Delaware to the Rescue

On Tuesday of last week, Citigroup was victorious in the Delaware Chancery Court when the court dismissed all but one claim in a lawsuit brought by shareholders of Citigroup. The shareholders claimed the Citigroup's board had breached its fiduciary duties because the board permitted the company to invest in sub prime mortgages despite suffering huge financial losses because of Citi's investment in sub prime mortgages.

As written by Professor Davidoff, of the University of Connecticut School of Law the decision is in important for three reasons.

1. It is doubtful that Delaware courts will hold corporate boards liable for bad decisions made before the financial crisis. Thus the decision last week reinforces the business judgment rule as highlighted by this quote from Chancellor William B. Chandler III.

Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk.

2. The court refused to dismiss the suit in favor of a New York suit which alleged similar claims and was filed first. The Delaware Court chose to implement the McWane doctrine, to retain jurisdiction over the suit even though the suit in New York had been filed first.

3. The Delaware Court dismissed the plaintiff's breach of fiduciary duty claim, which happened to be a Caremark claim. A Caremark claim created the duty a corporate board has to monitor the corporate enterprise. As stated by Chancellor William B. Chandler III, the standard for a Caremark claim is quite high.

[T]o establish oversight liability a plaintiff must show that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act. The test is rooted in concepts of bad faith; indeed, a showing of bad faith is a necessary condition to director oversight liability.

For commentary on the claim sustained by the Delaware Court, check out Professor Cunningham's blog.