Four Decades for Justice
On May 22, 2014, the New York State Supreme Court Appellate Division, First Department, unanimously affirmed the trial court’s decision dismissing a shareholder derivative action against Cravath clients, the outside directors of Citigroup, Inc.
Citigroup shareholder Stanley Lerner filed a derivative action in New York State Supreme Court alleging breach of fiduciary duty, corporate waste and mismanagement in connection with Citigroup’s losses on collateralized debt obligations, comprised of subprime mortgages and other assets, during the period from approximately 2005 through 2007. In a novel twist to actions of this type, Mr. Lerner amended his complaint to include a separate waste claim against the members of the board committee that had considered and rejected his demand to bring a derivative suit on behalf of Citigroup, asserting that the committee’s lengthy investigation of Mr. Lerner’s initial demand was itself a waste of corporate assets.
Cravath argued the outside directors’ motion to dismiss the complaint before the trial court on January 26, 2012. On May 15, 2012, Justice Bernard J. Fried dismissed the suit with prejudice. In his opinion, Justice Fried agreed with defendants that the board’s rejection of the demand was protected by Delaware’s business judgment rule and that the amended complaint failed to raise a reasonable doubt about the reasonableness and good faith of the demand committee’s investigation. The court also held that plaintiff had failed to allege the futility of his demand with respect to his follow-on waste claims against the demand committee for purportedly conducting a “sham” investigation. Following oral argument on September 10, 2013, the Appellate Division affirmed the trial court’s decision.
This is the third dismissal Cravath achieved for the Citigroup outside directors in actions related to the 2008 financial crisis. Cravath previously represented the outside directors in shareholder derivative actions alleging related claims in the Delaware Court of Chancery and in the U.S. District Court for the Southern District of New York (please click here); both actions were dismissed.
The Cravath team included partner Richard W. Clary and associate Andrew A. Bosse.
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