Since most large companies are incorporated in Delaware, that state’s law applies to most derivative claims filed on behalf of corporations, including those filed in federal and state court outside Delaware. Several recent decisions by Delaware courts have important implications for derivative cases involving claims that the board of directors breached its oversight duties.

In Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006), the Delaware Supreme Court held that a claim against the directors of a Delaware corporation for failure of oversight requires a showing of bad faith conduct.

The Delaware Chancery Court subsequently addressed the standard for pleading bad faith in dismissing breach of fiduciary duty claims against Citigroup Inc.’s board of directors in a shareholder derivative action concerning the directors’ alleged failure to monitor Citigroup’s business risk arising from Citigroup’s involvement in the subprime mortgage market.

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