Introduction to the Law of Corporations: Cases and Materials

Fall 2026

  • Brian JM Quinn (Boston College Law School)

This open-source casebook is the twelfth edition of a casebook using the H2O/OpenCasebook platform of the Library Innovation Lab of the Harvard Library and the Berkman Center. This casebook and the H2O/OpenCasebook platform are part of an effort by educators to make high quality course materials and casebooks available to students at reasonable prices. Because this casebook is subject to a Creative Commons license and can be printed via Amazon/Kindle Direct Publishing, it is available to students at a very modest cost. Alternatively, students can access and read the cases and materials online via the H2O platform at opencasebook.org at no cost. 

Although this course is called an Introduction to the Law of Corporations, it is better understood as a more general business organizations course. This casebook is intended to be used as the main casebook for this course. However, your learning during this semester-long course will not be limited to the corporate law. We will start the class with an online course covering the basic concepts of Agency. Agency is the single most important building block required to understand the corporate law. Agency is also an essential building block to understand the laws governing other forms of business organization. 

During the course of this semester, you will also be introduced to other forms of business organization, including Partnerships, Limited Liability Companies, Nonprofit Corporations, and Public Benefit Corporations. Most of your introduction to these other forms will come through a series of online courses covering the basic concepts and rules for each of the forms. You should plan to complete all of these courses, including the accompanying quizzes in Canvas, by the dates set forth in the syllabus. While you are working on these online courses, in class we will focus on the corporate form, the Delaware corporate code, and the Delaware common law of corporations.

Because the corporate law is so much more extensive than the laws of other business forms, like for example the law governing LLCs, courts often lean heavily on the corporate law and apply it by analogy to other forms when they are in search of persuasive authority. By becoming expert in the corporate law, you will find it easy to translate that knowledge and apply it other business organizations. 

Much of the work of the corporate lawyer starts with the code. As such, we will start with an in depth examination of the corporate code.  Although we could study the Model Code or the Massachusetts code, for most corporate lawyers, the Delaware corporate law will be central to their practice. Sixty percent of all publicly traded corporations are Delaware corporations. With respect to private corporations, they are typically incorporated in the state in which they are physically located, or they are incorporated in Delaware.

Beyond the code, Delaware has a very deep corporate common law. It is in the corporate common law that the courts have developed the law of corporate fiduciary duties. It is through fiduciary duties that the corporate law attempts to regulate the relationship between stockholders and the corporation, between managers and the corporation, as well as the relationships of controlling stockholders and minority stockholders. Delaware's treatment of the corporate common law is so extensive that it is not at all uncommon at all for the courts of other states to refer to, or cite Delaware corporate law cases, when deciding questions involving their own corporate law. The Delaware corporate law is the closest we have to a lingua franca in the US for corporate law.

The fiduciary duties of corporate directors are tested most often in the context of corporate takeovers. The corporate takeover materials in this casebook attempt to highlight the most important issues in takeover situations as well as the court's doctrinal efforts to mitigate the transaction costs that arise in these situations.

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In his 1970 book Exit, Voice, and Loyalty, Albert O. Hirschman offered a framework for understanding how individuals respond to decline in organizations, firms, or states. We will be thinking about this framework, and its application to corporate governance, over the course of the semester. When a member of an organization becomes dissatisfied, Hirschman argued, she faces two basic options: first, she can leave (exit). A citizen can emigrate to another country, like a refugee seeking a safer regime or a digital nomad seeking a cheaper lifestyle. Many organizations and states are essentially voluntary associations, where dissatisfied participants can simply decline to participate further. Second, she can stay and use her voice to complain about the decline (voice). Some organizations as very sticky, and not all individuals will find it easy to walk away from an organization. Or, emigration may be impossible for some. In that case, a citizen stay and vote for their representatives, or they can take to the streets with funny signs and slogans to demonstrate.

