964 A.2d 106 (Del. Ch. 2009)
Citigroup Inc. is a global financial services company incorporated in Delaware in 1988 with its principal executive offices in New York, New York.1
Plaintiffs Montgomery County Employees’ Retirement Fund, City of New Orleans Employees’ Retirement System, Sheldon M. Pekin Irrevocable Descendants Trust Dated 10/01/01, and Carole Kops are Citigroup shareholders. They brought consolidated derivative actions on behalf of the company against thirteen current and former directors who served on the board as of November 9, 2007, plus former directors and officers including former CEO Charles Prince.2
Beginning in late 2005, house prices plateaued and then declined. Adjustable-rate mortgages reset, causing defaults and foreclosures to rise and the value of residential mortgage-backed securities to fall.3 By February 2007 subprime lenders began filing for bankruptcy. By mid-2007 rating agencies downgraded bonds backed by subprime mortgages.4
Citigroup accumulated approximately $55 billion in subprime exposure through its Securities & Banking Unit. This consisted of $11.7 billion in securities held for pooling and $48 billion in super-senior tranches of collateralized debt obligations. The CDOs included liquidity puts allowing purchasers to sell the instruments back to Citigroup at face value.5 The company also operated structured investment vehicles that held riskier home-equity assets.6
In March 2007 and September 2007 Citigroup purchased $2.7 billion in subprime loans from Accredited Home Lenders and Ameriquest Home Mortgage.7 During the first quarter of 2007 the company repurchased 12.1 million of its own shares at an average price of $53.37 per share.8 On November 4, 2007 the board approved a letter agreement providing Prince with a $68 million compensation package upon his retirement. The package included bonus, salary, accumulated stock holdings, an office, an administrative assistant, and a car and driver for up to five years. In exchange Prince gave non-compete, non-disparagement, non-solicitation, and release agreements.
By October 2007 Citigroup announced a $1.4 billion write-down on leveraged finance commitments and a 57 percent decline in net income.9 In November 2007 it reported an $8 to $11 billion further write-down on subprime assets and provided $7.6 billion in emergency financing to its SIVs.10 On December 13, 2007 it brought $49 billion in SIV assets onto its balance sheet.11 In January 2008 the company announced an additional $18.1 billion write-down and a $9.83 billion quarterly loss. It cut its dividend 40 percent and later announced thousands of layoffs.12
Plaintiffs identified numerous public red flags between May 2005 and October 2007. These included statements by economists about a housing bubble, closures and bankruptcies of subprime lenders, downgrades of subprime-backed bonds by Standard & Poor’s and Moody’s, and warnings from peers such as Bear Stearns and AIG.13
On November 6, 2007 a derivative action was filed in the Southern District of New York.14 Three days later plaintiffs filed the first of four actions in the Delaware Court of Chancery. The Delaware actions were consolidated on February 5, 2008.15 Defendants moved to dismiss or stay the Delaware action in favor of the New York action. Alternatively, they moved to dismiss for failure to plead demand futility under Court of Chancery Rule 23.1 and failure to state a claim under Rule 12(b)(6).16
Whether the Delaware action should be stayed or dismissed in favor of the contemporaneous New York derivative action?17
Under McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., this Court may stay an action when there is a prior action pending elsewhere in a court capable of prompt and complete justice involving the same parties and issues.18 When actions are filed within days of each other they are treated as contemporaneous and evaluated under the traditional forum non conveniens framework without McWane preference.19 The six factors are applicability of Delaware law, relative ease of access to proof, availability of compulsory process, pendency of similar actions elsewhere, need to view premises, and other practical considerations. The defendant bears the burden to show overwhelming hardship that would subject it to sufficient hardship to warrant a stay.20
No. The actions were filed only a few days apart on November 6 and November 9, 2007, so they are contemporaneous and the forum non conveniens test applies.2122 Delaware law governs the fiduciary duty claims because Citigroup is incorporated in Delaware.23 Access to proof and witnesses is routinely managed across jurisdictions and defendants identified no unavailable evidence.24 The pendency of the New York Action does not create the required hardship even though it includes federal securities claims.25
No sui generis practical circumstances like those in Bear Stearns exist here that would produce overwhelming hardship for defendants.26
The motion to stay or dismiss in favor of the New York Action is denied because defendants failed to demonstrate the overwhelming hardship required under the forum non conveniens analysis.27
Whether plaintiffs adequately pleaded demand futility under Court of Chancery Rule 23.1 for their Caremark oversight claims?28
To excuse demand on Caremark oversight claims where no specific board decision is challenged, plaintiffs must allege particularized facts creating a reasonable doubt that the directors face a substantial likelihood of personal liability.29 Plaintiffs must show the directors utterly failed to implement any reporting system or consciously failed to monitor existing controls in bad faith, as clarified in Stone v. Ritter.30 Because directors are exculpated under section 102(b)(7) except for bad faith, plaintiffs must plead scienter-level conduct demonstrating conscious disregard of known duties rather than mere business risk misjudgment.31
