Citigroup case confirms protections for decisions by corporate boards.

• Author: Paulson, David
• Position: LAW JOURNAL 2009

On February 24, 2009, the Delaware Court of Chancery, a corporate law bellwether, issued a ruling that bolstered long-standing judicial protections afforded corporate directors when shareholders challenge ill-fated boardroom decisions. In re Citigroup Inc. Shareholder Derivative Litigation was the culmination of multiple actions brought by Citigroup shareholders asserting that company directors breached their duties and that this breach was the root cause of catastrophic losses incurred by the company--and its shareholders--during the recent financial markets meltdown. While the court's decision to dismiss the shareholders' lawsuit could be characterized as being primarily on procedural grounds, its written opinion includes an informative review of Delaware law concerning director liabilities. Moreover, it likely offers a forecast of how courts will view similar lawsuits that may arise in Delaware--and elsewhere--as shareholders seek a judicial salve for the deep financial wounds occasioned by the economic downturn.

Citigroup suggests that boards may continue to take comfort in the well-settled precept of corporate law to generally provide significant judicial deference to decisions made in good faith, even if those decisions appear less than shrewd in hindsight. In short, courts generally will not second-guess decisions made by informed and disinterested directors acting in good faith, and nothing about Citigroup indicates that this principle has changed.

The shareholders' case centered on claims that the board failed to manage Citigroup's exposure to the sub-prime mortgage market in the face of "red flags." The court recognized that the complaint attempted to frame its allegations as Caremark claims--named after the 1996 Delaware case of In re Caremark, a shareholder suit involving allegations of criminal conduct and fraud. A Caremark claim typically consists of an argument that corporate directors are liable for damages resulting from their failure to monitor misconduct or violations of law. Such "failure to monitor" liability is distinct from liability for an ill-advised board decision and is subject to a different legal analysis. In a Caremark situation, directors may be liable under Delaware law for failing to monitor their company's business activities, but only a "sustained or systematic failure of the board to exercise oversight--such as an utter failure to attempt to assure a reasonable information and reporting system...