Related to these two choices that participants in associations face is a third dynamic, that of loyalty. The concept of loyalty refers to a kind of adverse selection that presents in organizations. Participants with low loyalty to the organization, may exit immediately upon evidence of decline. Those participants with a higher degree of loyalty to the organization will stay; the costs of exit are too high, or they may agree with the ends of the organization. Those who stay will use their voice for as long as possible before they too decide to endure the costs required to exit a declining organization. Over time as an organization declines, the smaller and smaller group of remainders will be those participants most dedicated to the goals of the declining organization. In the words of Donald Rumsfeld, these are the ‘dead enders,’ people who will stubbornly cling to a cause or organization long after there is any realistic chance of the organization’s success. Jets fans will understand this feeling.

The elegance of the Hirschman’s framework lies in its tension between the two choices of a participant in the organization: exit is the economist’s solution, clean and market-driven, while voice is the political scientist’s, messy and relational. If exit is too cheap or easy, Hirschman warned, an organization will be impoverished due to members draining away at the first hint of difficulty. However, the answer is not necessary to impede exit. If participants cannot exit, they must have voice. Too much voice amongst those who remain can lead to polarization and paralysis. Too little voice leads to internal collapse with potentially catastrophic results. The challenge, as Hirschman noted, was to find the right balance.

Corporate governance has long mapped onto this framework with unusual neatness. Exit is the so-called Wall Street Rule: the shareholder who dislikes management simply sells her shares and moves on, disciplining the firm through the market rather than through engagement. Voice is the shareholder’s ballot: the proxy vote, the annual meeting resolution, the shareholder proposal filed under SEC Rule 14a-8; and the shareholder lawsuit. Voice is the machinery through which shareholders attempt to hold boards and corporate officers accountable. Each channel has its limits, of course, but taken together they have historically constituted a reasonably robust system of accountability, one in which shareholders retained meaningful leverage over the enterprises they owned.

What is striking about the current moment is that these governance channels are being simultaneously narrowed, in ways that are individually explicable but collectively alarming. The decades-long rise of passive index investing has largely neutered exit as a disciplining mechanism: an index fund manager who is dissatisfied with Apple or ExxonMobil cannot simply sell, because the mandate of the fund requires holding the stock. The Wall Street Rule presupposes a market of active, mobile capital; index investing converts shareholders into permanent, captive owners.

The voice channel has fared no better. The SEC’s recent retreat from robust enforcement of the shareholder proposal process has made it easier for companies to exclude inconvenient resolutions from the proxy ballot and avoid uncomfortable questions from shareholders. More troublingly, the emerging practice of proxy solicitation firms obtaining standing voting proxies (blanket authorizations that allow them to cast votes on behalf of shareholders without specific instruction) threatens to take advantage of rational shareholder apathy to reduce shareholder voice further. The wave of corporate reincorporations into Nevada and Texas, states that have aggressively curtailed shareholder litigation rights, has shrunk the jurisdictional space in which shareholders can sue. SpaceX’s 2026 IPO takes this anti-voice logic to its endpoint, including mandatory arbitration clauses that would effectively abolish class action litigation by shareholders, consigning disputes to a private forum that offers no precedent, limited discovery, and no meaningful public accountability.

Hirschman understood that organizations need some mechanism by which members can signal dissatisfaction and compel a response. Strip out exit, and there is no market discipline. Strip out voice, and there is no democratic accountability. We appear to be in the process of engineering a corporate governance regime in which all the traditional levers are being weakened at the same time. The beneficiaries of this shift are not hard to identify: entrenched management, controlling shareholders, and the institutional intermediaries who now stand between retail investors and the companies they nominally own. The losers are the millions of ordinary Americans whose retirement savings are invested in public markets on the implicit promise that those markets are governed by rules designed to protect them. That promise is becoming harder to keep.

5 Corporate Waste 5 Corporate Waste

Although we all think we know what a waste is, the concept of corporate waste has a very specific meaning. As a legal standard, corporate waste claims are – along with good faith claims – among some of the hardest claims for plaintiffs to succeed on. Chancellor Allen observed that a successful waste claim is much like the Loch Ness monster:

[T]he waste theory represents a theoretical exception to the statement very rarely encountered in the world of real transactions. There surely are cases of fraud; of unfair self dealing and, much more rarely negligence. But rarest of all — and indeed like Nessie [of Loch Ness fame], possibly non existent — would be the case of disinterested business people making non fraudulent deals (non-negligently) that meet the legal standard of waste!