No. Plaintiffs alleged numerous public red flags such as economist warnings, subprime lender bankruptcies, and rating agency downgrades between 2005 and 2007.3233 These amounted only to general market deterioration rather than specific Company wrongdoing.34 Citigroup maintained an ARM Committee that met eleven times in 2006 and twelve times in 2007 with a charter addressing risk assessment and reporting.35 The complaint failed to plead particularized facts showing the directors knew the oversight mechanisms were inadequate or consciously ignored them.36
The theory that directors should have prevented losses from subprime exposure is a hindsight evaluation of business risk that the business judgment rule and Caremark standard protect against.37
Plaintiffs failed to adequately pleaded demand futility for the Caremark oversight claims, so those claims are dismissed under Rule 23.1.38
Whether plaintiffs adequately pleaded demand futility under Court of Chancery Rule 23.1 for their disclosure claims?39
To excuse demand on disclosure claims when no shareholder action is sought, plaintiffs must plead particularized facts showing the directors deliberately misinformed shareholders with knowledge or in bad faith.40 Because of the section 102(b)(7) exculpation a substantial likelihood of liability requires allegations that the misstatements or omissions were made knowingly or in bad faith.41 This standard applies rather than through good-faith reliance on officers and experts under section 141(e).42
No. The complaint alleged in general terms that the board abdicated duties by failing to disclose risks from SIVs and liquidity puts.4344 It did not identify specific misleading disclosures, when they were made, or what the board was obligated to disclose.45 Plaintiffs provided no particularized facts showing the director defendants prepared the statements or had knowledge they were false.46 Broad group allegations against the ARM Committee members as financial experts did not demonstrate individual scienter.47
Directors are protected when relying in good faith on officers and experts who prepared the financial statements.48
Plaintiffs failed to adequately pleaded demand futility for the disclosure claims, so those claims are dismissed under Rule 23.1.49
Whether plaintiffs adequately pleaded demand futility under Court of Chancery Rule 23.1 for their corporate waste claims arising from the stock repurchase program?50
To excuse demand on waste claims challenging board action under the second prong of Aronson, plaintiffs must allege particularized facts raising a reasonable doubt that the transaction was the product of a valid exercise of business judgment.51 Plaintiffs must show an exchange so one-sided that no person of ordinary sound judgment could conclude the corporation received adequate consideration.52
No. Plaintiffs alleged the board authorized repurchase of 12.1 million shares at an average price of $53.37 per share in the first quarter of 2007 while the stock later traded at $46.5354 The complaint showed only that the company bought shares at then-prevailing market prices without any facts demonstrating the price was so disproportionately high that no reasonable business person would have approved the transaction.55 The red flags cited were the same general market warnings already rejected under the Caremark analysis and did not overcome the presumption of good faith.56
Plaintiffs failed to adequately pleaded demand futility for the waste claim arising from the stock repurchase program, so that claim is dismissed under Rule 23.1.57
Whether plaintiffs adequately pleaded demand futility under Court of Chancery Rule 23.1 for their corporate waste claim arising from approval of the Prince compensation package?58
To excuse demand on waste claims challenging board action under the second prong of Aronson, plaintiffs must allege particularized facts raising a reasonable doubt that the transaction was the product of a valid exercise of business judgment. Plaintiffs must show an exchange so one-sided that no person of ordinary sound judgment could conclude the corporation received adequate consideration. The outer limit of compensation discretion is reached when the award is so disproportionately large as to be unconscionable.59
Yes. Plaintiffs alleged the November 4, 2007 letter agreement approved by the board granted Prince a $68 million package including bonus, salary, stock holdings, office, assistant, and car and driver for up to five years in exchange for non-compete and release agreements.60 The complaint provided little information on the real value of the promises given by Prince or how much additional compensation he received solely because of the agreement.61 These facts create a reasonable doubt whether the package meets the stringent one-sided standard or exceeds the outer limit of board discretion on executive compensation.62
Plaintiffs adequately pleaded demand futility for the waste claim arising from approval of the Prince compensation package, so that claim survives under Rule 23.1.63
Whether the corporate waste claim arising from approval of the Prince compensation package states a claim under Court of Chancery Rule 12(b)(6)?64
On a Rule 12(b)(6) motion the Court accepts all well-pleaded factual allegations as true and draws all reasonable inferences in the plaintiff's favor.65 The Court dismisses only if the plaintiff could prevail on no set of facts that may be inferred from the complaint.66 Because the demand-futility standard under Rule 23.1 is more stringent than Rule 12(b)(6), a complaint that survives Rule 23.1 will also survive Rule 12(b)(6) if it otherwise states a cognizable claim.67
Yes. The same particularized allegations that satisfied the more demanding Rule 23.1 standard for the Prince compensation waste claim also satisfy Rule 12(b)(6).68 They permit the reasonable inference that the multi-million-dollar package approved for a departing CEO could be found so one-sided that no ordinary business person would conclude the corporation received adequate consideration.69
The corporate waste claim arising from approval of the Prince compensation package states a claim under Rule 12(b)(6) and therefore survives the motion to dismiss.70