In recent years, we have witnessed a sharp increase in the number of lawsuits filed in Israel against officers and directors of companies and a broadening of the scope of their liability. As a result of their roles, directors and officers face exposure to risks of civil, criminal, and administrative liability. In these lawsuits, the courts and the Israel Securities Authority frequently use minutes of board committee meetings as evidence of the extent of the board members’ knowledge, involvement, and liability. 

Therefore, it is highly important that directors and officers (and even various advisors) stop treating minutes as a purely technical procedure that is a huge nuisance. Properly drafted and prepared minutes may prove beneficial to board members in the event of a lawsuit and provide them with good protection when the court examines their conduct against the business judgment rule, which focuses on the decision-making processes in a company.

Obligation to Record Minutes

Section 108 of the Companies Law prescribes that a company must record minutes of the proceedings during board meetings and retain them for a period of seven years after the date of the meeting. Furthermore, minutes approved and signed by the director who presided over the meeting serve as prima facie evidence of that stated therein. Section 111 of the Companies Law prescribes that the obligation to record and retain minutes also applies to meetings of board committees if a company has formed such committees. This obligation applies to every company, whether private or public, and to all means of communication used to convene a meeting or pass a resolution.

Importance of Minutes

Israeli courts have often underscored the importance of minutes when examining how meetings were conducted, what questions were asked, and what material was presented. The courts carry out these examinations, inter alia, based on minutes. The following examples illustrate how minutes find their way into investigations and, ultimately, into court rulings.

Financitech

One example is that of Financitech Ltd. In this case, the directors were sued for negligence in their duties because the company failed to exercise assets pledged as collateral to recoup loans not repaid to it on time. The court held that detailed minutes reflecting an informed decision-making process, while specifying the information presented to the directors to help them reach their decision, may make it much easier for a board of directors to substantiate its arguments based on the business judgment rule.

Discount Investment Corporation

In the acquisition of the Maariv newspaper by Discount Investment Corporation, the court attributed considerable value to the minutes when it considered the motion to approve the derivative suit alleging the directors failed to thoroughly scrutinize Maariv, a company bleeding money at the time. It became blatantly evident to the court when presented with the board meeting minutes approving this acquisition (only two pages) that the board members were not presented with all of the considerations and risks involved in the transaction and that the board did not hold an adequate and comprehensive discussion of the acquisition transaction.

Pinros Holdings

Another example of judicial review can be seen in the Pinros case. In this case, the plaintiff claimed minority discrimination and alleged the company’s controlling shareholders and directors breached their duty of care by not doing enough to prevent the company from being placed on the TASE maintenance list. During the hearing, the court criticized the fact that there were no orderly and detailed minutes of what was said during the board meetings and that only the final resolution was noted in the minutes presented to the court, without specifying the information presented to the board of directors before it passed the resolution. The court also opined that the obligation to record orderly minutes also applies to “small” companies, since the recording of minutes is not very costly. On the other hand, the court noted, the recording of minutes may make it much easier for directors to prove they had held a substantive and informed discussion about this or that resolution. Needless to say, this ruling broadened directors’ obligations and liabilities not only to the company but also to minority shareholders.

Malrag Engineering and Construction

In the Malrag case, the court ruled that, prior to the collapse of the company, the board of directors executed prohibited distributions, even though the company presented a positive profit balance at the time. The court held that the best evidence for ascertaining if the directors performed the solvency tests, as compulsory prior to a distribution, can naturally be found in the board meeting minutes. The court expounded on the importance of recording minutes as an essential tool for the accurate documentation of board meetings.

Osem

The Osem case, in effect, delineates the judicial review of merger transactions involving conflicts of interest and of the work of the independent committee conducting the negotiations. In the Osem case, the court expounded on the considerable importance of board meeting minutes when examining the proceedings conducted by the directors. It stated that minutes documenting the course of events enable the court to examine the directors’ work as it occurred in real time, to scrutinize the work process, and to ascertain whether it was proper and free of defects.

Recording Accurate Minutes for Legal Counsels and the Corporate Secretariat

Each company has its own unique characteristics and different emphases regarding how to record minutes. However, we recommend that all companies consider the following emphases and record the following details in their minutes:

• ŸThe time and place of meeting.
• The full names and roles of all attendees, including participants and/or other attendees who are not directors.
• The items on the agenda and the topics discussed during the meeting.
• The informational materials presented during the meeting.
• A notation that the directors participating in the discussion and/or voting during the meeting were asked to disclose whether they have a personal interest and/or a conflict of interest, as the case may be, in the topic on the meeting’s agenda. In addition, if directors participated in such discussion and/or vote, their names and the reason for their participation must be recorded in the minutes.
• The names of those directors who were not present during the discussion and/or vote on a particular topic and the reason for it.
• The course of the discussion during the meeting.
• Every resolution passed during the meeting, and whether it was passed unanimously or by a majority of votes.
• A list of directives, topics and/or actions for further handling and follow-up that the board requested its committees and/or the company’s management to perform during the meeting (in the last section of the minutes). In this regard, it is important to know that the summary of findings report published by the Israel Securities Authority in 2021 emphasized the considerable importance of monitoring the implementation of board resolutions and/or of requests received from board members, in order to enable board committee members to fulfill their duties optimally. The summary of findings also determined it is advisable to periodically review the follow-ups on the implementation of resolutions/requests in order to ensure monitoring and control of the implementation of the resolutions.
• Corrections and amendments to draft minutes should be limited. If corrections and amendments have already been made, make sure there are material differences between the draft minutes and the final version.

Guidance for Directors

While, in practice, the recording and management of minutes is carried out by the company and its advisors, board members may want to supervise this process and may even request or demand that procedures be established in this regard, if only to ensure a minimum threshold for controlling the quality of this process. We offer some guidance in this regard that we believe every director should follow.

• At the beginning of your incumbency, examine a random sampling of the company’s minutes (degree of detail, manner of documentation, length of the minutes, and identity of the person recording the minutes). If anything is not to your liking, suggest changes.
• Ask to schedule fixed dates for forwarding the minutes to the directors for their review. The minutes should be forwarded shortly after the meeting, when all of the information is still “fresh” and directors can still recall what was said during the meeting.
• Be diligent about requesting and receiving explanations in relation to particular topics that require in-depth discussion under law. For example, when approving terms of office and employment (the disparity between the average and median wages in the company, and transactions with controlling shareholders), whether a competitive proceeding was held, etc. Finally, make sure the minutes indeed document the discussion.
• Consult with members of the company’s management, legal advisors, independent auditors, and consultants, as relevant, in relation to all aspects that must be analyzed before voting on a resolution.
• Whenever you receive a draft of meeting minutes, thoroughly read it before approving it.
• Make sure all materials presented during the meeting are attached as appendices to the minutes and constitute an integral part of the minutes.

As long as the courts and the Israel Securities Authority continue examining the quality of board resolutions and/or board committee resolutions primarily based on meeting minutes, directors should consider minutes an important source of protection against exposure to lawsuits and should examine them carefully. Likewise, minutes should not be used to state things “merely for the record.”

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