- Steiner v. Meyerson, Del. Ch., C.A. No. 13139, Allen, C. (July 18, 1995), Mem. Op. at 2, 1995 WL 441999.

The judicial standard for determination of corporate waste is well developed. A waste entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. Most often the claim is associated with a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received. Such a transfer is in effect a gift. If, however, there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste, even if the fact finder would conclude ex post that the transaction was unreasonably risky. Courts are ill-fitted to attempt to weigh the “adequacy” of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk (Lewis v. Vogelstein, 699 A. 2d 327, 336 (1997).

Nevertheless, corporate waste claims are not uncommon. In recent years, plaintiffs have brought many corporate waste claims against boards for their executive compensation practices. Few – if any – of these claims are ever successful. To the extent executive compensation levels reflect a disinterested view by boards of directors - advised in good faith by outside compensation experts - such decisions are mere business judgments and, consistent with § 141(a), get the business judgment presumption and the protection of § 141(e). 

As you already know, a disinterested board making an informed decision will receive the protection of the business judgment presumption when the decision to pay an executive a large amount of money is challenged by stockholders. Because it is extremely difficult to plead demand futility in such cases, they are often characterized as “waste” claims in order to access Aronson's second prong (that the decision was not a rational business decision).

Some believe that boards have an obligation to minimize tax liability or to avoid paying taxes and that paying more taxes than the absolute minimum constitutes some sort of fiduciary duty violation or is a corporate waste. Such a view has never been supported by any corporate law doctrine. Nevertheless, that fact does not stop some litigants from bringing fiduciary challenges against board decisions with respect to tax strategy. Such challenges, assuming a disinterested and reasonably informed board are doomed for failure. Consequently, plaintiffs who bring such claims are left to characterize such claims as residual “waste” claims, again with no record of success.

One area where plaintiffs are more successful is in claims against excessive director compensation, rather than executive compensation. Although directors are expressly authorized by statute to set their own pay (DGCL 141(h)), the levels of such pay can give courts pause. Plaintiffs are obviously more successful in such cases because by their nature, directors are interested parties in their own pay. Consequently, plaintiffs are much more likely to succeed in overcoming Zuckerberg's demand futility pleading requirements thus supporting a duty of loyalty claim.

5.1 In re Citigroup Shareholder Derivative Litigation 5.1 In re Citigroup Shareholder Derivative Litigation

In recent years executive compensation has soared to almost unimaginable levels. It is not uncommon to see headlines about an executive being paid multiple million dollars a year to run a failing business. You have probably seen headlines like those and thought to yourself: "What a waste." You wouldn't be alone.

Following the financial crisis of 2008 a number of very high profile cases were brought on behalf of stockholders against boards alleging among other things that the compensation schemes deployed by boards amounted to a "corporate waste" and that they even created incentives that encouraged excessive risk-taking, bringing the entire economy to the brink of collapse. Goldman Sachs, the case that follows, is an example of such a case. The court is asked to rule on whether the executive compensation plan approved by the board amounted to a "corporate waste". As you will see this standard is very difficult to meet.

The opinion that follows was one of many that were issued in the wake of the Financial Crisis of 2008. For the most part, claims that directors violated their duty of good faith and oversight to the corporation in the lead up the crisis failed to have any purchase. However, a small number of claims associated with executive compensation accompanying the massive failure of financial institutions had some initial purchase - at least they survived a 12(b)(6) motion to dismiss. Although ultimately unsuccessful, those claims proceeded as "waste" claims. 

You will observe that in the Citigroup opinion that follows, the court applies the second prong of Aronson's demand futility standard. Although Zuckerberg is the present pleading standard for demand futility, both Aronson and Rales were not overturned and remain good law. Aronson's second prong, that "the challenged transaction was otherwise the product of a valid exercise of business judgment" remains good law and can be deployed when plaintiffs are pleading a "waste" claim. 

In re Citigroup Inc. Shareholder Derivative Litigation

964 A.2d 106 (2009)

 

OPINION

CHANDLER, Chancellor.

