00:00hi everyone welcome to the Asics NC
00:02podcast I'm sonal and today I'm here
00:05with Joe Gunn vest and Nicky Locker Joe
00:07is a professor at Stanford Law School as
00:10well as a former commissioner of the SEC
00:12or Securities and Exchange Commission
00:13and Nicky is a senior partner in
00:16securities litigation and government and
00:18internal investigations at Wilson
00:20Sonsini the reason we're having um a 6nc
00:23podcast today is that I heard you guys
00:26speak at our Stanford board directors
00:28college program about board governance
00:31and in particular minutes which and you
00:34guys I was like these guys need their
00:36own show and we have a show and which is
00:38why we're excited to have you here
00:39well thanks Anil and let me just sort of
00:42try to frame what we're going to talk
00:44about today I think when you look at the
00:46history of all andreessen horowitz
00:48podcasts this one will be remembered as
00:51being epic and epic minimally epic
00:55because I think the topic that we're
00:58addressing today is going to be the most
01:00boring yet valuable topic in the history
01:02of all and race that's an amazing record
01:04day thank you and we're striving for
01:07this boredom value ratio and let me
01:10explain you know if you take the typical
01:12BCG two-by-two matrix
01:14imagine setting up the matrix so on the
01:17horizontal axis you have boredom and at
01:21the left you have low boredom items and
01:24at the right you've got the high boredom
01:26items and on the vertical axis I want
01:29you to imagine the value of a subject to
01:31you so at the bottom what you have is
01:33low value items and at the top you have
01:36high value so what quadrant are we gonna
01:38be in we're gonna be high into the right
01:40we are in the quadrant of boring but
01:43valuable and if you pay attention to
01:46what we're gonna be talking about today
01:47you may actually get some of the most
01:49valuable litigation insurance you can
01:52buy for essentially free this is as
01:55close to free legal insurance as you're
01:57gonna get so why do you say free
01:59litigation insurance because that's not
02:02what I think of when I think of people
02:03taking minutes in a board meeting
02:05minutes are the formal records of the
02:10discussions at a board or a
02:13of a corporation and the reason why
02:16they're the cheapest form of litigation
02:19insurance is because they are heavily
02:22relied upon in litigation and
02:25particularly have heavily relied upon in
02:27litigation involving whether or not a
02:30board complied with its fiduciary duties
02:33and if a board member for example wants
02:37to testify that they acted with great
02:40due care and there was quite extensive
02:43deliberations and the minutes are either
02:45inconsistent with that or don't reflect
02:48that I think the court would look at
02:51that testimony quite skeptically it
02:53makes you think that you should I should
02:55probably not write anything down then
02:56because oh no no no oh gosh no you're
03:01you know it's it's exactly the opposite
03:04the the rule of thumb once you get into
03:07court is if it's not in the minutes
03:09you're gonna have to work really hard to
03:12demonstrate that it actually happened so
03:14for example suppose you're considering a
03:17financing transaction at a privately
03:19held company at a venture back company
03:21and it's the kind of transaction that
03:23could have adverse consequences for the
03:25common holders well you're gonna want to
03:28establish that the board paid careful
03:30attention to the consequences to the
03:32common and that it reached its decision
03:35after due deliberation and giving very
03:38full concern to these consequences and
03:42the board was aware of the consequences
03:44now if there's nothing in the corporate
03:47minutes about that kind of deliberation
03:49you're gonna have a harder time it's not
03:53but you're gonna have a harder time
03:55persuading the court that you actually
03:57did it the simple solution and this is
04:00why this is cheap litigation insurance
04:02is it that the law requires that a board
04:04consider something it's a good idea that
04:07the minutes show that the board
04:08considered it you mentioned privately
04:11held corporations so you're saying this
04:13is different and this only applies to
04:14startups and boards for startups
04:16oh no this this applies the the need for
04:20properly prepared minutes applies
04:23equally to privately held corporations
04:26and public companies and that's not
04:29necessarily intuitive and most people
04:31would actually ask and think that
04:33properly prepared minutes are only
04:35needed at a public company that's
04:38exactly what and the answer is no and
04:41here's why here's why people think what
04:44you just asked and here's why it's not
04:47the correct answer in a public company
04:50those sitting around the boardroom table
04:52are much more attenuated to those who
04:55actually hold our owners of the company
04:58and the people to whom they're
05:00accountable and you must have others
05:02that's exactly right you must have an
05:04excellent record therefore that they
05:06comply with their fiduciary duties to
05:08the owners of the corporation in a
05:11privately held company particularly a VC
05:13backed company the owners or at least
05:17the representative of the owners or
05:18sitting right over usually sitting
05:20around the table and therefore everyone
05:22who actually matters is usually has a
05:25seat at the table and so you would think
05:27okay you don't really need me right
05:29because you're not worrying about their
05:30interests they're represented at the
