As has seemingly become the norm after major stock market corrections, legislators1 and regulators2 have claimed that a major cause of the 2008-2009 financial crisis and the resulting global recession was the failure of oversight by corporate directors. Putting aside the merits of the argument (with which the authors do not agree) for the moment, the Delaware courts, the most important jurisdiction in the United States for establishing corporate governance and liability concepts, is not prepared to hold corporate officers and directors personally liable for alleged oversight failures, even those that are alleged to have contributed to substantial erosion of stockholder value.
Delaware’s Chancellor William B. Chandler III recently reconfirmed the supremacy of the business judgment rule in an important decision arising out of losses allegedly suffered by Citigroup as a result of so-called subprime lending.3 The In re Citigroup Inc. S’holder Derivative Litig. decision is important for what it did do, but also what it did not do. It did hold that a plaintiff in a stockholder’s derivative case was not excused from making a pre-litigation demand that the Board of Directors consider the alleged wrongs. This is important because, when a demand is made, the board itself has the power to determine whether or not to initiate litigation in respect of the alleged claims. However, the Citigroup court did not hold that pre-litigation demand was excused in respect of a severance arrangement that the board approved for the company’s prior CEO.