This is a shareholder derivative action brought on behalf of Citigroup Inc. ("Citigroup" or the "Company"), seeking to recover for the Company its losses arising from exposure to the subprime lending market. Plaintiffs, shareholders of Citigroup, brought this action against current and former directors and officers of Citigroup, alleging, in essence, that the defendants breached their fiduciary duties by failing to properly monitor and manage the risks the Company faced from problems in the subprime lending market and for failing to properly disclose Citigroup's exposure to subprime assets. Plaintiffs allege that there were extensive "red flags" that should have given defendants notice of the problems that were brewing in the real estate and credit markets and that defendants ignored these warnings in the pursuit of short term profits and at the expense of the Company's long term viability.

Plaintiffs further allege that certain defendants are liable to the Company for corporate waste for (1) allowing the Company to purchase $2.7 billion in subprime loans from Accredited Home Lenders in March 2007 and from Ameriquest Home Mortgage in September 2007; (2) authorizing and not suspending the Company's share repurchase program in the first quarter of 2007, which allegedly resulted in the Company buying its own shares at "artificially inflated prices;" (3) approving a multi-million dollar payment and benefit package for defendant Charles Prince, whom plaintiffs describe as largely responsible for Citigroup's problems, upon his retirement as Citigroup's CEO in November 2007; and (4) allowing the Company to invest in structured investment vehicles ("SIVs") that were unable to pay off maturing debt. …

The motion to dismiss is denied as to the claim in Count III for waste for approval of the November 4, 2007 Prince letter agreement. All other claims are dismissed for failure to adequately plead demand futility pursuant to Rule 23.1.

 

BACKGROUND

The Parties

Citigroup is a global financial services company whose businesses provide a broad range of financial services to consumers and businesses. Citigroup was incorporated in Delaware in 1988 and maintains its principal executive offices in New York, New York.

Defendants in this action are current and former directors and officers of Citigroup. The complaint names thirteen members of the Citigroup board of directors on November 9, 2007, when the first of plaintiffs' now-consolidated derivative actions was filed. Plaintiffs allege that a majority of the director defendants were members of the Audit and Risk Management Committee ("ARM Committee") in 2007 and were considered audit committee financial experts as defined by the Securities and Exchange Commission.

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 all owners of shares of Citigroup stock.

Citigroup's Exposure to the Subprime Crisis

Plaintiffs allege that since as early as 2006, defendants have caused and allowed Citigroup to engage in subprime lending that ultimately left the Company exposed to massive losses by late 2007. Beginning in late 2005, house prices, which many believe were artificially inflated by speculation and easily available credit, began to plateau, and then deflate. Adjustable rate mortgages issued earlier in the decade began to reset, leaving many homeowners with significantly increased monthly payments. Defaults and foreclosures increased, and assets backed by income from residential mortgages began to decrease in value. By February 2007, subprime mortgage lenders began filing for bankruptcy and subprime mortgages packaged into securities began experiencing increasing levels of delinquency. In mid-2007, rating agencies downgraded bonds backed by subprime mortgages.

Much of Citigroup's exposure to the subprime lending market arose from its involvement with collateralized debt obligations ("CDOs") — repackaged pools of lower rated securities that Citigroup created by acquiring asset-backed securities, including residential mortgage backed securities ("RMBSs"), and then selling rights to the cash flows from the securities in classes, or tranches, with different levels of risk and return. Included with at least some of the CDOs created by Citigroup was a "liquidity put" — an option that allowed the purchasers of the CDOs to sell them back to Citigroup at original value.

According to plaintiffs, Citigroup's alleged $55 billion subprime exposure was in two areas of the Company's Securities & Banking Unit. The first portion totaled $11.7 billion and included securities tied to subprime loans that were being held until they could be added to debt pools for investors. The second portion included $43 billion of super-senior securities, which are portions of CDOs backed in part by RMBS collateral.

