Corporate Governance.    Within any business, there is an authority structure.  In a corporation, it is the Board of Directors and the corporation’s executive officers.  Within a limited liability company, it is a managing member or members (or if very small the members themselves).  In a limited partnership, it is the General Partner(s).  Who can make decisions is one thing and how they are made is another.  For virtually every business entity (other than sole proprietorships), those in positions of authority such as directors, officers, and managing members have fiduciary duties to their owners (shareholders, members, or limited partners).   The fiduciary duty is comprised of three main elements that in their totality require making decisions in the best interests of all owners.  These elements are (a) the duty of care (being diligent and making informed decisions), (b) the duty of loyalty (i.e., not self-dealing by taking or diverting business opportunities that belong to the business), and (c) the duty of good faith (i.e., acting in the best interest of shareholders or holders of ownership interest).   

Formalities. Corporate governance (or perhaps better stated business governance) is about how to demonstrate the proper discharge of fiduciary obligations through the formalities of good process and documentation.  The basic process for accountability is formally established under laws governing the organization of corporations (which requires a board of directors and officers) but is less structurally defined for limited liability companies and partnerships which rely very heavily on their organizational documents (operating agreement or partnership agreement).  Corporations, LLCs, and LPs provide a shield from personal liability for owners, directors, and officers but their strength is a function of abiding by formalities in conducting business to show a clear separation between the business entity and its decisional stakeholders acting on behalf of the business rather than in their personal capacity.  The failure to hold meetings, document minutes, deliberations, and decisions can be problematic especially when transactions involve interested parties (i.e., decision-makers that have an ownership interest and economic stake in the outcome).

How In-depth Should Minutes Be? There is plenty of bad advice floating around about this subject. As a foundational principle, minutes (a) must include information about who attended, where the meeting was held, and at what time it started and was concluded, (b) include a reference to any notice given or if not given that notice is waived, (c) should reflect the nature of the business discussed, the actions that were voted upon and the voting results (this does not require a listing of votes by name when voting is unanimous), and (d) any next steps that are substantive or procedural, such as any delegated actions, referral or assignment of tasks such as due diligence inquiries, investigations, and any schedule-related matters. It is not necessarily true that minutes should exclude more detailed content, especially where establishing proper due process and deliberation are critical as to matters of shareholder fairness, commercial suitability, and the like. More precisely, additional descriptive content should be added when specific deliberative points or subjects are considered as well as when relying on outside professional reports or expert recommendations. Compare the following examples:

Version 1:

“The board discussed the proposed subject transaction with X.”

MOTION MADE approving the subject transaction with X and Seconded; UNANIMOUSLY PASSED.

Version 2:

“The board discussed the terms of the proposed subject transaction with X, including the pricing, transaction costs, and projected benefits to shareholders when compared to other potentially available options, including raising additional capital, and the risks associated with such alternatives. A report and recommendation from Our Investment Banker were discussed and considered. Our Investment Banker’s report included comparable transaction data, valuation multiples of public companies in the space, and as wells as a discounted cash flow analysis, which demonstrated the transaction price is in line or at a premium to the prevailing market for like companies taking into account adjustments for size, margins and growth rate. The board discussed the taxable nature of the transaction and the best modalities to optimize its tax treatment. It was also noted that the price and term of the transaction were negotiated at arm’s length with the representation of Our Law Firm and the assistance of Our Investment Banker.”

MOTION MADE that the subject transaction is fair and reasonable upon due consideration and in the best interests of shareholders taken as a whole and that the subject transaction be and hereby is approved in accordance with terms of the definitive agreement attached as Exhibit A hereto with such modifications and amendments thereto as the Chief Executive Officer may approve in his/her reasonable discretion. MOTION SECONDED. MOTION UNANIMOUSLY APPROVED.

Version 2 is much more sound because it captures the deliberation process in a level of detail that establishes the director’s exercised due diligence, and acted reasonably using the business judgment. Version 1 leaves the process opaque and invites criticism. Version 2 becomes a critical marker of material decision points that may be relevant in a future contest well, down the road when memories fade. Minutes are as much a documentation of a corporate authorization as they are a documentation of the process behind it supporting the decision.