05:31table that's exactly right but there's
05:33many situations where there are
05:35conflicts potential issues of lack of
05:38independence because those people
05:41sitting at the table of the vc-backed
05:43corporation their preferred shareholders
05:47yes they overdo she arey duties to the
05:49common shareholders and that takes
05:51priority and precedence over everything
05:53as a director and therefore they must
05:56have a record that they acted in
05:59conformity with their fiduciary duty to
06:02the common shareholders and it's even I
06:04mean it's just critically important that
06:06today the best interest of the company
06:08that's right and in writing minutes is
06:10an art not a science and the question of
06:13the balance between too much detail who
06:16asked what question what were the
06:18answers to each question which is too
06:19much detail has to be balanced against
06:22too little detail a topic came up
06:27discussion ensued questions were asked
06:29and answered period so what is that or
06:31how do you think Nikki's right on it's
06:34almost a literary form and you need to
06:37contemplate how the minutes are going to
06:40look if there's an issue that comes up
06:42three years from now and there's a
06:44dispute in a controversy so you need to
06:46think about the level of detail you want
06:49to present given the nature of the issue
06:52that you're addressing so how do you
06:54strike that balance then the answer
06:57usually lies somewhere between haiku and
07:00Tolstoy okay all right it's gonna be
07:02somewhere in that range
07:04and if there's an issue where you know
07:06that it's litigation prone and we're
07:10dealing with something that could be
07:11toxic you want to have enough detail in
07:15the myths to make sure that when a
07:18hostile third party goes back and reads
07:21the record that hostile third party will
07:24say you know it looks like they covered
07:26all their bases and I'm gonna have a
07:28hard time arguing that this board
07:30breached its fiduciary responsibilities
07:33and the hostile third party could come
07:34like three years later absolutely in the
07:36sphere of anyone's awareness at the
07:38current moment absolutely and and the
07:40important thing is when you're a lawyer
07:42doing the minutes you what you want to
07:45do is read your work product from the
07:47perspective of somebody who wants to
07:49attack it so you want to build something
07:52that is appropriately bulletproof but
07:56you don't want to go to the level of
07:58doing what they call in a reportage
08:00tick-tock what are some quick examples
08:02of those types of situations or topics
08:05that you can know in advance could lead
08:07to those kinds of heated discussions or
08:10issues in the future and let me also say
08:12there are some times where you have just
08:16ordinary course of business topics where
08:19relatively brief not detailed minutes
08:24are absolutely appropriate there's no
08:26question but then there are certain
08:28topics a screamer in Silicon Valley is
08:31anything that involves a conflict of
08:32interest anything that involves with
08:35know where there's a conflict among any
08:37of the constituencies they're involved
08:39so for example if a certain financing
08:43transaction can raise a conflict between
08:45the preferred and the common right or if
08:48there's a certain complexity and you
08:50want to demonstrate that you
08:52appropriately address your duty of
08:54or if you've got a director who might be
08:57sitting on two boards where there's a
08:59potential argument that one company is
09:01competing with another company anything
09:04that smells like it might be a conflict
09:06either today or evolve into a conflict
09:10in the future really requires attention
09:12that's that's the big red flag that's
09:14yeah let me give some examples of what
09:17the principles that Joe just laid out
09:19which is if imagine a situation where
09:21you're doing a down round where the and
09:25it's led by the existing investors where
09:28the common shareholders as opposed to
09:30the preferred shareholders who will
09:33actually be participating in that round
09:35the common shareholders are going to be
09:37diluted or imagine a situation where
09:39you're looking at a potential
09:41acquisition but the acquisition price is
09:44such where the preferred shareholders
09:46will probably get some significant
09:49percentage of a return of their
09:51investment but there really won't be
09:53anything left over for the common
09:55shareholders even if it might be a
09:56decision that could be in the best
09:57interest of the company that's you just
09:59have to show that it has that well and
10:02you might need to do more than just show
10:04there was a discussion if you may
10:05actually have to try to set up a
10:07committee of independent directors I
10:09mean another example is you have a
10:10start-up that's struggling do you give
10:15up and basically distribute whatever is
10:19left over although there's not going to
10:21be enough for the common shareholders or
10:23do you spend every last penny trying to
10:26make a go of it but there are also
10:28situations that you might not think
10:30would lead to potential conflicts or
10:33potential independence issues and that's
10:35why actually sometimes having a lawyer
10:37just sitting and listening or at least
10:40being consulted with is so important so
10:42imagine a scenario whether where one of
10:44your board members is the CEO of a
10:48second company Company B well that's
10:50actually pretty common a lot of serial
10:51entrepreneurs they all want to have like
10:53do companies that one but if your
10:56company and Company B are backed by the