By late 2007, it was apparent that Citigroup faced significant losses on its subprime-related assets, including the following as alleged by plaintiffs:

  • October 1, 2007:Citigroup announced it would write-down approximately $1.4 billion on funded and unfunded highly leveraged finance commitments.
  • October 15, 2007:Citigroup issued a press release reporting a net income of $2.38 billion, a 57% decline from the Company's prior year results.
  • November 4, 2007:Citigroup announced significant declines on the fair value of the approximately $55 billion in the Company's U.S. subprime-related direct exposures, and estimated that further write downs would be between $8 and $11 billion.
  • November 6, 2007:Citigroup disclosed that it provided $7.6 billion of emergency financing to the seven SIVs the Company operated after they were unable to repay maturing debt. The SIVs drew on the $10 billion of so-called committed liquidity provided by Citigroup. On December 13, 2007 Citigroup bailed out seven of its affiliated SIVs by bringing $49 billion in assets onto its balance sheet and taking full responsibility for the SIVs' $49 billion worth of assets.
  • January 15, 2008:Citigroup announced it would take an additional $18.1 billion write-down for the fourth quarter 2007 and a quarterly loss of $9.83 billion. Citigroup also announced that the Company lowered its dividend to $0.32 per share, a 40% decline from the Company's previous dividend disbursement.
  • By March 2008, Citigroup shares traded below book value and the Company announced that it would lay off an additional 2,000 employees, bringing Citigroup's total layoff since the beginning of the subprime market crisis to more than 6,000.
  • July 18, 2008: Citigroup announced it lost $2.5 billion in the second quarter, largely caused by $7.2 billion of write-downs of Citigroup's investments in mortgages and other loans and by weakness in the consumer market.

Plaintiffs also allege that Citigroup was exposed to the subprime mortgage market through its use of SIVs. Banks can create SIVs by borrowing cash (by selling commercial paper) and using the proceeds to purchase loans; in other words, the SIVs sell short term debt and buy longer-term, higher yielding assets. According to plaintiffs, Citigroup's SIVs invested in riskier assets, such as home equity loans, rather than the low-risk assets traditionally used by SIVs.

The problems in the subprime market left Citigroup's SIVs unable to pay their investors. The SIVs held subprime mortgages that had decreased in value, and the normally liquid commercial paper market became illiquid. Because the SIVs could no longer meet their cash needs by attracting new investors, they had to sell assets at allegedly "fire sale" prices. In November 2007, Citigroup disclosed that it provided $7.6 billion of emergency financing to the seven SIVs the Company operated after they were unable to repay maturing debt. Ultimately, Citigroup was forced to bail out seven of its affiliated SIVs by bringing $49 billion in assets onto its balance sheet, notwithstanding that Citigroup previously represented that it would manage the SIVs on an arms-length basis.

Plaintiffs' Claims

Plaintiffs allege that defendants are liable to the Company for breach of fiduciary duty for (1) failing to adequately oversee and manage Citigroup's exposure to the problems in the subprime mortgage market, even in the face of alleged "red flags" and (2) failing to ensure that the Company's financial reporting and other disclosures were thorough and accurate. As will be more fully explained below, the "red flags" alleged in the eighty-six page Complaint are generally statements from public documents that reflect worsening conditions in the financial markets, including the subprime and credit markets, and the effects those worsening conditions had on market participants, including Citigroup's peers. By way of example only, plaintiffs' "red flags" include the following:

  • May 27, 2005:Economist Paul Krugman of the New York Times said he saw "signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble."
  • May 2006:Ameriquest Mortgage, one of the United States' leading wholesale subprime lenders, announced the closing of each of its 229 retail offices and reduction of 3,800 employees.
  • February 12, 2007:ResMae Mortgage, a subprime lender, filed for bankruptcy. According to Bloomberg, in its Chapter 11 filing, ResMae stated that "[t]he subprime mortgage market has recently been crippled and a number of companies stopped originating loans and United States housing sales have slowed and defaults by borrowers have risen."
  • April 18, 2007:Freddie Mac announced plans to refinance up to $20 billion of loans held by subprime borrowers who would be unable to afford their adjustable-rate mortgages at the reset rate.
  • July 10, 2007:Standard and Poor's and Moody's downgraded bonds backed by subprime mortgages.
  • August 1, 2007:Two hedge funds managed by Bear Stearns that invested heavily in subprime mortgages declared bankruptcy.
  • August 9, 2007:American International Group, one of the largest United States mortgage lenders, warned that mortgage defaults were spreading beyond the subprime sector, with delinquencies becoming more common among borrowers in the category just above subprime.
  • October 18, 2007:Standard & Poor's cut the credit ratings on $23.35 billion of securities backed by pools of home loans that were offered to borrowers during the first half of the year. The downgrades even hit securities rated AAA, which was the highest of the ten investment-grade ratings and the rating of government debt.[7]

