There can often seem to be a disconnect between the tax world and the legal world. One example of this is attitudes about how decision-making should work in the context of a group reorganisation. And to be more precise: whether it is appropriate to use pre-written board minutes.
There is a view – which may have been held by some tax inspectors – that the use of pre-written board minutes indicates that the relevant matters have been “pre-ordained”, and that the directors of the relevant companies have not independently considered those matters.
The company law perspective
From a UK company law perspective, a company director owes a duty to “exercise independent judgment” and to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.” This is one of the yardsticks against which any proposed sequence of steps should be measured – and requires that each step makes sense from the individual perspective of each participating company.
Generally speaking, there are very few formal requirements for the calling of board meetings. In particular, unless the articles require otherwise (which is unusual), it is not a legal requirement for the notice of a meeting to be in writing or to specify the agenda.
Similarly, it is unusual for companies’ articles of association to lay down specific rules as to how board meetings are to be conducted, and this is generally left to the directors to decide.
In order to be valid, a directors’ resolution does not have to be contained in a formal document. However, section 248(1) of the Companies Act 1985 states that “every company must cause minutes of all proceedings at meetings of its directors to be recorded.” Section 249 goes on to say that minutes which are authenticated by the chairman of the meeting (or by the chairman of the next directors’ meeting) are evidence of the proceedings of the meeting.
In general, the function of board minutes is to create a formal record of the end result of board meetings – the resolutions passed. It is usually considered impracticable for minutes to record the discussions and deliberations of directors on the way. And, of course, it is standard practice to use pre-written board minutes – for example, for transactions between economically unconnected undertakings such as acquisitions, disposals and refinancings. This does not reflect a lack of independent consideration, just the complexity of the arrangements and the need to ensure that all the necessary formal approvals are documented. In reality, the formally convened board meetings usually form part of the execution phase of a project which has been considered over a period of time and already approved in principle by the relevant directors.
For group reorganisations, the appropriate way to manage decision-making will depend on the complexity of the arrangements and the formal steps required. Best practice will often involve preparing a board paper describing the proposed steps and the reasoning behind them, and briefing the directors of the participating entities on the issues they need to take into account.
The board paper should usually be prepared and issued by whoever in the group has responsibility for the project. Generally speaking, this should reflect the reality as regards which function originated the project and ‘owns’ it.
The board paper should be sent with whatever supporting information is required (such as valuations and guidance notes on specific legal issues), and may be accompanied by a formal request to the respective boards of the proposed participating companies to consider and approve the proposals.
It is important to prepare a comprehensive plan of the steps involved, the individual documents and actions which are required to implement the arrangements, and the sequence of events.
For significant projects within larger groups, there may be a corporate approval document which records the proposed arrangements and the individuals within the relevant group-wide functions which have approved the arrangements. This is a useful control within the group, but should be subject to the independent consideration and approval by each participating company.
The final stage in the decision-making process is usually the review and approval of the arrangements and documents by the boards of directors of the individual companies involved. And yes, it makes sense for the form of the proposed minutes or written resolutions to be prepared in advance. Where board approval is to take place by board meeting rather than written resolution, the time allowed for each meeting should obviously be sufficient to review the matters under consideration. But assuming that the background information (whether set out in a board paper or otherwise) and the actual documents to be signed have been provided a reasonable time in advance, the time for the meeting need not assume that all those materials need to be reviewed afresh at the meeting.