In past issues, we have stressed the importance of maintaining corporate records to ensure continued recognition of the corporate entity as a shield that enables shareholders, officers and directors to separate their personal and business affairs and thereby protect personal assets from business creditors. This has become increasingly important as recent litigation involving shareholder or other claims reflect a tendency to sift through directors’ meeting minutes and records to establish lack of due diligence or violations of fiduciary duties so that directors’ personal assets may be seized to satisfy business claims.
For example, in Stanziale v. Nachtomi, a 2004 Delaware case, a bankruptcy trustee filed claims against officers and directors of a defunct airline, alleging breaches of fiduciary duties, gross negligence, corporate mismanagement and corporate waste arising from equipment leases and borrowings completed at a time when the company still carried substantial debt and was suffering severe cash flow problems. The trustee alleged, among other things, the officers took no action to remedy staffing and equipment maintenance department issues or to inform the directors of such issues, pointing to the absence of references in directors’ meeting minutes during the period in which such issues arose. The trustee also alleged the directors breached their duties of loyalty, good faith and due care by allowing mismanagement to continue and by failing to keep themselves fully and adequately informed about the daily management of the company. Thus, the directors were charged with making, or failing to make, decisions on a fully informed basis, pointing again to the lack of references in minutes.
Similarly, in the 2003 Delaware case of In re Walt Disney Co. Deriv. Litig., shareholder claims were raised against the directors who were alleged to have breached their fiduciary duties by blindly approving an employment agreement with the company’s president, which provided extremely lucrative compensation and severance benefits. Directors’ minutes and records were carefully reviewed and the court concluded that the facts suggested the directors consciously and intentionally disregarded their responsibilities and made material corporate decisions without adequate information or deliberation.
Corporate officers and directors will always be on the hot seat and their decisions will always be subject to second-guessing. Nevertheless, they can protect themselves by duly investigating, deliberating and deciding issues and, just as importantly, documenting their meetings to create a record evidencing their decision-making process. Experienced corporate counsel should be present at, and prepare the minutes of, board, shareholder and committee meetings. If you would like more information regarding these matters, please do not hesitate to telephone us.