When Board Minutes Become a Liability
How do you prove negligence?
For shareholders of Blue Bell Creameries, it came down to a case of what was — or more importantly, wasn’t — in the board meeting minutes. In 2015, the Texas ice cream manufacturer recalled all of its products and closed its production plants due to a listeria bacteria outbreak that sickened 10 people in four states, killing three.
In May 2020, the Department of Justice announced that the company pleaded guilty to criminal charges that it had shipped contaminated products and agreed to pay a total of $19.35 million in fines, the second-largest amount ever paid in resolution of a food safety matter. But shareholders also believed the board failed to hold management accountable for product safety and didn’t press management about a recall when the outbreak began. In 2019, shareholders sued the key executives and directors for these breaches of fiduciary duty.
It can be hard for shareholders to prove a breach of fiduciary duties, called the Caremark duties after the case that established the precedent. They constitute “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” according to the case’s 2019 decision.
In this case, however, that burden of proof was met. The Delaware Supreme Court found it was reasonably conceivable that the directors breached their Caremark duties — a duty of loyalty to make a good faith effort and oversee a company’s operations via board-level systems to monitor and mitigate risks. It cited the board’s failure “to implement any system to monitor Blue Bell’s food safety performance or compliance.”
How did they know this? The meeting minutes were the tell-tale documents.
Shareholders used the company’s own books and records to show that the board lacked a committee to address food safety and a regular process requiring management to inform directors on food safety matters and compliance. The records also showed the board didn’t have a regular discussion about food safety issues at board meetings — even after the company received positive listeria tests, according to the lawsuit.
The Blue Bell case shows that a board of directors can establish bad faith by failing to implement a reporting or monitoring system, or failing to monitor or oversee its operations. For bank directors, it should underline the importance of board meeting minutes that reflect discussions around regulation, safety and oversight — and that they can be liable for bad faith indifference if they fail to perform these duties.
• Kiah Lau Haslett, managing editor of Bank Director