The Rising Reputation of Minutes in the Rulings : Twelve Insights For Review By Officeholders 

 By Partner Moshe H. Ne’eman, Partner  Gil Rosenberg and Adv. Efrat Dayagi – Shibolet & Co., Law Firm

Corporate law in Israel and other countries imposes personal liability on directors, officers and legal counsel in a company in respect of offenses that occurred and resolutions that were passed in the company contrary to the provisions of the law.

Additionally, in recent years a trend of transition has been observed from procedure to substance. The courts in Israel, and in particular, the judges of the Tel Aviv District Court’s Economic Department, review the manner in which resolutions are adopted in a company, and do not make do with the question as to whether the subject was discussed according to the procedural rules set forth in the law. As a result, the court refers to the minutes of meetings as an indication of how participants examined the subject.

Israeli law imposes an obligation to record minutes documenting the meetings of the corporation, including the general meeting, board of directors’ meetings and meetings of committees of the board of directors. While section 108(a) of the Companies Law, 1999 requires that meetings be documented and that the documentation be kept for seven years, the courts and the regulators have begun to flesh out this obligation.

According to the law, the minutes of a meeting serve as prima facie evidence of the discussions therein. Noting Amendments 16 and 17 to the Companies Law , which sanction derivative actions that enable shareholders and debenture holders to file suits against officers of the company for breach of duties applicable by virtue of corporate law, the evidentiary weight of minutes is increasing.

The use of minutes as evidence was initiated in the court in Delaware by as early as 2006[1]. This trend, which evolved in Israel particularly with respect to the law of tenders, is today also evident in the rulings and regulations relating to corporate law.

Last May, a decision by Judge Ruth Ronen on the Financitech case was published. In this case, a motion was heard for the approval of a derivative action in the name of Financitech Ltd. against directors who had served in the company in different periods. The derivative action addressed an allegation that the respondents had breached their duty of care to the company in that despite the fact that payments of loans granted by the company were not repaid to it in a timely manner, the directors did not procure the exercise of pledges registered in the company’s favor, which were designed to ensure repayment of the loans it had given to other companies, and despite valuations of the encumbered assets attesting to possible gains for the company upon realization. As a result, the company lost the opportunity to recover approximately $3.7 million from the realization of these assets.

As part of the evidence considered with regard to the process for adopting resolutions by the board of directors, the court gave credit to the minutes of the meeting. In the judgment, Judge Ruth Ronen made reference to the great importance of minutes when reviewing the conduct of the directors[2]:

 “From the evidentiary aspect, a review of the process of adopting resolutions – i.e. a review of the question as to the nature of the information that was before the board of directors, whether the board examined the information and made an informed decision on the basis of this information – is first of all made on the basis of documents that reflect the process of adopting resolutions by the board, and in particular, of course, the minutes of board meetings, including their annexes. These minutes are meant to reflect, in a manner which cannot be disputed, the decision-making process applied by the board of directors, including all its phases.”

 The trends described give rise to the question as to the proper way to record minutes that are likely to subsequently serve as evidence that possesses weight.

                                                              
Several recommendations for recording minutes:

1. The background materials sent before the meeting should be itemized in the minutes and attached to them as an annex. In the June 2015 report by the Auditing Unit of the Israel Securities Authority on the subject of the distribution of dividends and the self-acquisition of shares, it was asserted that failure to keep an annex that forms an integral part of the minutes is inconsistent with the provisions of section 108(a) of the Companies Law.

2. The names of absent directors should be stated in the minutes, together with the names of the directors who are present. The judgment in the case of Africa Israel Investments Ltd. awarded on April 26, 2015[3] determines that the liability of directors of the company is personal. The presence of a director at the meeting (as well as his absence) is essential when liability is imposed on board members for adopting an erroneous resolution.

3. The minutes are meant to be a summary of the meeting and not a transcript of what was said in it. This approach is supported by the judgment of the Tel Aviv Regional Labor Court in the Wachtel case, awarded on July 19, 2015[4]. Mr. Wachtel, a contender for the position of CEO of the Standards Institution of Israel, argued that in light of flaws in the actions of the search committee, inter alia in the minutes of the committee’s meetings, the CEO who was chosen must be disqualified. Judge Oren Segev determined that the summarized documentation of stormy, and occasionally chaotic, meetings does not constitute a flaw in the minutes of the meetings of the identification committee.

4. The length of the minutes will be determined as a function of the scope of the items discussed during the meeting, their importance and their complexity. The minutes of a meeting must reflect and cover the meeting in a manner that is proportionate to the scope of discussions at the meeting.

5. The opening and closing times of the meeting must be stated, and the time devoted to each item discussed during the meeting, or at least to the important subjects, such as the conditions of office and employment of the CEO or interested party transactions. The length of the discussion will reflect to the court the compatibility between the scope of the material sent to the directors, the importance and sensitivity of the subject being discussed, and the practical ability to properly review it in the time devoted to it at the meeting.

6. Recording the discussions at the meetings. Although recording meetings is practiced mainly in government companies and tender committees (in light of the principle of transparency mandated by the provisions of administrative law), in our opinion taping meetings in private and public companies is undesirable. Words uttered at the meeting are liable to be interpreted out of context in the future, in a way that is embarrassing or insulting. Furthermore, taping a meeting is liable to cause participants to keep their views to themselves.

7. It should be stated whether the resolution was adopted unanimously, and if not – by what majority it passed. This detail will inform the court of the complexity of the subject and the difficulties in reaching a decision.

8. It is important to define a policy in the company for keeping the minutes after the meeting. Minutes that are sloppily stored are liable to lead to the conclusion that the decisions were made negligently. Saving drafts, remarks and documents that are no longer relevant after the final document has been approved should be avoided in order to prevent the existence of contradictory documents.

9. The draft minutes must be sent for approval by participants as soon as possible to allow for remarks on the draft minutes to be made efficiently, before the minutes are approved.

10. It is worth also sending the minutes for inspection by those who were meant to attend the meeting and were absent, together with the background materials for the next meeting, at which the minutes are to be approved. This will allow absentees to stay informed of the company’s affairs and of the subjects that were discussed, and to faithfully discharge their duties.

11. It is important that resolutions on material subjects be passed in frontal meetings and not by written resolution or telephone. The meeting secretary should not be a member of the board of directors or an active participant in the meeting in order to ensure the objective documentation of what was said and to prevent impairment of the minutes’ evidentiary weight.

12. It is recommended that the minutes be written by the company secretary or the CLO.

[1] In re Walt Disney Derivative Litigation, 825 A 2d 275 (Del. Ch. 2003).

[2] Derivative Action (Tel Aviv – Jaffa) 13663-03-14 Guy Neuman v. Financitech Ltd. et al., par. 88 of Judge Ruth Ronen’s judgment (published in Takdin, May 24, 2015).

[3] Petition for Leave to Appeal 4024/14 Africa Israel Investments Ltd. v. Rafael Cohen (published in Nevo, April 26, 2015).

[4] Labor Dispute Presided over by a Judge 59834-06-15, Yaacov Wachtel v. the Standards Institution of Israel SII, par. 62-63 (published in Nevo, July 19, 2015).