Tips for Preparing Board of Directors Minutes

Preparing board of directors meeting minutes is an important task for all types of corporations. Having accurate minutes can help avoid litigation. Also, accurate minutes assist with managing future litigation risk.

To avoid litigation risk, board of directors minutes must provide an accurate record of board decisions. The minutes should also contain a record of any board due diligence. Finally, evidence of directors’ good faith intentions and absence (or resolution) of conflicts of interest should also be recorded.

Drafting Tips

The following tips are essential for preparing board of directors’ meeting minutes:

  • Do not rely on emails or text messages to serve as board minutes. These type of messages can easily be taken out of context and are not a replacement for board level deliberations. These type of messages are often subject to discovery in litigation.
  • Follow the board agenda when preparing the minutes. Often, the agenda serves as a guide to prepare the minutes. All of the agenda schedule and any related topics should be listed in the minutes.
  • Circulate draft minutes promptly after the meeting. Any delay affects the accuracy of the minutes. Also, directors’ memories fade over time.
  • Clearly state the board’s final decision. Provide some brief reasoning and background for board decisions. Add ‘whereas’ clauses to assist with the explanation of board decisions.
  • Include an explanation of the expert materials or expert testimony the board used to reach a decision.
  • If the board does not reach a formal decision on a particular topic then provide the reasoning for the non-decision. Also provide evidence the board carefully considered the issue before reaching no decision. If further action is warranted to reach a decision then state why and what action is necessary.
  • All communications with the board’s legal counsel should be recorded in a manner that is easy to redact or to mark confidential. Board minutes are subject to discovery in litigation. Ensuring the confidentiality of past board communications with its legal counsel is important to defending corporate lawsuits.
  • The minutes are not a transcript of the meeting. However, they must provide a complete and accurate description of the board’s actions. Accordingly, they do not usually identify individual directors as speakers or include direct quotes by directors.

More information:

For more information about operating a closely held businesses:

https://legalvaughan.com/2021/02/04/shareholder-voting-rights

For more information about preparing board of directors’ meeting minutes:

https://corporate.findlaw.com/corporate-governance/corporate-minutes.html

Buy-Sell Agreement Basics

A buy-sell agreement protects the owners of a business from unintended consequences of a co-owner’s death, retirement, divorce or disability. Moreover, subject to certain exceptions, without a buy-sell agreement, the owners of a business may sell or transfer their business ownership interest (their “Interest“) without restriction.

First, a buy-sell agreement establishes:
• when the co-owners of a business can sell their Interest;
• the purchase price paid to a selling partner; and
• who is eligible to own, purchase or sell an Interest.

Second, buy-sell agreements provide a funding mechanism for the purchase or sale of an Interest. Many times life insurance is the source of funding. Also, the valuation method used to determine the business’ market value is defined. Valuation options include formulas such as book value, liquidation value or capitalization of earnings. Another valuation option is requiring an independent appraisal to establish the purchase price of an Interest.

Third, buy-sell agreements each have different purchasing requirements. Accordingly, some types provide for mandatory purchases by either the co-owners or the business entity upon a triggering event. Possible triggering events are death, disability or retirement of a co-owner. Other types of buy-sell agreements provide for optional purchase rights for co-owners. Optional purchase rights are used when the transfer of ownership is to a new partner or between existing partners.

There are three main types of buy-sell agreements:

Cross Purchase Agreement

A cross purchase agreement obligates the remaining co-owners of a business to purchase a departing co-owner’s Interest. The agreement sets a previously agreed price and determines the proportions of purchases between the co-owners. This type of buy-sell agreement does not contain an option for the business to purchase any of the Interest of the departing or deceased owner. In the event of a death of a partner, cross purchase agreements use the proceeds of life insurance to fund purchases and sales between partners and the deceased partner’s probate estate.

Redemption Agreement

An entity redemption agreement obligates the business entity itself to purchase a departing co-owner’s Interest in the business. In the event of an owner’s death, the business uses life insurance it owns on the life the deceased co-owner to fund a purchase of the deceased owner’s Interest.

Mixed or Hybrid Agreement

A mixed or hybrid buy-sell agreement combines the cross purchase and redemption agreements. Both the business entity and the remaining co-owners have the right and/or obligation to purchase and sell Interests. The goal is to provide flexibility to the business and the co-owners upon a triggering event.

Additionally, for more information about closely held businesses see:

Also, for more information about buy-sell agreements see:

https://corporate.findlaw.com/law-library/buy-sell-agreement-critical-for-business-owners.html

Shareholder Voting Rights

Under Colorado law, what corporate actions require a shareholder vote or other type of shareholder approval?

The shareholders of a corporation generally have decision making power over the following corporate actions:

  • Annually electing the members of the corporation’s board of directors
  • Removal of a member of the corporation’s board of directors
  • Amendment or restatement of the Articles of Incorporation of the corporation
  • Amending or restating the Bylaws of the corporation (however, many times the Bylaws authorize the board of directors to amend or restate the Bylaws without shareholder approval)
  • Merging the corporation with another business entity
  • Dissolving the corporation or liquidating the assets of the corporation
  • Selling, leasing or exchanging all or a substantial majority of the corporation’s assets
  • Approving the conversion to a different type of business entity
  • Approving business transactions or business combinations with corporation shareholders that would otherwise be prohibited due to a conflict of interest
  • Approving conflict of interest transactions between a member of the corporation’s board of directors and the corporation

Do shareholders have the power to force the corporation’s board of directors to take a certain course of action?

