to properly document the conduct of a board or committee meeting. It is no wonder, therefore, that corporate secretaries struggle to define best drafting practices. One branch of government has almost single-handedly created the guidelines for preparing legally proper minutes-the courts. Judges have used corporate minutes to exonerate directors or hold them accountable and the courts in their opinions have directly or implicitly established important guideposts for proper minute taking.

Judicial guideposts

Parties in litigation use board and committee minutes as a sword or a shield, depending on their position in a case. In the recent case stemming from the Disney litigation in Delaware involving the employment of Michael Ovitz as Disney's president, the court engaged in an extensive review of the minutes of the Disney board and compensation committee. The minute books could have provided a stronger defense for the defendant directors than they did, but the minutes lacked explanations supporting director decision-making and, in some cases, contradicted testimony given by directors about activities during the meetings.

The degree of care exercised by the board and compensation committee in making employment decisions regarding Disney's president was at issue in the derivative action. Despite the gravity of those employment decisions, the minutes did not reflect that the terms of the Ovitz employment relationship were given special prominence in director meetings. Indeed the court remarked that it would have been extremely helpful if the minutes had indicated in any fashion that the discussion relating to the employment agreement was longer and more substantial than the discussion relating to the myriad of other issues brought before the compensation committee. The court expected to see minutes that gave special attention to the employment decisions surrounding the company's president.

In the 1980s, the Delaware Supreme Court in the Van Gorkom case held directors liable for breach of fiduciary duty in approving a merger transaction, noting that the board minutes did not support a finding that the directors had satisfied their duty of care. Indeed, the minutes revealed that the board had acted hastily and with little or no documentation in reaching a judgment to proceed with the merger. The court's criticisms in Van Gorkom created special standards for board conduct and minute taking when a company is for sale.

When it comes to board minutes, the courts have had to settle disputes about which portion of the minute book is protected in discovery and which portion must be turned over. There are some parts of every bank's minute book that the board will want to withhold from a litigation opponent under attorney/client privilege. The courts have ruled when the privilege does and does not apply. In the First Federal Savings Bank of Hegewisch case, the court ruled that the bank had to turn board minutes over to the United States government in a claim by the bank against the government in a supervisory goodwill case. This was because the bank had given its outside auditing firm access to the minutes, which included privileged communications between the board and the bank's lawyers. By giving a third-party access to the minutes, the court reasoned, the bank had waived attorney/client privilege. The Hegewisch decision reaffirms the rule in minute writing that creating good minutes includes properly protecting them, where appropriate, as privileged documents.

More traps for the unwary

When a community bank prepares its monthly board minutes, it likely gives little thought to the possibility that those pages may someday be closely scrutinized by a party outside of the bank. But that scrutiny can and does happen and it may involve a review of the minutes by the bank's auditor, a proposed merger partner, a lawyer representing an underwriter in a securities offering for the bank, or a law enforcement agency.

For example, an inquiry by the Securities and Exchange Commission exposed a material discrepancy between what Caterpillar Inc. had said in its board minutes and what the company had disclosed in its SEC filings on the same subject.

The minutes reflected that in early 1990 management had apprised the board of a situation that threatened the earnings of a major foreign subsidiary. But the company's SEC filing, a draft of which the board had reviewed during the same meeting in which the earnings threat was discussed, did not give the threat the same prominence as it had received during the board meeting. The company made its SEC filing that later resulted in an SEC inquiry. Especially in the post-Sarbanes-Oxley environment, the board minutes and a company's disclosure documents need to be consistent.

Seemingly innocent statements in board minutes also can create unintended accounting and tax consequences. For instance, if the board minutes express that the company's senior investment officer intends to sell a certain series of bonds in the following fiscal year, that expressed intent may require an immediate accounting adjustment, even though a transaction has not yet occurred or may never occur. Likewise board minutes that address a company's position on a federal income tax issue may be used later by the IRS in an audit, to the company's disadvantage.

Getting it down--and done

Drafting board minutes requires discretion. It is difficult to predict whether a statement that appears innocent when written may carry unexpected weight later in litigation, a government investigation, or a bank exam. No process for drafting board minutes is perfect. However, there are some basic principles which, if followed, will minimize the risk that the content of board minutes will have unintended consequences.