Plaintiffs also allege that the director defendants and certain other defendants are liable to the Company for waste for: (1) allowing the Company to purchase $2.7 billion in subprime loans from Accredited Home Lenders in March 2007 and from Ameriquest Home Mortgage in September 2007; (2) authorizing and not suspending the Company's share repurchase program in the first quarter of 2007, which allegedly resulted in the Company buying its own shares at "artificially inflated prices;" (3) approving a multi-million dollar payment and benefit package for defendant Prince upon his retirement as Citigroup's CEO in November 2007; and (4) allowing the Company to invest in SIVs that were unable to pay off maturing debt.

 

THE MOTION TO DISMISS UNDER RULE 23.1

The Legal Standard for Demand Excused

… In evaluating whether demand is excused, the Court must accept as true the well pleaded factual allegations in the Complaint. The pleadings, however, are held to a higher standard under Rule 23.1 than under the permissive notice pleading standard under Court of Chancery Rule 8(a). To establish that demand is excused under Rule 23.1, the pleadings must comply with "stringent requirements of factual particularity" and set forth "particularized factual statements that are essential to the claim." …

Plaintiffs have not alleged that a majority of the board was not independent for purposes of evaluating demand. Rather, as to the claims for waste asserted in Count III, plaintiffs allege that the approval of certain transactions did not constitute a valid exercise of business judgment under the second prong of the Aronson test. …

Demand is not excused solely because the directors would be deciding to sue themselves. Rather, demand will be excused based on a possibility of personal director liability only in the rare case when a plaintiff is able to show director conduct that is "so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists."  …

 

Demand Futility Allegations Regarding Plaintiffs' Waste Claims

Count III of the Complaint alleges that certain of the defendants are liable for waste for (1) approving the Letter Agreement dated November 4, 2007 between Citigroup and defendant Prince; (2) allowing the Company to purchase over $2.7 billion in subprime loans from Accredited Home Lenders at one of its "fire sales" in March 2007 and from Ameriquest Home Mortgage in September 2007; (3) approving the buyback of over $645 million worth of the Company's shares at artificially inflated prices pursuant to a repurchase program in early 2007; and (4) allowing the Company to invest in SIVs that were unable to pay off maturing debt.

Demand futility is analyzed under Aronson when plaintiffs have challenged board action or approval of a transaction. With regard to the claims based on the approval of the Letter Agreement and the repurchase of Citigroup stock, plaintiffs do not argue that a majority of the director defendants were not disinterested and independent. Rather, plaintiffs argue that demand is excused under the second prong of the Aronson analysis, which requires that the plaintiffs plead particularized factual allegations that raise a reasonable doubt at to whether "the challenged transaction was otherwise the product of a valid exercise of business judgment."

Delaware law provides stringent requirements for a plaintiff to state a claim for corporate waste, and to excuse demand on grounds of waste the Complaint must allege particularized facts that lead to a reasonable inference that the director defendants authorized "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." The test to show corporate waste is difficult for any plaintiff to meet; indeed, "[t]o prevail on a waste claim ... the plaintiff must overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests."

 

Approval of the Stock Repurchase Program

Plaintiffs' claim for waste for the board's approval of the stock repurchase program falls far short of satisfying the standard for demand futility. Plaintiffs allege that "in spite of its prior buybacks below $50 per share and in spite of the Company's expanding losses and declining stock price, Citigroup repurchased 12.1 million shares during the first quarter of 2007 at an average price of $53.37." Plaintiffs then claim that at the time the buyback of Citigroup stock was halted, the stock was trading at $46 per share. Plaintiffs conclude that the director defendants "authorized and did not suspend the Company's share repurchase program, which resulted in the Company's buying back over $645 million worth of the Company's shares at artificially inflated prices."

