Thursday, May 23, 2019

Time to Reconsider Electronic Corporate Actions?

For some companies, formal recordkeeping of corporate actions is a burdensome task. Decisions must be made quickly, and officers and directors are spread across the country or even the world.

So it’s no surprise that companies are increasingly relying on technology to communicate with officers and directors and document corporate actions. But, as a decision earlier this year by the Delaware Supreme Court illustrates, operating on such an informal basis may have unintended consequences for a company.

In its decision, the Delaware Supreme Court held that a corporation may be required to produce emails and other electronic documents to satisfy a shareholder’s legitimate request to inspect corporate books and records pursuant to §220 of the Delaware General Corporation Law. This article summarizing the case quotes the Court as holding: 

…if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions, and official letters, it will likely be able to satisfy a §220 petitioner’s needs solely by producing those books and records. But if a company instead decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which §220 entitles them.”

Under this ruling, the inspection rights granted under §220 are not dependent upon the existence of pending litigation but simply require that a shareholder present a proper purpose(s) and demonstrate how the requested information is “essential” to accomplishment of that purpose. 

So, how can a corporation minimize the likelihood of such electronic communications being subject to inspection? I suggest the following: 

  • Limit the amount and type of corporate business that is conducted on an informal basis or solely via electronic communications;
  • Hold discussions among board members via conference calls instead of lengthy email threads;
  • Prepare and retain written minutes of all board meetings; and
  • For actions taken in lieu of board meetings, prepare and circulate written actions for signature. If you want to facilitate electronic approvals, consider circulate via Docusign or other electronic document-signing software rather than using less formal email threads to approve an action.

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