The concept of an “executive session,” like that of an “independent” director, can be surprisingly slippery.
According to Section 9:24 of the current (12th) edition of Robert’s Rules of Order, “An executive session in general parliamentary usage has come to mean any meeting of a deliberative assembly, or a portion of a meeting, at which the proceedings are secret. This term originally referred to the consideration of executive business—that is, presidential nominations to appointive offices, and treaties—behind closed doors in the United States Senate.”
The term appears nowhere in the Delaware General Corporation Law or the Model Business Corporation Act.
But in 2003, the NYSE and NASDAQ amended their listing standards to require regular “executive sessions,” encouraging more (and more-candid) discussions among the directors who do not also serve as a company as its officers (i.e., that company’s “outside directors”). Ironically, such an “executive session” actually excludes executive officers.
Section 303A.03 of the NYSE’s Listing Standards provides that, “To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management.”
The NYSE clarifies that a “non-management” director is any director who is not an executive officer of the company, even if she is “not independent by virtue of a material relationship, former status or family membership, or for any other reason.”
Under this exchange’s listing standards, unless the board chooses to limit its regularly-scheduled executive sessions to its independent directors (as allowed by a 2010 amendment), it must hold at least annually an executive session of only the independent directors.
By contrast, the “executive sessions” of NASDAQ Rule 5605-2 are “[r]egularly scheduled meetings at which only Independent Directors are present.” Such sessions should “occur at least twice a year, and perhaps more frequently, in conjunction with regularly scheduled board meetings.
Perhaps the most notable “executive session” of recent years was featured in a decision introduced as “outlin[ing] carefully the relevant facts and law, in a detailed manner. . . in part, because of the possibility that the Opinion may serve as guidance for future officers and directors. . . of other Delaware corporations” in the exercise of their fiduciary duties. In re The Walt Disney Company Derivative Litigation, 907 A.2d 693, 697-698 (Del. Ch. 2005).
The gathering in question immediately followed the November 25, 1996 meeting of Disney’s board— although, under the listing standards’ current definition, it would not qualify as an executive session, because of the presence of (if not also its being convened and conducted by) Michael Eisner, who was then not only the chair of Disney’s board but also its CEO.
The Court noted that “Eisner himself testified that this was not an official executive session, but instead he gathered the non-management directors in a room to discuss [Disney President Michael] Ovitz,” id. at 730 n.277; see also 906 A.2d 27, 61 (Del. 2006) (referring to “the September 26, 1995 executive session, which was attended by Eisner and all non-executive directors”). According to the Wall Street Journal, Eisner testified that he had not convened a formal executive session because “it would be so difficult to get Michael Ovitz out of the room.”
In one of several Delaware decisions finding Disney’s directors not personally liable for having approved an employment agreement that had allowed Ovitz to leave office after only fourteen months with a severance package valued at approximately $130 million— or for having discharged him through a Non-Fault Termination (“NFT”) instead of terminating him for cause, which would have contractually deprived him of that payment—the Court of Chancery summarized the trial testimony about this gathering:
“Although there was no mention of Ovitz’s impending termination at the board meeting, it is apparent, despite the lack of a written record, that directly following the board meeting, there was some discussion concerning Ovitz at the executive session which was held at Disney Imagineering in a glass-walled room. . . One of the more striking images of this trial is that apparently Ovitz was directly outside the glass walls—looking in at this meeting—while his fate at Disney was being discussed. There are no minutes to show who attended the executive session, but I am reasonably certain that at least Eisner [and four other directors] were in attendance. In the absence of further evidence, I must conclude that no other directors attended this session. It is also clear that Eisner notified the directors in attendance at the executive session that it was his intention to fire Ovitz by year’s end. . . .
“Beyond Ovitz’s impending doom. . . there is some controversy as to whether any details of the NFT and the cause question were discussed at this meeting. . .
“Because of . . . numerous discrepancies, I cannot conclude that [one director] questioned Eisner during this meeting regarding cause, nor can I conclude that the conversation that took place between [that director and another] occurred after the executive session in the presence of those who were in attendance.” Id. at 730-732.
In another now-outmoded application of the term, the Court observed that after a compensation committee meeting on September 26, 1995, “In executive session, the board was informed of the reporting structure that Eisner and Ovitz agreed to. . . Eisner led the discussion regarding Ovitz. . . . Upon resuming the regular session, the board deliberated further, then voted unanimously to elect Ovitz as President.” Id. at 710.
Five years later, the Court suggested that another company’s independent directors should have convened in executive session to address whether the company’s founder and current board chair posed a “threat” to the company’s plans, rather than (in a “strange interlude”) considering that issue “in his presence.” The Court noted that “it was a less than adroit way to have an important discussion—a discussion that should have occurred in an executive session with [that director and certain other directors] absent.” Yucaipa American Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 326-327 (Del. Ch. 2010).
