In Proof of Directors' Breach of Duty of Care: The significance of board minutes

Generally, when an obligation is imposed on a person or entity, the proof of breach rests on producing sufficient evidence to show the duty-bound person or entity failed to perform the imposed obligation. In law, the pursuit of such a claim will result in an action for negligence, requiring the proof of duty owed, the breach of such duty, and its resulting damage.

Similarly, duties imposed on directors by the Companies Act 2019 (Act 992) measure up to the same standard. For instance, the failure of the board of directors to discharge an imposed duty could result in a negligence suit against the board by a shareholder or the company—subject to the provisions of the Act.

Considerably, the Companies Act contains provisions clearly delimiting the scope of directors’ duties, the role of the board of directors in performing these duties, and a list of remedial actions shareholders can take to hold the board accountable for a resulting breach.

The Companies Act also clearly outlines the importance of “minutes” of board meetings as providing sufficient evidence of the discharge of the duties imposed on directors.

Therefore, this article aims to assess the scope of this duty of care imposed on directors and how board minutes could offer some pointers on how directors lived up to this duty in an action alleging negligence on their part.

THE SCOPE OF DIRECTORS’ DUTY OF CARE

I am reproducing the relevant text of Section 190 of the Companies Act, which imposes the "duty of care" on directors and, invariably, the board. I am convinced it will offer some context and appreciation for discussing this duty. The relevant portions are as follows:

Duties of directors

190. (1) A director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in a transaction with or on behalf of the company.

(2) A director shall always act in what the director believes is the best interest of the company as a whole so as to preserve the assets, further the business, and promote the purposes for which the company was formed in the manner that a faithful, diligent, careful and ordinarily skillful director would act in the circumstances and in doing so shall have regard to

(a) the likely consequence of any decision in the long term,

(b) the impact of the operations of the company on the community and the environment, and

(c) the desirability of the company maintaining a reputation for high standards of business conduct.”

This provision imposes the minimum duties on directors. The registered constitution of a company could impose additional duties. Arguably, the following defines the scope of directors’ duty of care imposed by law:

1. A fiduciary relationship between directors and the company mandating the exercise of utmost good faith by directors in transactions with or on behalf of the company;

2. An obligation on directors to act in what they believe is the best interest of the company as a whole so as to preserve the assets, further the business, and promote the purposes for which the company was formed; and

3. In performing the imposed duties, act in the manner that a faithful, diligent, careful, and ordinarily skillful director would act in the circumstances and, in doing so, shall have regard to (a) the likely consequence of any decision in the long term, (b) the impact of the operations of the company on the community and the environment, and (c) the desirability of the company maintaining a reputation for high standards of business conduct.

Broadly, the scope could be categorized as (1) the relationship established and its implied duties, (2) the imposition of expressed duties, and (3) the establishment of a standard for measuring the performance of the implied and expressed duties, respectively.

The combined effects of this scope establish the threshold for directors' duty of care towards a company. Invariably, it requires directors to act reasonably, diligently, carefully, and in good faith in all matters involving the company. To a large extent, it includes acting without conflicts of interest, taking reasonable steps to be informed about matters for decision-making, attending and participating in board meetings and decision-making processes, and exhibiting ordinary skills in assessing consequences (risks and benefits) of decisions and whether they advance the best interests of employees, members, and company among others.

Simply, it requires directors to exercise independent judgment in the honest belief that their decisions and corporate actions are justified and reasonable. These decisions should be made based on the circumstances and with careful consideration of all available related information. Where directors uphold these duties and, upon due diligence, inquiries, make corporate decisions, the business judgment rule will protect them against a claim of breach of duty of care and immune them from liability.

The directors’ duty of care in this regard is two-fold. First, it requires the production of record of proceedings of board meetings (form) and secondly, the accurate record of what transpired at those board meetings (substance). In claims of breach of this duty, both the form – record of proceedings and substance – subject matter discussions will be considered and are not exclusive of the other.

In instances where the directors act in breach of this scope, the Companies Act provides sufficient remedies, including damages.

BOARD MINUTES

The duty of care imposed on directors by the Companies Act is elaborate. It requires evidence of acts underlying the breach to prove whether or not directors discharge the imposed duties and could be immune from liability or acted negligently and should become liable (including personal liability) for their actions or omissions.