Generally, shareholders of a corporation do not have the power to require the board of directors of a corporation to pursue a particular course of action. However, the shareholders’ power to annually elect the directors gives the shareholders some control over the board of directors and the decisions made by the board. The shareholders also have the power to remove members of the board of directors either with or without ’cause’ giving the shareholders another method to influence or control corporate activities. Typically, the required vote removing a director equals the majority of the outstanding shares of stock of the corporation entitled to vote on the issue pursuant to the corporation’s Articles of Incorporation.

How much liability does a shareholder have for the actions of a corporation?

A shareholder is not generally liable for the actions of the corporation and has limited liability protection for corporate actions. However, there are certain times when a shareholder can be held liable for corporate activities. In such a situation, a shareholder’s liability for corporate actions is generally equal to the amount of their equity investment in the corporation (there are some exceptions). This is because the shareholder has limited ability to control the actions of the corporation. Also, shareholders are not typically involved in management of the corporation on a daily basis unless the corporation is closely-held. Shareholders also have rights to invalidate acts of the corporation that should have been approved by the shareholders but were not submitted to a shareholder vote. For these reason’s a shareholder is usually only liable for corporate actions to the extent of his or her equity investment in the corporation.

For more information see Colorado Revised Statutes – Title 7:

https://leg.colorado.gov/agencies/office-legislative-legal-services/colorado-revised-statutes

For more information on the duties of majority shareholders to minority shareholders:

https://legalvaughan.com/wp-admin/post.php?post=1600&action=edit

Reviewing a Letter of Intent for a Real Estate Transaction

Parties to a real estate transaction use a letter of intent to agree on, and describe, the important terms of a real estate transaction. The important terms of a real estate transaction are typically the financial terms and the other contract terms that have a substantial affect on one or both of the parties after or during the transaction. The parties use the the letter of intent as a guide in preparing the real estate purchase and sale contract and other binding documents for the transaction.

When reviewing a letter of intent, the first step is determining whether or not the letter of intent is binding on the parties. Although most letters of intent are non-binding they often contain specific terms and conditions which are binding. A few examples of clauses that are typically binding are the confidentiality, dispute resolution, choice of venue and choice of jurisdiction clauses of the letter of intent. These clauses are enforceable even if the parties do not sign a formal agreement memorializing the proposed transaction. Therefore, it is important to review the entire letter of intent to identify any such binding provisions.

The specific language of the letter of intent is also crucial to ensuring the letter of intent is non-binding. If a a letter of intent includes all of the material terms to the transaction then the letter of intent may be binding on the parties. For example, courts have found that including the warranties and representations of the parties to the transaction in the letter of intent, together with the financial terms, may create a binding contract between the parties.

Another clause that appears in a letter of intent causing the agreement to become binding on the parties is a clause stating the letter of intent is enforceable even if the terms of the subject transaction are not completed in a formal written agreement between the parties. Courts have found that including this type of language in a letter of intent is evidence of the intent to create a binding letter of intent.

Deferred Compensation Plans – Common Types

Deferred compensation plans are used by businesses to compensate and incentivize their employees without offering the employees equity ownership in the business. A deferred compensation plan for an executive allows the business to retain talent by compensating the executive over a longer period of time such as during their retirement.

The following are some common types of deferred compensation plans:

Phantom Share Plan

  • Imitates equity ownership by issuing ‘shares’ that have a value connected to the fair market value of the outstanding stock of the company
  • Phantom ‘shares’ can be issued pro-rata to employees or can be tied to productivity; vesting is usually by meeting performance standards or over a certain length of time
  • The value of the phantom shares increase or decrease together with the fair market value of the business
  • Payments tied to the phantom shares are forfeited if the employee leaves prior to the occurrence of a payment trigger
  • Typical payment triggers are the sale of the business, retirement, death or disability and payment on a certain future date
  • The amount of the payment received is equal to the per-share value of the company on the trigger date
  • Employer receives no income tax deduction until a payment is made to employee; employee defers income tax until payment is received or the date the payment is not subject to forfeiture by employee

Long Term Incentive Plan

  • Rewards employee performance; not connected to the financial success of the company or the fair market value of the company stock
  • Typically paid over a period of 3-5 years; can be very structured with complicated payment schedules
  • No vesting; employees must be employed on December 31 of the year in which performance is measured to receive plan payments; payment forfeited if not employed on December 31
  • Payment equal to a percentage of employee’s regular salary
  • Employer receives income tax deduction when payment is made to employee; employee incurs income tax upon receipt of payment

Nonqualified Deferred Compensation Plan

  • Non-qualified plans avoid limitations placed on other types of qualified retirement accounts such as 401k
  • Non-qualified plans may limit participation to certain executives, make larger contributions and require longer vesting periods than qualified plans
  • Employee may defer income tax over a longer period of time as payments to employee are deferred
  • Appealing option for employees who have maxed out their contributions to qualified plans
  • Business segregates funds to pay awards; funds remain subject to creditors of the business and therefore subject to a substantial risk of forfeiture; resulting in no income tax due to employee on the award of deferred compensation
  • Vesting periods can be a substantial length of time (15 years)
  • Payments can be accelerated if there is a change of control event
  • Typical payment triggers are the later of two events: a fixed date, retirement, death, disability, change in control, termination of services
  • Payment amount is equal to a set formula which the business uses to make annual contributions of cash to the plan
  • Payment is generally in the form of an annuity or a lump sum; employee has the option to choose the form of payment
  • Employers can not deduct amounts contributed to the plan and payments are not subject to income tax by employee until they are distributed; however the employee is required to pay FICA taxes up and until payment is received