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In re Citigroup, Inc. Shareholder Derivative Litigation | 964 A.2d 106 (2009)
Generally, corporate directors have a fiduciary duty of loyalty to act in the best interests of the corporation and may be personally liable to shareholders for consciously failing to do so. In the 2009 case In re Citigroup Shareholder Derivative Litigation, the Delaware Court of Chancery considered whether directors could be personally liable to shareholders for breach of the duty of loyalty for failing to manage the corporation’s business risk during the 2008 financial crisis.
Citigroup is a global financial services company that was engaged in subprime lending, or providing high-risk loans to consumers with low credit ratings. Through its lending practices, Citigroup exposed itself to $55 billion in liability if the high-risk loans weren’t paid.
In late 2007, Citigroup lost a significant amount of money due to borrowers defaulting on their subprime mortgage loans. Because of these losses, Citigroup was forced to give $7.6 billion in emergency financing to its structured investment vehicles to bail the investment vehicles out. By 2008, Citigroup reported a quarterly loss of nearly $10 billion. As a result, Citigroup shares traded below book value, and the company was forced to lay off more than 6,000 employees.
At the same time, several of Citigroup’s directors sat on an Audit and Risk Management Committee, which met to discuss how to manage the company’s risk. Citigroup’s certificate of incorporation included a provision exculpating directors from liability for breaches of fiduciary duty unless the directors, first, acted in bad faith; second, engaged in intentional or illegal misconduct; or third, were disloyal to the corporation.
Subsequently, several Citigroup shareholders sued Citigroup’s directors in the Delaware Court of Chancery for breach of fiduciary duties. Specifically, the shareholders alleged, in part, that Citigroup’s directors breached their duty of loyalty by failing to adequately protect the corporation from the subprime lending market in the face of red flags. In response, the directors moved to stay the action pending the result of another suit filed in New York and moved to dismiss for failure to make a pre-suit demand or properly plead demand futility
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