11:01same venture fund the question is
11:04whether or not the CEO of Company B is
11:08that VC fund when he's considering
11:11activities in connection with your
11:13company and that's a potential and
11:15that's been a scenario that fee that
11:16Delaware courts have actually addressed
11:18where there is indeed an independence
11:20issue so it's kind of like a minefield
11:22yeah you in effect have to look at
11:24yourself through the eyes of conspiracy
11:26theorists right you can be sitting on a
11:29board of directors and you can be
11:30entirely comfortable that the decision
11:32that you're making is a reasonable
11:34business decision but you have to
11:36understand that a plaintiff's lawyer
11:38looking at what you do is gonna try to
11:40blow a torpedo through every assumption
11:42that you make so you have to look at
11:45your own behavior with a very very
11:47critical eye and you can't afford to
11:49give yourself the benefit of any doubt
11:51so what are situations that are not
11:53minefields I mean is everything a
11:55minefield basically pretty much yeah so
12:01for example you know their business
12:02decisions that could be made that
12:04wouldn't be viewed as a conflict because
12:07the decision is going to be in
12:09everybody's best interest do we invest
12:11in project a or in project B all right
12:14that's typically a low index of concern
12:17when you talk about conflict do you want
12:20to do a marketing campaign a or a
12:22marketing campaign B it's not going to
12:24impact the preferred shareholders
12:26differently in the common sure we have
12:28three candidates for chief operating
12:30officer which one do we hire so there
12:32are lots of issues that come up and and
12:35that can implicate board decisions that
12:38that are entirely non problematic from a
12:40conflict to me all those examples you
12:43just shared to me those are more
12:45minefields in some ways because you're
12:47looking at it through the lens of
12:48preferred versus common I mean there are
12:50other legal issues a board can face as
12:52well yes but if you don't have a
12:54conflict broadly defined you're likely
12:57to get the protection of what we lawyers
12:59call the business judgment rule so if
13:01there's no conflict the odds are that
13:05courts will say wait a minute you can
13:08exercise your business judgment and we
13:09understand that business is a risky
13:12thing and people are allowed to make
13:14mistakes and as long as we have no
13:17reason to believe that you're behaving
13:21or you have an incentive to be disloyal
13:23primarily because of a conflict we're
13:25going to give you a lot of deference
13:26there are however certain situations
13:29where there may not be a conflict where
13:31it is still extremely important and let
13:33me give you one example that the minutes
13:36reflect do care so and this is a public
13:40company example it was a secondary
13:42offering of a company where in
13:46connection with the issuance of what's
13:48called a registration statement you as a
13:51board member need to be able to
13:53establish your due diligence which means
13:55the record and therefore hopefully the
13:57official records that is the minutes
13:59need to reflect that you carefully read
14:01the registration statement and which is
14:04the offering document you asked
14:07questions you received answers that
14:09there was a discussion at the board
14:11level and if that's not reflected in the
14:15minutes or not reflected at least then
14:17you have to end up going to emails which
14:19is not an ideal you're not it's gonna be
14:22very difficult to work ten times harder
14:24based and correct to establish what's
14:26called your due diligence defense which
14:28basically allows you to escape liability
14:30for any false or misleading statements
14:34in the registration statement do you
14:36guys have any examples of any of these
14:38minutes Nikki yes I do actually and so
14:42let me read and and talk about what's
14:44wrong with these minutes quote after
14:47discussion the board unanimously voted
14:49in favor of authorizing the company to
14:51issue 1 million shares of the company's
14:53Class A common stock subject to the
14:57appropriate organization of and this is
15:00a subsidiary in I'm not gonna name of
15:02subsidiary as an unaffiliated legal
15:05entity and approving the secondary
15:07including among other things in the
15:10company to file a registration statement
15:14and take such other steps as appropriate
15:17or necessary in connection with the
15:19secondary offering unquote that is the
15:22record of the board's deliberations of
15:24the registration statement and its
15:28accuracy it's not a good record that was
15:31a con it was actually a conversation
15:32about the secondary and then
15:34board authorized management to file the
15:37registration statement so it actually
15:40undercuts not just as inconsistent with
15:42but undercuts a due diligence defense
15:45because it said it basically says it
15:49authorizes the management to file the
15:52registration statement without the board
15:53reviewing it could actually be read that
15:56way so so what you ideally want is a
15:59record that establishes that all of the
16:01directors are signing the registration
16:03statement have actually read the
16:05registration statement it's hard as a
16:07matter of law to prove that a director
16:11exercise due diligence meaning that they
16:14behaved appropriately the way an
16:16investor would when investing their own
16:18money with regard to the accuracy of an
16:20SEC filing if you can't demonstrate that
16:23the director even read the SEC file so
16:25you're saying that you would have had
