## Facts

- Citigroup shareholders filed a derivative action against current and former Citigroup directors and officers, alleging fiduciary breaches tied to Citigroup’s losses from subprime mortgage-related exposure.
- Plaintiffs claimed defendants ignored “red flags” about deteriorating credit and housing markets, failed to manage Citigroup’s risk profile, and failed to disclose the company’s subprime exposure.
- Plaintiffs also alleged corporate waste arising from (1) purchases of subprime loans (including transactions involving Accredited and Ameriquest), (2) continuation of share repurchases at allegedly inflated prices, (3) involvement with and support of structured investment vehicles holding subprime-related assets, and (4) approval of a large departure compensation package for outgoing CEO Charles Prince.
- Citigroup’s certificate of incorporation contained a DGCL § 102(b)(7) exculpatory provision eliminating directors’ personal liability for duty-of-care breaches, absent non-exculpated misconduct (e.g., bad faith or loyalty breaches).
- Defendants moved to stay or dismiss in favor of a contemporaneous federal securities action in the Southern District of New York and separately 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).

## Issues

1. Whether demand was excused for oversight claims alleging the board failed to monitor and manage subprime-related business risk under a Caremark/Stone v. Ritter theory.
2. Whether demand was excused for derivative disclosure claims based on alleged failures to disclose Citigroup’s subprime exposure.
3. Whether demand was excused and claims stated for corporate waste challenges to subprime loan purchases, SIV-related decisions, share repurchases, and the CEO departure compensation package.
4. Whether the Delaware action should be stayed or dismissed in favor of the parallel federal securities litigation.

## Decision

- The court denied the motion to stay or dismiss in favor of the New York federal action, applying forum non conveniens analysis and emphasizing Delaware’s interest in internal-affairs claims.
- The court dismissed the Caremark-style oversight claims and related disclosure theories for failure to plead demand futility with particularized facts showing a substantial likelihood of non-exculpated director liability.
- The court dismissed waste claims attacking subprime loan purchases, SIV-related decisions, and the share repurchase program for failure to plead demand futility and for not meeting the stringent waste standard.
- The court denied the motion to dismiss as to a narrow corporate waste claim challenging the board’s approval of Charles Prince’s departure compensation package, finding the allegations sufficient at the pleading stage to raise reasonable doubt that the decision was a valid exercise of business judgment.

## Legal Principles

- Demand futility in a derivative action requires particularized facts showing that a majority of the board cannot exercise independent and disinterested business judgment, including because they face a substantial likelihood of personal liability.
- Where a corporation has a § 102(b)(7) exculpatory provision, plaintiffs must plead a non-exculpated theory (typically bad faith/loyalty-based conduct) to show a substantial likelihood of liability for directors.
- Caremark oversight liability requires a sustained or systematic failure of board oversight, such as an utter failure to implement or attempt to ensure a reasonable information and reporting system; it is not triggered by hindsight disagreement with responses to ordinary business risk absent well-pled bad faith.
- The business judgment rule generally bars judicial second-guessing of board decisions made through a rational process using reasonably available material information.
- Corporate waste is an extreme standard, satisfied only when the corporation receives no consideration or consideration so inadequate that no person of ordinary, sound business judgment could deem it worth what was paid; however, at the pleading stage, unusually large executive exit compensation may support a waste inference when the alleged consideration is arguably nonexistent or grossly disproportionate.

## Conclusion

The Court of Chancery rejected an attempt to convert large subprime-related losses into director oversight liability without particularized allegations of bad faith, dismissing most claims for failure to plead demand futility in light of § 102(b)(7). It nevertheless permitted a narrowly framed corporate waste challenge to proceed concerning the board’s approval of the departing CEO’s compensation package, while also declining to defer to parallel federal securities litigation on forum grounds.


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