Why you should keep board minutes

As part of every due diligence exercise for operating companies, real estate projects, and investment funds, CrowdCheck will ask to see all of the minutes of the meetings of the Board of Directors or managing body, or the written consents in lieu of meetings, of the issuer in the securities offering.  Documented minutes or consents is a fundamental requirement of good corporate governance that all too often is simply ignored.

At CrowdCheck we understand that for entrepreneurs running a lean startup, holding regular board meetings is time consuming and entrepreneurs would rather spend time on revenue building activities.  However, board meetings and minutes should never be overlooked.  Minutes provide a guide to the actions considered and taken by the directors and serve as evidence that these actions were adopted according to the proper procedures set out by state law, the certificate of incorporation, and the bylaws of the company.

Failure to adhere to the required procedures set out in these sources of corporate governance rules may be grounds for loss of liability protection to stockholders, officers, and directors — meaning that these persons could be personally liable for corporate actions to third-parties or disgruntled investors.  Additionally, the absence of minutes or written consents means that the company has no evidence that directors exercised their fiduciary duties to the company.  Without that record, it is possible that the directors would not receive the benefit of the Business Judgment Rule when facing a lawsuit from investors, because there is no record that the directors exercised the fiduciary duty of care.[1] 

Additionally, some Directors & Officers insurance policies address issues of corporate governance of the company.  After all, the absence of proper corporate governance exposes the directors and officers to increased liability that the policy may have to step in to cover.  Lack of minutes and corporate records may increase the costs of such an insurance policy, or even mean that coverage is not available when needed by a director or officer facing a lawsuit from investors.

Are the increased risks and costs associated with potential liability and insurance fees worth the time saved by not engaging in proper corporate governance?  Likely not.  There are other benefits to the operations of a company that come from regular board meetings.  For instance, board meetings are an opportunity for the CEO/Director to think differently about the prospects of the company and what is in the company’s best interests.

Again, at CrowdCheck we are cognizant of the reasons that minutes or written consents are not available documenting major actions taken by the directors of the company.  However, these practices are not in the best interest of the company, especially as it takes on outside investors.

The Business Judgment Rule provides that courts will not second guess the decisions of officers and directors, even if those decisions were bad decisions, if there was no breach of a fiduciary duty the directors owed to the company and stockholders.

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