16:27that aligned to the effect of sonal Joe
16:29and Nicki where the three people on this
16:30fake board read the statement reviewed
16:34it and agreed to this I would want more
16:37and that we had the opportunity to ask
16:39questions Wow even more detail okay all
16:42right you know your example if if if Joe
16:44is the business expert it might actually
16:47say yeah mister run fast ask several
16:49questions regarding the description of
16:51the industry and the products let's
16:53assume I was the audit committee experts
16:55on you know on the board it might say it
16:57wouldn't say the exact questions but it
16:59would say you know MS locker asks the
17:01CFO certain questions about the income
17:04statement or certain questions about to
17:06illustrate the analysis taking place so
17:09you don't actually ask the actual
17:10questions you have to record the actual
17:12discussion no you don't so it's not a
17:14transcript you don't want a transcript
17:16okay so that's the other extreme that's
17:17the other thing you want to avoid you
17:19want more than haiku but you don't want
17:21to get too Tolstoy you don't want to be
17:23you don't want to transcript all right
17:25because you don't need a recording what
17:27actually happens in the room you know
17:31the kind of a record that might be good
17:33in this situation is one establish all
17:35the directors read it that there was an
17:37opportunity for questions several topics
17:41were discussed you'd want to make sure
17:43that if you're going to list the topics
17:45discussed you don't leave anything out
17:47because if there are eight important
17:49things in the registration statement and
17:51you list only six you know you're gonna
17:54get in trouble on the - you don't list
17:55your because someone's gonna find the
17:57holes no matter exactly remember you
18:00always have to read the minutes like a
18:01conspiracy theorist okay and and you
18:05know from that perspective you want to
18:08establish you want to have minutes that
18:10establish that the board exercised its
18:13fiduciary responsibilities ask questions
18:16about this document got answers and only
18:20after doing that level of inquiry did it
18:22authorize the executives to file the
18:25document with the SEC the minutes that
18:28Nicki read have none of it
18:30so what if someone says recusing
18:31themselves from a discussion do the
18:33minutes have to say so-and-so in person
18:35actually left the room or do they is it
18:37good enough to just say who was present
18:39for that discussion do you actually have
18:41to share some of the movements in and
18:43out of the room as well so I think it's
18:45a good a good idea to do that I think
18:48actually think it's a very good idea for
18:50the minutes to reflect that the board
18:53recognized a potential conflict that
18:55they discussed the potential conflict
18:57and took action the action being maybe
19:00perhaps the recusal of the person with
19:01the conflict from the room and and
19:05discusses at least and recognizes the
19:07action taken and that's the same thing
19:10for example if you have any one of the
19:13situations that Joe or I mentioned as
19:17raising a potential conflict a down
19:19round and you want to therefore form an
19:22independent committee of independent
19:24directors who are not affiliated with
19:26the preferred shareholders the Board
19:29minutes ideally should recognize that
19:31the board recognized the potential
19:34conflict even better if a lawyer
19:38provided a discussion of their fiduciary
19:40duties in connection with a potential
19:42conflict then what did they do to take
19:45care of this potential concept they
19:47created an independent committee and
19:49then what were the considerations of the
19:52independent committee you know and when
19:55you're dealing with situations of
19:56individual recusal their variety of
19:58different styles that people use so for
20:01could say you know at this point in the
20:03conversation Miz Locker left the room or
20:05if it's on a Telecom at this point the
20:07conversation MS Locker dropped off the
20:10telecom and then when Miss Locker
20:12re-enters the room you put that into the
20:14minutes or comes back on the telecom you
20:16put that in a little bit like a stage
20:18play enter stage left remove you know
20:20stage right like it's actually a little
20:22bit of literary metaphors are exactly
20:24right you you want to know who's on the
20:26field all right you know who's on stage
20:28when this particular scene is happening
20:30another way to do it is up front is
20:33saying on the periods involving
20:34conflicts and discussion of the
20:36following matters Miz Locker did not
20:37participate so there are many many
20:40different styles that achieve the
20:41objective but you have to understand
20:43what the objective is create the record
20:46you want that can survive an attack by a
20:50conspiracy theorist create the record
20:52you want just survive an attack by a
20:54conspiracy theorist I think it's worth
20:56repeating so I wanted to make sure that
20:57I got that could you repeat that
21:02well Joe Nikki thank you so much for
21:05joining the acct podcast I actually
21:06disagree wholeheartedly with you Joe
21:09this is not the most boring podcast and
21:18we would never publish a boring podcast
21:20I thought it was incredibly interesting
21:22oh you should see what we can do with
21:23stuff that's really exciting well for
21:26the next podcast and I do want you guys
21:27to come back on to share some more
21:29insights on board governance and some of
21:31the other exciting stories from the
21:33field thank you thank you
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