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As corporate scandals continue to dominate the financial press, the actions taken by members of corporate boards of directors are under attack by the civil class action bar, the Securities and Exchange Commission, federal prosecutors and state regulators. As the activities of board members are increasingly subjected to challenge in civil and even criminal proceedings, the existence of a clear record of the board’s activities has become an increasingly critical element in establishing a corporation’s decision-making process. More and more, courts are taking hard looks at the minutes of board of director and committee meetings to determine whether the actions taken by directors are consistent with corporate law and the fiduciary duties owed by directors to the corporation. Thus, boards of directors should take a fresh look at how their decision-making process is described in corporate minutes to ensure that the minutes will permit the directors to defend the actions taken in the boardroom, as well as to demonstrate that the directors have performed their oversight duties with appropriate care. This article summarizes the recent case law and investigations focusing on the contents of board and committee minutes to evaluate the conduct of board members. These cases fall into two broad areas: 1) compensation decisions; and 2) the defense of federal securities law claims. Examples of cases within both of these areas are discussed in this article. We will then summarize the lessons learned from these cases in an effort to provide guidance to board members, legal advisers and corporate secretaries on the preparation of minutes. COMPENSATION AND EMPLOYMENT DECISIONS: ‘DISNEY’ In the recent Walt Disney derivative litigation ( In re The Walt Disney Co. Derivative Litig., 825 A.2d 275 (Del. Ch. 2003)), plaintiffs challenged the compensation and severance paid to Disney’s former president, Michael Ovitz. The Delaware Court of Chancery held that the plaintiff shareholders sufficiently stated a cause of action that Disney’s Board of Directors and Compensation Committee failed to adequately investigate, oversee and become informed about the details of the original employment agreement provided to Ovitz. (See, Id. at 278.) The court also found that the directors should have, among other things, evaluated a “non-fault” termination provision that was later added to Ovitz’s employment agreement, which provision resulted in a payout of more than $140 million to Ovitz after only one year of employment. (Id. at 289.) The court reviewed the minutes of Disney’s Compensation Committee and Board of Directors meetings, which had been provided to plaintiff’s counsel pursuant to a books and records demand. (See, Del.Code Ann. Tit. 8 �220.) In upholding the claim, the court placed emphasis on the following: 1) that the proposal to the Compensation Committee did not include detailed information as to the provisions of Ovitz’s employment; 2) that the Committee got “sidetracked” by the issue of a fee paid to one of the members of the Board for securing Ovitz’s employment; and 3) that the Committee did not retain a compensation expert to provide industry comparisons to the Board. ( Walt Disney, 825 A.2d at 280.) The court further stated that: “(t)he minutes of the meeting were fifteen pages long, but only a page and a half covered Ovtiz’s possible employment,” and the Board appointed Ovitz without asking “any questions about the details of (his) salary, stock options, or possible termination.” (Id. at 281.) ‘COGAN’ The Pereira v. Cogan, 294 B.R. 449 (S.D.N.Y. 2003), case was similar to Disney, except that the decision followed a trial on the merits. The court upheld various claims by a Chapter 7 trustee against a former chief executive officer, officers and directors of the corporation. The court held, among other things, that the director defendants were liable for the payment of excessive compensation that was provided to the chief executive officer, Marshall Cogan, and that the approval of that compensation was a breach of the directors’ fiduciary duties. Based upon a review of the minutes of the board meeting, the court found that when the Board ratified Cogan’s unilaterally increased compensation in 1992, the directors appeared to be entirely unaware of the amount of such compensation. (Id. at 475.) In particular, the court stated that there was “no evidence regarding any discussions of Cogan’s compensation, nor any evidence that the Board members were aware of Cogan’s compensation.” (Id. at 475.) Also, when the Board later retroactively ratified Cogan’s compensation for 1998 to 1994, “there (was) no agreement on what level of compensation the Compensation Committee or the Board believed they were ratifying.” (Id. at 477.) GRASSO COMPENSATION One of the most publicized disputes regarding director compensation was addressed in a lengthy report prepared by legal counsel for the New York Stock Exchange (NYSE). The report is the result of a detailed internal investigation into the compensation of Richard Grasso during his tenure as the chairman and chief executive officer of the NYSE, which found that Grasso received up to $156.7 million in excessive compensation and benefits. (Report to the New York Stock Exchange on Investigation Relating to the Compensation of Richard A. Grasso, Dec. 15, 2003, at 2.) In addition to criticizing Grasso, the report examined and criticized the actions of the NYSE Compensation Committee. The report concluded that: “Grasso’s excessive compensation and benefits were the product of multiple flaws in the compensation and benefits process employed