When most people envision a board meeting of a corporation they assume a formal process in which a Chairman of the board presides and the discussions occur in a paneled room with a large mahogany table. The fantasy assumes formal resolutions moved, seconded, discussed and passed and placed verbatim in a formal minute book, perhaps a stenographer present or a recording being made of the meeting.
Such meetings do occur and are often the best way to operate the board meetings. However, the simple fact is that most California corporations are owned by families or friends, often husbands and wives, and their meetings are far more informal affairs, often done hurriedly or over the kitchen table.
Which may work until there is an audit or a dispute within the corporation at which time the written minutes and resolutions may suddenly become vitally important. This often does not occur until there is a death in the family or a new owner brought in or a divorce occurs; but it does occur and it is not uncommon to hear angry owners accuse the past owners or board members of negligence in not keeping accurate records of what occurred many years ago. Since taxing authorities require proof of critical financial decisions by the corporation, lack of such minutes can be extremely expensive.
With these incentives, one would assume that most corporations keep carefully drafted minutes with resolutions carefully noted. But does the law in the State actually require such minutes to be kept? The answer, remarkably, is no.
THE BASIC LAW AND PRACTICE:
There is law providing that closely held (non public) corporations can be administered informally especially when all directors agree to the informality. Note that if a board member or shareholder insists upon formal resolutions from this time forward and is on record of having done so, then unanimous consent to proceed informally will not exist. However, the law does not require corporate resolutions to take any particular form, other than they be in English, and either in writing or in a form which can be reduced to writing.
Because California law is silent on the issue, legal treatises often referred to by judges and arbitrators may be useful. These include Fletcher’s Corporations, California Jurisprudence and other texts yet none of these texts indicate a requirement to utilize any particular form of minutes.
Most formal corporations adopt Roberts Rules of Order as the rules governing meetings in their bylaws. However, unless they are incorporated in the bylaws of the corporation, this is not required. Also, most corporate form books (including Fletcher) provide forms for minutes of meetings, and they suggest formal wording for resolutions, including that there be a resolution moved, seconded, voted upon, and either adopted or rejected. For example, Fletchers suggested the following language:
On motion duly made and seconded, the following resolution was unanimously adopted:
Resolved, that the bylaws, a copy of which was presented at this meeting, are adopted as the bylaws of this corporation.
However, the authorities stopped short of mandating that language.
Instead, California courts have recognized that closely held corporations are often run informally, and that courts will not require formality where the directors had not previously required it. See, for example, Brainard v. De La Montanya (1941) 18 Cal.2d 502, 511, which is often quoted for the following language:
It is immaterial that no formal directors' meetings were held. While it is true that a corporation ordinarily acts by resolutions which are adopted at formal meetings of its board of directors and are entered in its minutes, it is also true that decisions reached by all the directors and stockholders of a closed corporation at informal conferences will be binding upon the corporation when, by custom and with the consent of all concerned, corporate formalities have been dispensed with and the corporate affairs have been carried on through such informal conferences.
See also American Center for Education, Inc. v. Cavnar (1978), 80 Cal.App.3d 476, which, in footnote 7, addresses the 1978 Corporations Code:
In cases of close corporations where the directors are in frequent contact with each other, it is unnecessary to hold formal meetings in order to reach decisions.FN7 (Brainard v. De La Montoya (1941) 18 Cal.2d 502, 511, 116 P.2d 66; In re Stylemaster Dept. Store (1956) 7 Misc.2d 207, 154 N.Y.S.2d 58, 61; 2 Fletcher, Cyclopedia of Corporations (1969) s 394.1, pp. 238-239.) Moreover, it has also been held that the directors of small corporations may transact their business by conversation and without formal votes. (2 Fletcher, Cyclopedia of Corporations (1969) s 418, pp. 268-270; In re Ostwald's Estate (1959) 20 Misc.2d 1001, 189 N.Y.S.2d 472, 480.) The latter rule is especially applicable in corporations where informality has become customary. (19 Am.Jur.2d Corporations ss 1121-1122, pp. 557-558; 2 Fletcher, Cyclopedia of Corporations (1969) s 418, pp. 268-270, s 394, pp. 236-238.) As already noted, the court in the instant case found that both ACE’s executive committee and board of directors were accustomed to conducting their business informally.
FN7. The newly adopted California Corporations Code contains provisions enacted for the purpose of recognizing that “shareholders of a closely held corporation often disregard the legal requirements and formalities for doing business in corporate form altogether and neglect to hold shareholders’ and directors’ meetings.” (Legis. Comm. Comment to Corp.Code, s 158 (West p. 34 1977).) The new law provides that a corporation with 10 or less shareholders may elect to become a close corporation. (Corp.Code, s 158, subd. (a).) Under the more general law which governs this case, a close corporation is simply one with few shareholders and a board of directors which personally conducts the corporation’s business. (1 Fletcher, Cyclopedia of Corporations (1969) s 4, p. 32; 2 Fletcher, s 394.1, p. 239.) ACE has no shareholders, its control is held in few hands, and its board members conducted its business. Accordingly, the legal principles and policies which obtain in cases involving close corporations are applicable here.
80 Cal.App.3d at 490 – 491.
There is a fair amount of case law that diminishes the importance of the minutes of a meeting of the board of directors. Courts generally hold that the minutes are only prima facie evidence of what took part in the meeting, and can be rebutted by payroll evidence. For example, in the case of Hughes Manufacturing & Lumber Co. v. Wilcox (App. 1910) 13 Cal.App. 22, the court said: “It is likewise immaterial that the minutes failed to disclose the action of the board taken in regard to certain matters. At most, the minutes of the proceedings of the board of directors are prima facie evidence only of its acts. In the absence of minute entry of its proceedings they may be proved by payroll evidence.”
As with insurance, the only time one really misses having formal minutes is…when they are needed. The moment there is a dispute within a company as to what happened or what decisions were made or the moment some outside authority, such as the Internal Revenue Service or a possible buyer, wants to confirm some action is taken, the minutes become absolutely vital.
And it is no more difficult to keep good minutes and have at least annual formal meetings than not to. It is simply one more skill to develop if one is to enjoy the protections of the corporate veil, corporate separate taxation, and the useful business aspects of the corporate shell. Once mastered, the minutes procedure is easily reproduced from year to year.
And if any third party seeks to impose personal liability on the owners by “piercing the corporate veil” it is extremely useful to have a thick minute book, with minutes going back years, to demonstrate to judge and jury that the corporation was a fully functioning entity. As one litigator once told the writer, “Once I slap a fat minute book down on the table in front of the jury, opponents have a hard time claiming that we didn’t follow the right rules.”
Law may not require formal minutes. Good business sense and common sense both recommend it strongly.