In re Citigroup, Inc. Shareholder Derivative Litigation

United States District Court for the Southern District of New York · 2009 · Corporations

CorporationsShareholder derivative suitsDemand futilityderivative actiondemand futilityRalesBraddockboard composition

Facts

Plaintiffs alleged that current and former Citigroup officers and directors harmed the company in connection with mortgage-backed assets, including through fiduciary breaches, misleading registration statements, and corporate waste. The amended complaint added Section 11 allegations based on registration statements and a corporate waste challenge to Charles Prince's retirement package. Plaintiffs still made no pre-suit demand on Citigroup's board. By September 2009, when the amended complaint was filed, Citigroup had a seventeen-member board, nine of whom had joined after November 2007.

Issue

When plaintiffs file an amended derivative complaint after dismissal without prejudice, must demand futility be evaluated as to the board existing at the time of the amended filing, and did plaintiffs plead particularized facts creating a reasonable doubt that a majority of Citigroup's September 2009 board could impartially consider a demand?

Rule

Under Delaware law, demand futility is assessed with respect to the board in place at the time the operative complaint is filed; when a complaint is amended with permission following dismissal without prejudice, the relevant board is the one existing when the amended complaint is filed. Under Rales v. Blasband, plaintiffs must plead particularized factual allegations creating a reasonable doubt that a majority of that board could properly exercise independent and disinterested business judgment in responding to a demand.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Shareholders of Lakefront Biologics, a Delaware corporation based in Chicago, filed a derivative suit in federal court without first demanding action from the board. The complaint was dismissed without prejudice for failure to plead demand futility, and six months later the court granted leave to file an amended complaint. By then, the corporation had replaced four of its nine directors.

For purposes of deciding whether demand was excused, which board is the court most likely to evaluate?

Explanation. When a derivative complaint is amended with permission after dismissal without prejudice, demand futility is assessed with respect to the board in place when the amended complaint is filed, not the earlier board. The focus is the operative complaint and the board then able to consider a demand.