by the NYSE.” (Id. at 3.) After extensively considering the content of several compensation committee and board meetings, based upon a review of the minutes of such meetings, the report concluded that the committee: 1) failed to “examine and consider the level of Grasso’s (supplemental executive retirement plan) benefits accumulating when making its compensation decisions”; 2) used an “inappropriate comparator group for benchmarking Grasso’s compensation levels”; and 3) employed consultants who “did not have the appropriate level of involvement in, or input regarding, the compensation and benefits process.” (Id. at 3-4.) SECURITIES LITIGATION DECISIONS ‘ENRON’ In the class action litigation Newby v. Enron Corp., 258 F. Supp.2d 576 (S.D. Tex. 2003), the class plaintiff alleged that the outside directors of Enron engaged in fraud because they failed to disclose, and recklessly approved, “the fraudulent transactions, conflicts of interest and deceptive accounting practices (that) were at the center of the fraud.” (Id. at 611.) The court granted the outside director defendants’ motion to dismiss with regard to these fraud claims arising under ��10(b) and 20A of the federal securities laws. (Id. at 638-39.) The court utilized the Board and committee meeting minutes to demonstrate that the outside directors were unaware of the alleged fraudulent acts that were taking place and being approved, noting that the “references in the (board and committee meeting) minutes … are merely brief allusions or lists of topics … but no particular facts or details about the presentation or discussion indicate that … their resolutions as members of the board or committees were intended to further fraud.” (Id. at 627-28.) The court also used these minutes to hold that the outside directors acted “in reasonable reliance on opinions of legal and accounting experts (such as Arthur Andersen) whose opinions they had no reason to question,” and that “(e)ven a strong inference of negligence, which requires a much lower showing than severe recklessness, is negated by reliance on outside auditors’ accounting.” (Id. at 617-20.) Together, these conclusions helped to support the court’s dismissal of the fraud claims against the outside directors. ‘ARNLUND’ In contrast to the Enrondecision, the opinion in Arnlund v. Smith, 210 F. Supp.2d 755 (E.D. Va. 2002), demonstrates that meeting minutes that are inconsistent with public disclosures can subject directors to potential liability. In Arnlund, investors alleged that the directors of Heilig-Meyers Co. committed federal securities fraud by making certain misrepresentations and omitting certain information regarding the financial condition of the company in the May 30, 2000 annual report. (Id. at 762.) The court held that plaintiffs sufficiently pled facts supporting the allegation that the statements regarding the financial condition of the company were made by the director defendants, who knew that they were false, had no reasonable grounds for the belief that the statements were true or knew facts that undermined grounds for that belief that they were true. (Id. at 765.) Upon a review of the allegations, the court noted that “Plaintiffs do more than rely on a change in the Company’s position to infer fraud; they set out in painstaking detail when Defendants were made aware of material information, based on the Company’s own meeting minutes.” (Id.) Thus, the court held that the complaint sufficiently stated a claim under �10(b) and Rule 10b-5 of the federal securities laws, and denied the defendants’ motion to dismiss. GUIDELINES: WHAT TO INCLUDE IN THE MINUTES Minutes should by no means set forth a transcript of the statements made during board of directors or committee meetings. Indeed, by the Oxford English Dictionary’s definition, minutes constitute “a summarized record of the points discussed at a meeting.” However, recent litigation described in this article demonstrates the importance of minutes that clearly set forth the decisions made by a board of directors or board committee, and the basis for those decisions. While each board and board committee should have significant latitude in the amount of detail to include in the minutes of its meetings, these cases demonstrate the need to consider the following five guidelines in preparing minutes: 1. The minutes should clearly identify the decisions made by the board or board committee, either through a resolution or statement within the document; 2. The minutes should set forth the identity of experts, such as accountants, attorneys or compensation consultants, who provided advice to the board of directors, and a summary of the advice provided to the board; 3. The minutes should refer to handouts or other materials that were distributed to directors or committee members, stating whether such documents were distributed in advance of the meeting. Copies of the documents should be filed with the minutes in the corporate records books by the corporate secretary; 4. The minutes do not need to include a recitation of all questions asked or answers given by persons attending the board meeting. Instead, it should be sufficient to note that, following discussion of the matter, the board took action; and 5. The minutes should be consistent with the company’s public statements. If these five guidelines are followed, the potential liability of directors can be reduced. Timothy E. Hoeffner is the co-chair of the Corporate Governance practice at Saul Ewing LLP (www.saul.com) in Philadelphia. Shiloh D. Napolitan is an associate with the firm. Subscribe to the Corporate Counselornewsletter.

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