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In re Citigroup Inc. S'holder Derivative Litig. - 964 A.2d 106 (Del. Ch. 2009)


Under the familiar Aronson test, to show demand futility under Del. Ch. Ct. R. 23.1, plaintiffs must provide particularized factual allegations that raise a reasonable doubt that: (1) the directors are disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Where, however, plaintiffs complain of board inaction and do not challenge a specific decision of the board, there is no "challenged transaction," and the ordinary Aronson analysis does not apply. Instead, to show demand futility where the subject of a derivative suit is not a business decision of the board, a plaintiff must allege particularized facts that create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. 


Plaintiffs, shareholders ("Shareholders") of defendant Citigroup Inc., filed a shareholder derivative action in federal district court alleging that defendants, current and former directors and officers of Citigroup (collectively, "D&Os") breached their fiduciary duties by failing to properly monitor and manage risks faced by Citigroup from problems in the subprime lending market, even in the face of "red flags." The Shareholders further alleged that the D&Os breached their fiduciary duties by failing  to disclose properly Citigroup's exposure to subprime assets. They also asserted claims of corporate waste against certain D&Os and other defendants for, among other things, their granting of a multi-million dollar compensation package to defendant Charles Prince upon his departure as Citigroup's chief executive officer ("Prince agreement"). Defendants filed a to dismiss or stay the action in favor of an action pending in the United States District Court for the Southern District of New York (the "New York Action"), or; (2) to dismiss the complaint for failure to state a claim under Delaware Court of Chancery Rule 12(b)(6) and for failure to properly plead demand futility under Court of Chancery Rule 23.1.


Were the Shareholders able to provide particularized factual allegations for the claims regarding D&O liability?




The court denied defendants' motion to stay or dismiss in favor of the New York Action, denied the motion to as to the claim for waste for approval of the Prince agreement, and granted the motion as to all other claims for failure to adequately plead demand futility. The court held, inter alia, that: (1) All but one of the claims regarding D&O liability under various theories were based on conclusory allegations that were lacking in factual particularity for purposes of demand futility under Del. Ch. Ct. R. 23.1; (2) The corporate waste claim regarding the Pence agreement adequately pleaded demand futility in that the agreement was so one-sided and beyond the limits of directorial discretion, and; (3) Although there might have been some overlap with the New York action, defendants failed to meet their burden of showing hardship that entitled them to a stay or dismissal in favor of that action under a forum non conveniens analysis.

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