Board resolutions: the costs of complexity

In our last blog I examined the recent judgment in Australia in which the ATO succeeded in litigation with Singapore Telecom Australia.

One of several striking features of that case was that the group had seemingly set up a financing arrangement that the directors of the entities concerned could not have properly approved. It also appears that the group did not have a practice of creating briefing notes for those directors that explained the relevant documents and the rationale for the various amendments made. This greatly weakened its position during the litigation.

In this blog I’d like to examine board resolutions in a bit more detail.

I’m reminded of a quote variously attributed to Albert Einstein and Richard Feynman (probably erroneously in both cases): “If you can't explain it simply, you don't understand it well enough.” That’s particularly relevant here, because the more complicated a decision is, the more important it is to express what’s happening clearly and succinctly.

Board resolutions and other forms of corporate approval are an essential part of documenting the steps involved in group reorganisations and cross-border restructuring projects. They are also key to managing personal liability risks for directors of individual legal entities within a group. But we often find that, particularly when there are many entities involved, the result is an unintelligible mass of corporate resolutions, each containing long lists of documents tabled, statutory provisions observed and matters considered. That can make it very hard to spot mistakes and contradictions.

Board resolutions have four key functions.

• Express the overall objectives. In other words, the actual end result. Not merely the consideration of the dozens of legal documents involved.
• Identify the key source or sources of information about what is proposed and how it affects the relevant entities. These might be board papers, accounts, cashflow forecasts and so on.
• Identify the principal transaction documents.
• Document the decision to approve the proposals, and to grant delegated authority to implement them.

In general, we prefer written resolutions of directors. This is not always possible, for example if there is a need to show that an actual meeting has taken place in a specific location and at a specific time. But all things being equal, we believe it’s a more authentic way to record decisions, and it avoids the potential artificiality of claiming that a ten-minute meeting has considered five lever arch files full of documents.

Above all, our philosophy is that board resolutions, as far as possible, should be short and should reflect a natural decision-making process. Achieving that takes time, effort and attention. Producing excessively long and complex documents may seem like a way to save time and cost in the short-term. However, we’ve seen time and again that in the long run it can be anything but.