This calls into play the required proof and the burden of producing it. Yes, the burden of proof concerning the existence of a particular fact rests on the claimant to prove by a preponderance of evidence. This implies that a plaintiff in a negligence action must produce evidence sufficient to demonstrate that directors failed to uphold the imposed duties.

"Minutes" offers the best form of evidence in this regard. Although the Companies Act offered no format for producing minutes, directors are mandated to document records of proceedings at board meetings, and ensure copies are entered in a book(s) kept for this purpose. This discretion means that each board may adopt relevant and essential formats to record its proceedings in sufficient detail. The only validity requirement is that the chairman who presided at the related meeting must have signed the said record of proceedings to make it adequate evidence of proceedings.

Minutes are expected to be produced of board meetings as a whole or its subcommittees, each entered in book(s) for such purpose. Unless contrary evidence is adduced, a minute produced in a minute book will be deemed evidence of the meeting held, convened, and conducted by directors.

Also, the Companies Act mandates companies to maintain and keep open minutes books for members to inspect without charge or at a fee for copies. With the general provision that directors shall meet at least once every six months in each year, directors are expected to produce at least two (2) minutes per year and make them available for inspection and copying by members.

At the board level, company secretaries are mandated to produce minutes of board meetings.

BOARD MINUTES – THE PROOF

The concept of "proof" in law requires demonstrating by sufficient evidence that an allegation or claim is true. In a civil action, as may be in a negligence action, the burden of proof of the claim of a breach of directors' duty of care to a company will require the plaintiff to prove on the balance of probabilities that directors did not live up to or uphold the standards as are necessary for the performance of the imposed duties by law or the company's constitution.

This burden is discharged when the plaintiff proves by a probability that there is a higher chance (mostly 50%) that the claim of breach of duty is true, making directors liable for the resulting damages to the company. Therefore, it is essential that documentary evidence, such as minutes of board meetings, which are accessible by shareholders, contain sufficient records of proceedings demonstrating the exercise of good faith and considerable business judgment in the decision-making process and outcomes by the board.

This implies that minutes become the reference document for evidence of how directors conducted their affairs, resulting in decisions and the subject matter of negligence actions. This pre-warning by the law is sufficient notice to directors to ensure board meetings are conducted in an appropriate business-like manner, and records of proceedings are accurately recorded, documented, and filed in minute books as exhibits. This arrangement is the precautionary protection for directors who bear the enormous burden of steering the affairs of companies for the benefit of all stakeholders against becoming personally liable once compliance demands are adhered to.

While this does not call for directors to demand that everything they say at board meetings be recorded and reflected in board minutes as future evidence of their support or opposition to board decisions, it mandates that some essential details of board meetings must be recorded in sufficient detail to show the nature of discussions, proper consideration of a subject matter, and the decision reached on same.

It is principally the secretary's role to ensure accurate and sufficient recording of proceedings. Nonetheless, directors must establish a checklist to cross-check recordings and ensure they reflect the honest discharge of their imposed duties.

For a minute to reflect the actual record of proceedings, it must account for details of board meetings, such as the date, venue, time, agenda, and details of directors in attendance. Also, it must reflect discussions on agenda items, members' opinions either in support or opposition, votes taken on unanimous or otherwise basis, directives and mandates for sub-committees and management action, considerations of reports and matters of inquiry, and resolutions passed, among others.

While directors may be permitted to make notes of proceedings, such personal notes should be destroyed once the minutes are reviewed and adopted, accurately reflecting the director's recordings.

Technological advances have improved the means and methods for producing minutes, and each board must decide on which assistance these technologies will offer to improve their work and make them more efficient. Regardless of the style or technology, in-person or virtual, the substance and relevance of board minutes as evidence of how directors performed their imposed duties remain primary proof for determining a breach or otherwise of such responsibilities. Therefore, boards must ensure they accurately reflect their good faith considerations, business judgments and beliefs in company decisions in their minutes.

CONCLUSION

Directors are humans. The outcomes of their decisions may not always be favorable to the best interest of stakeholders, particularly shareholders. With the right of shareholders to sue directors for breach of their duties as imposed by law or company, directors must demand accurate and sufficient documentation of their decision-making processes to immune themselves from liabilities.

Therefore, all boards must strictly adhere to the statutory provisions on the production and keeping of board minutes and additionally adopt some best practices in corporate governance as minutes offer the best evidence of how directors performed their imposed duty of care towards a company.