There is otherwise little discussion in caselaw of executive sessions, which are generally referred to only in passing. See, e.g., In re Toys “R” Us, Inc. Shareholder Litigation, 877 A.2d 975, 986 and 995 (Del. Ch. 2005) (mentioning executive sessions of independent directors in connection with the board’s determination of the disposition of the company’s store-operating division, and of a merger of the entire company); In re Lear Corp. Shareholder Litigation, 926 A.2d 94, 104 (Del. Ch. 2007) (merger discussion); In re Massey Energy Co. Derivative and Class Action Litigation, 2011 WL 2176479 (Del. Ch.), at *12 (considering merger or being acquired); Klaassen v. Allegro Development Corporation, 2013 WL 5739680 (Del. Ch.), at *7 (discussing the performance of the CEO); id. at *11 (discussing the termination of the CEO); Cinotto v. Levine, 2014 WL 4604750 (Cal.App. 2 Dist.), at *4 (merger discussions); Air Products & Chemicals, Inc. v. AirGas, Inc. 16 A.3d 48, 73 n.134 (Del. Ch. 2011) (executive session of non-management directors held to discuss a proxy contest).
Among the “executive session” issues that board might wish to address explicitly in their governance guidelines are:
First, who can convene—and who can end—a non-regularly-scheduled executive session? Any one of, or a specified percentage (or just a simple majority of), the eligible participants (non-management directors; or, as defined by relevant listing standards, independent directors)? Can someone who is not herself eligible to attend an executive session convene one, or at least suggest that one be held?
Does it make a difference if the session is to take place immediately before or after a previously scheduled meeting of the board?
How can a meeting already in progress be brought into—or out of– executive session? Although not all boards have explicitly adopted them to resolve procedural issues, under Robert’s Rules, “A meeting [already in progress] enters into executive session only when required by rule or established custom, or upon the adoption of a motion to do so. A motion to go into (or out of) executive session is a question of privilege, and is adopted by a majority vote.”
What if the session would occur at a much different day or time than a regularly scheduled board meeting?
Second, who presides at such a meeting? The lead director, if there is one? The participant who has served the longest as a director of the company? The chair of a specific committee (or of one of several designated committees) of the board?
Third, who sets the agenda? Neither of the listing standards defines, or gives examples of, the topics that could be addressed, but those issues might well include the performance and compensation of, and succession plans for, the “inside directors” (particularly the CEO), as well as consideration of proposed transactions such as mergers that might ultimately result in the involuntary departure of inside directors.
Fourth, can directors meeting in executive session allow the presence of (presumably after impressing upon them the confidentiality of the proceedings) what Robert’s Rules (Section 9:25) designates as “special invitees, and such employees or staff members as the body or its rules may determine to be necessary”? Some governance guidelines refer to these as “semi-executive sessions.”
Fifth, because the purpose of an executive session is to foster the open sharing of ideas and opinions, to what degree should any of the proceedings be memorialized? Should formal minutes be taken, and if so, by whom? Even if minutes are not prepared, should a record be kept at least of the identities of the participants, of (some or all of) the specific issues discussed, and possibly of the time spent on (some or all of) those topics?
Sixth, if minutes or other formal records of an executive session are created, should they be maintained separately from the minutes of the board’s regular meetings—and should they be under the control of, and readable by, the corporate secretary?
Seventh, can directors meeting in executive session take binding action? Even if the directors in attendance constitute a quorum for the purpose in question, should they not at least discuss their conclusions with the remainder of the directors before calling for a formal (or, possibly, for the formality of a) vote by the whole board?
Eighth, should the board ever delegate to the directors meeting in executive session the power to take action on a certain issue? Would that necessitate formally creating a committee of those directors?
Ninth, are any the board’s normal operating procedures (whether Robert’s Rules, or some alternative) automatically modified in some way(s), or specially subject to change, during an executive session?
Tenth, is a director who was eligible to attend the executive session but who could not be present entitled to be “brought up to speed,” in full detail, on what happened?
Eleventh, how much of the deliberations that occurred during an executive session should be conveyed, and by whom, to directors who were not eligible to participate— and who were possibly the topics of some of the discussions? Just the decisions that were made? The degree of support (unanimous? overwhelming? a bare majority?) that those decisions commanded? The issues that emerged during the decision-making process? (Presumably not the statements, positions, or votes of individual participants.) For discussions that did not conclude in a vote, the “sense of the group”? Is it considered a breach of a participant’s fiduciary duty to disclose information about the discussion to a non-participant without explicit authorization? And who could give such authorization?
Twelfth, can a board committee (or subcommittee) that—unlike the compensation, audit, and nominating committees—is not required by the current listing standards to be composed entirely of independent directors, conduct its own “executive sessions,” restricted to independent members of the committee, and possibly with different procedural rules than the normal committee?
Boards should address these concerns in their governance guidelines, and perhaps also in general or specific rules of operation for these meetings (“In Case of Executive Session, Break Glass”), leaving room for flexibility and also for some creativity.
On that last factor– much of the memoir, Who Is Michael Ovitz? (2018), is devoted to the author’s pre-Disney co-founding and leadership of an extremely successful firm for talent management. Page 215 offers what might be not only a prime example of “Ovitz’s salesmanship or, in other words, his ‘agenting,’” 907 A.2d at 720, but also a clear indication that at his Creative Arts Agency, the first word of the title modified the third, as well as the second:
“[W]e told our clients the truth. That didn’t mean we told everyone else the truth. I often had to offer more than I could deliver in order to be able eventually to deliver what I had offered. If the truth was bad for us, we had to change the reality, and then deliver it as what we’d said it was all along. In the meantime, well, you’d get creative.”
