A S R FROM THE NON-PROFIT LEGAL & TAX …

1 ORGANIZATION MANAGEMENT, INC. OCTOBER 9, 2006. A SPECIAL REPORT FROM THE NON-PROFIT LEGAL & TAX LETTER . NON-PROFIT LEGAL guide to meeting minutes by Hugh K. Webster Webster, Chamberlain & Bean Washington, indication of the thinking and intent of Summary: minutes of Board meetings and other those controlling the organization. key committee meetings should be drafted with care and deliberation. Poorly or hastily written [When reviewing minutes ], do not minutes can be harmful to an organization in the confine your review solely to the event of litigation or government investigation, taxable year under examination.

2 But well crafted minutes not only avoid harming Cover at least some of the tax years the organization, but can actually be highly immediately before and after. Expand beneficial. your review as circumstances warrant. INTRODUCTION Review the minutes of any com- mittees that maintain separate When the Internal Revenue Service began its minutes . just recently concluded investigation of the National Association for the Advancement of Colored People (NAACP) in October 2004 based STRATEGIC DRAFTING OF minutes . on charges of improper political activity, one of Probably the best example of how the drafting of the very first document requests by the IRS was minutes can harm, or help, an organization for minutes of NAACP Board of Directors and embroiled in a LEGAL dispute involved a lawsuit Executive Committee meetings.

3 This, in fact, against the members of a Board of Directors in was to be expected. Whenever a NON-PROFIT which the Board members were accused of organization is named in a lawsuit or is the negligence in approving a top executive's subject of an investigation whether the employment agreement and compensation opposing party is a private litigant, the federal package. government, or a State attorney general the minutes of Board and other meetings are sought The plaintiffs alleged that the Board members and closely scrutinized. approved the contract without having sufficient knowledge of its terms and used as evidence Board Indeed, the Internal Revenue Service Manual1.

4 minutes which seemed to indicate that the Board itself provides the following instruction to spent very little time considering the arrangement. examining agents: As stated by the Court: The minute book [of an exempt The minutes of the meeting were 15. organization] usually provides a pages long, but only a page and a half summary of the activities conducted covered [the executive's possible during the year. A review of the employment]. A portion of that page minute book may also give an 1. Exempt Organization Examination Guidelines, Part VII, Section , Chapter 1. Published by Organization Management, Inc. Box 368, Lovettsville, VA 20180-0368.

5 Phone 540/822-3928 Fax 540/822-3945 E-mail COPYRIGHT 2006 IT IS ILLEGAL TO PHOTOCOPY OR REPRODUCE THIS REPORT IN ANY WAY. Page 2 of 4 NON-PROFIT LEGAL guide TO meeting minutes . and a half was spent discussing [a raise unnecessary suspicions as to different topic]. According to the why the routine was not followed with minutes , the Board did not ask any respect to a particular meeting . questions about the details of [the executive's] salary, stock options, or Finally, a person serving as counsel to, or an possible termination. The Board also executive of, a NON-PROFIT organization in did not consider the consequences of a attendance at a Board meeting , who notices that termination, or the various payout the Board is not giving sufficient attention to a scenarios that existed.

6 Nevertheless, matter, may wish to raise even obvious issues or at that same meeting , the Board ask basic questions simply to have them, and decided to [hire the executive].2 any ensuing discussion, reflected in the minutes . This case, and others like it, demonstrate the BASIC CORPORATE LAW RULES. importance of crafting minutes that can be used as evidence that a Board at all times acted Most state statutes require NON-PROFIT or- appropriately and in particular gave important ganizations to maintain minutes of Board of issues due consideration. While it is not Directors (as well as membership) meetings. A. necessary, and is in fact ill advised, to have typical statute will require that each NON-PROFIT minutes that resemble a transcript, key phrases corporation "shall keep minutes of the such as, after a lengthy discussion or proceedings of its members, Board of Directors following much deliberation can be quite and committees having authority of the Board of useful.

7 Directors.". Other steps include: Of course, there are also very practical reasons Summarize or cite reports and other to maintain minutes of Board meetings, the most information provided to the Board, basic of which is to have a written record of and attach copies to the minutes . actions of the Board. In fact, the purpose of minutes of a corporation is to transcribe into Describe alternatives considered by permanent and official form the actions at a the Board in reaching major Board of Directors decisions, as this demonstrates diligence. minutes are also used to prove what action was, in fact, taken by a Board of Directors.

8 Corporate Be careful about word choice; , minutes are prima facie evidence of the discussion is preferable to proceedings that transpired at a meeting and are argument, and saying the Board admissible in a court proceeding as such reached a compromise might suggest they made a poor decision for the sake of placating a particular Other evidence also can be introduced to rebut faction. Of course, inflammatory what is contained in the minutes in order to adjectives should be avoided prove that the minutes do not reflect what in fact altogether. occurred, but the burden is on the person attacking the minutes to prove that they are Try to follow the same format or style incorrect.

9 Of minutes for each meeting . A. sudden change or aberration could 3. Chapin v. Cullis, 299 824 (Mich. 1941). 4. Phoenix Finance Corp. v. Iowa-Wisconsin Bridge 2. In re Walt Disney Co. Derivative Litig., 8 25 d Co., 16 789 (Del. 1940); Santa Fe Hills Golf &. 2 75 (D el. Ch . 200 3) Country Club, 349 27 (Mo. 1961). Published by Organization Management, Inc. Box 368, Lovettsville, VA 20180-0368. Phone 540/822-3928 Fax 540/822-3945 E-mail COPYRIGHT 2006 IT IS ILLEGAL TO PHOTOCOPY OR REPRODUCE THIS REPORT IN ANY WAY. NON-PROFIT LEGAL guide TO meeting minutes Page 3 of 4. minutes are also important to prove that a in written minutes does not invalidate that action, meeting was valid.

10 For example, if someone as it can be proven in other ways, such as challenges the validity of an entire meeting on testimony of individuals who attended the the basis of a lack of a quorum, such a meeting , informal notes, challenge may succeed if the minutes do not One issue that organizations continually struggle explicitly state that a quorum was in fact with is the amount of detail that the minutes of a Also, if an action by the Board is not Board meeting should contain. Some minutes recorded in the minutes , that action may be are very short, essentially reflecting only motions that were passed. This is sufficient legally, and has the advantage of brevity.