Guiding Principles in Minute Preparation

1. Avoid the blow by blow account. Board meetings involve debates among directors, but the minutes should not capture the point and counterpoint like a literal transcript. Rather, the minutes should say enough to give the reader a clear impression about the matter discussed and the outcome of a particular discussion. Litigators caution against minutes that describe particular statements by individual directors, favoring instead minutes that are concise and written in plain English. Indeed, recounting verbal exchanges among directors can create misimpressions about the atmosphere of the meeting. Or they may give undue weight to a particular point of view.

2. Reflect flexibility in writing. Drafting board minutes requires judgment, and a corporate secretary must use discretion each time minutes are prepared. It is necessary to choose what to recount from the meeting in the bank's permanent record. While the rule of thumb is to keep the minutes concise, there may be times when the board minutes require a more elaborate discussion of a particular matter. For instance, if the board hires a new president or decides to sell the bank, the board minutes should give such matters special attention.

3. Long versus short-form style. Minutes can either reflect a long-form or a short-form style. The short-form style records the actions taken by the board without elaborate explanation. It has the advantage of being concise and avoids ambiguity. Long-form minutes, on the other hand, discuss the advantages and disadvantages associated with a particular board action. The long-form approach substantiates the board's diligence in making a particular business decision and puts a complexion on the situation that short-form minutes do not. Either style can work; but the bank should choose a style and remain consistent.

4. Destroy drafts of minutes and notes. A corporate secretary may take detailed notes during a board meeting and use those notes to construct a draft and then final minutes. Only the final minutes should be retained. All notes and drafts of minutes should be destroyed because they are potentially discoverable in any litigation. Notes and drafts are by their nature preliminary impressions. As such, they may not properly emphasize the outcome of a particular discussion during a meeting. Moreover, they may reflect personal impressions of the note taker that can prove damaging in litigation.

5. Protect privilege. Whether or not certain information in the board minutes raises issues under attorney/client privilege will depend on whether the minutes reflect communication between a lawyer and client. Safeguarding minutes that are to be privileged is important because giving minutes to a bank outsider can waive the protection. Another problem arises when a director disagrees with the legal advice given to the board or feels the need to go on the record with his dissent over a course of action taken by the board. In these instances, the better approach is for the director to commit his issues and concerns in a memo to outside counsel, thus securing the protection of attorney/client privilege, rather than including an elaborate dissent in the minutes. A corporate secretary should be alert to privileges other than attorney/ client that may protect certain minutes.

6. Turn off the tape recorder! Some community banks tape record their board meetings in order to create a permanent record of those events or to create a temporary record that assists the corporate secretary in writing the board minutes. Any taped record of a board meeting is subject to discovery in litigation and can be reviewed by regulatory bodies such as the SEC or the bank examiners. Tape recording a meeting is inadvisable even if the tapes are retained only temporarily. Tapes are discouraged for the same reason that blow-by-blow accounts should not be included in the minutes.

7. Get the resolutions right. Directors will propose resolutions for a vote by verbally reciting the proposed resolution. When a vote is taken on the resolution, it may not be clear to some in the room exactly what form the resolution took when adopted by the board. The corporate secretary should be sure that he or she understands the text of the resolution before it is included in the minutes. If the chairman or another director has a resolution written down in advance, it is a best practice to have the written resolution circulated to each director before or during the meeting. The terms of a resolution can be checked again for accuracy when minutes from the prior meeting are circulated to directors for final approval.

A final word: Writing and summarizing what happen's at board meetings is more an art than a science. As such, it requires discretion and good judgment. The bank's corporate secretary and chairman should be attentive to the risks involved in writing board minutes. Being vigilant about the risks along with following the general principles mentioned will go a long way toward spotting high-risk verbiage and giving those parts of the minutes special attention.

By Christopher J. Zinski, a former banking partner in the law firm of Schiff Hardin LLP, Chicago, and now general counsel for Private Bancorp, Inc., also of Chicago. At his old firm Zinski represented banking companies in corporate governance matters; mergers and acquisitions; and securities offerings.