EMINUTES places cookies on your device to give you the best user experience. By using our website, you agree to the placement of these cookies. Please read our updated Privacy and Cookie Policy.

Feb
19 • 2012
Share
Article

The Benefits Corporate Minutes Provide Board Members

The law requires that corporations keep minutes of the proceedings of its shareholders and board of directors. See Cal. Corp. Code § 1500; N.Y. Bus. Corp. Law § 624(a). But there are important reasons to keep adequate corporate minutes other than just complying with the law. For one thing, memorializing important corporate decisions in the minutes is a relatively easy way to help show that the separate identities of the corporation and its principals (who usually serve on the board in a small corporation) are being maintained, which is crucial to insuring that the principals cannot be held personally liable for the corporation’s debts. See, Avoiding Alter Ego Liability with Proper Corporate Minutes, Understanding How Courts Pierce the Corporate Veil.

In addition, minutes reflecting that the directors have discussed and properly considered their options before settling on a corporate course of action can help protect the directors’ decisions from outside scrutiny under the “business judgment rule”.  The “business judgment rule” is a longstanding legal doctrine that “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.” Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 926 (1979); see also Bader v. Anderson, 179 Cal. App. 4th 775, 787, 101 Cal. Rptr. 3d 821, 830 (6th Dist. 2009) (“Judicial deference is accorded to directors under the ‘business judgment rule,’ which recognizes that where decisions are without fraud or breach of trust, management of the corporation is best left to those to whom it has been entrusted, not to the courts.”). Under the business judgment rule, questions of corporate policy and management are left solely to the directors, whose decision making powers, if wielded honestly and unselfishly, “‘are without limitation and free from restraint, and . . . may not be questioned, although the results show that what they did was unwise or inexpedient.'” Auerbach, 47 N.Y.2d at 629, 419 N.Y.S.2d at 926 (quoting Pollitz v. Wabash R.R. Co., 207 N.Y. 113, 124, 100 N.E. 721, 724 (1912)).

A second, equally important, component of the business judgment rule, which has been codified in California, “immunizes directors from personal liability if they act in accordance with its requirements[.]” Berg & Berg Enters., LLC v. Boyle, 178 Cal. App. 4th 1020, 1045, 100 Cal. Rptr. 3d 875, 897 (6th Dist. 2009) (review denied); see Cal. Corp. Code § 309(c) (a director who performs his duties in good faith, in a manner believed to be in the best interests of the corporation and its shareholders, and with reasonable care “shall have no liability based upon any alleged failure to discharge [his] obligations as a director”). The corporate minutes provide an excellent way to demonstrate that the directors did, in fact, exercise their judgment honestly and in good faith in reaching a particular decision, thus entitling them to the protections of the business judgment rule. For example, in Skouras v. Victoria Hall Condo., 73 A.D.3d 902, 902 N.Y.S.2d 111 (2d Dep’t 2010), leave to appeal dismissed, 16 N.Y.3d 729, 917 N.Y.S.2d 94 (2011), a unit owner sued the board of her condominium after her car was booted and towed, claiming that the board breached its fiduciary duty in implementing a parking rule pursuant to which it revoked her parking privileges for failure to pay certain past-due special assessments. Reviewing the board’s actions under the business judgment rule, the court concluded that the defendants had met their prima facie burden of establishing that the board acted within the scope of its authority and in good faith in adopting the parking rule and imposing and collecting the special assessments by submitting, among other things, the minutes of the board’s meeting at which the actions were considered and implemented. Id. at 903, 902 N.Y.S.2d at 112-13; see also Estate of Detwiler v. Offenbecher, 728 F. Supp. 103, 152 (S.D.N.Y. 1989) (plaintiffs’ claim that directors blindly relied upon third party’s oral fairness opinion concerning sale of corporation was rebutted by minutes showing that third party “reviewed each of the bids in great detail, and was questioned at great length by members of the Board of Directors”).

The protections of the business judgment rule extend to all aspects of corporate management, such as determining salaries, settling internal disputes, and deciding whether to retain earnings to finance the corporation’s needs rather than paying dividends and borrowing to meet those needs, so long as the decisions are made honestly and in good faith. Cf. J.H. Rutter Rex Mfg. Co. v. Comm’r of Internal Revenue, 853 F.2d 1275, 1285 (5th Cir. 1988) (“Under the tax laws a corporation properly can finance its various financial needs from its retained earnings. . . . The IRS and the courts have no power to substitute their judgment for the valid business judgment of corporate management to operate without extensive borrowing[,] . . . even though the corporation may have the ability to obtain favorable outside credit.”). Taking the time to have the corporate minutes reflect that board members have carefully considered these decisions before taking action is an important step in insuring that directors are not later called to account unnecessarily for their management decisions.