In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106 (Del. Ch. 2009)

• Author: Joe McKenney
• Pages: 10

Page 61

Amidst the recent economic turmoil, shareholders have pointed fingers at company directors in hopes of assigning personal liability and recovering losses associated with subprime investments. In this case, shareholders initiated a derivative suit against current and former directors and officers of Citigroup. The principal allegation in the complaint was based on a theory that the defendants breached their fiduciary duty by failing to adequately oversee and manage the company's exposure to problems in the subprime mortgage market. The shareholders claimed that there were numerous "red flags" that provided notice of the imminent problems and that the defendants failed to act on those signs.

The business judgment rule protects directors from liability for decisions that are made, so long as the process involved in the decision-making was in accordance with their fiduciary duties. This eliminates the possibility of judicial second-guessing of business decisions that lead to company losses. In re Citigroup re-examined the principals set forth in the Delaware Supreme Court case In re Caremark, where the court articulated that in order to succeed in a director oversight liability case, the plaintiff must show that: (1) the directors utterly failed to implement any reporting or information system or controls; or (2) having implemented the controls, the directors consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either situation, the imposition of liability requires a showing that the directors knew they were not discharging their duties and failed to act in the face of a known duty to act, violating their duty of loyalty.¹ Moreover, Citigroup adopted § 102(b) (7) of the Delaware code which exculpates directors for breaches of fiduciary duties unless, among other things, they breach their duty of loyalty, or the acts or omissions were not in good faith or involve intentional misconduct or a knowing violation of law.² The exculpation statute acts as another layer of the "shield" held by directors making it even more difficult for shareholders to succeed in a derivative suit of this...