Specifically, plaintiffs argue the following:

As set forth in the Complaint, the Director Defendants recklessly failed to consider and account for the subprime lending crisis, the Company's exposure to falling CDO values by virtue of its liquidity puts, and the collective impact on the Company's billions in warehoused subprime loans. Consequently, the Director Defendants are not entitled to the presumption of business judgment and are liable for waste for approving the buyback of over $645 million worth of the Company's shares at artificially inflated prices pursuant to the repurchase program. Under the circumstances, the repurchase program should have been suspended, and would have saved the Company hundreds of millions of dollars. The magnitude of the Director Defendants' utter failure to properly inform themselves of the Company's dire straits has only been highlighted by the Company's recent historically low share prices.

To say the least, this argument demonstrates that the Complaint utterly fails to state a claim for waste for the board's approval of the stock repurchase. Plaintiffs seem to completely ignore the standard governing corporate waste under Delaware law — a standard that requires that plaintiffs plead facts overcoming the presumption of good faith by showing "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." Plaintiffs attempted to meet this standard by alleging that the director defendants approved a repurchase of Citigroup stock at the market price. Other than a conclusory allegation, plaintiffs have alleged nothing that would explain how buying stock at the market price — the price at which presumably ordinary and rational businesspeople were trading the stock — could possibly be so one sided that no reasonable and ordinary business person would consider it adequate consideration. Again, plaintiffs merely allege "red flags" and then conclude that the board is liable for waste because Citigroup repurchased its stock before the stock dropped in price as a result of Citigroup's losses from exposure to the subprime market. In short, the Complaint states no particularized facts that would lead to any inference that the board's approval of the stock repurchase constituted corporate waste. Accordingly, plaintiffs have not adequately alleged demand futility as to this claim pursuant to Rule 23.1.

Approval of the Letter Agreement

Plaintiffs allege that the board's approval of the November 4, 2007 letter agreement constituted corporate waste. Because approval of the letter was board action, demand is evaluated under the Aronson standard. Plaintiffs claim that demand is excused under the second prong of Aronson because the particularized factual allegations in the Complaint raise a reasonable doubt as to whether the approval was "the product of a valid exercise of business judgment."

The directors of a Delaware corporation have the authority and broad discretion to make executive compensation decisions. The standard under which the Court evaluates a waste claim is whether there was "an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade." It is also well settled in our law, however, that the discretion of directors in setting executive compensation is not unlimited. Indeed, the Delaware Supreme Court was clear when it stated that "there is an outer limit" to the board's discretion to set executive compensation, "at which point a decision of the directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste."

According to plaintiffs' allegations, the November 4, 2007 letter agreement provides that Prince will receive $68 million upon his departure from Citigroup, including bonus, salary, and accumulated stockholdings. Additionally, the letter agreement provides that Prince will receive from Citigroup an office, an administrative assistant, and a car and driver for the lesser of five years or until he commences full time employment with another employer. Plaintiffs allege that this compensation package constituted waste and met the "so one sided" standard because, in part, the Company paid the multi-million dollar compensation package to a departing CEO whose failures as CEO were allegedly responsible, in part, for billions of dollars of losses at Citigroup. In exchange for the multi-million dollar benefits and perquisites package provided for in the letter agreement, the letter agreement contemplated that Prince would sign a non-compete agreement, a non-disparagement agreement, a non-solicitation agreement, and a release of claims against the Company. Even considering the text of the letter agreement, I am left with very little information regarding (1) how much additional compensation Prince actually received as a result of the letter agreement and (2) the real value, if any, of the various promises given by Prince. Without more information and taking, as I am required, plaintiffs' well pleaded allegations as true, there is a reasonable doubt as to whether the letter agreement meets the admittedly stringent "so one sided" standard or whether the letter agreement awarded compensation that is beyond the "outer limit" described by the Delaware Supreme Court. Accordingly, the Complaint has adequately alleged, pursuant to Rule 23.1, that demand is excused with regard to the waste claim based on the board's approval of Prince's compensation under the letter agreement.

 

The Motion to Dismiss under Rule 12(b)(6)

The only claim as to which plaintiffs adequately pleaded demand futility is the claim for corporate waste for the board's approval of the letter agreement granting a multi-million dollar compensation package to Prince upon his departure as Citigroup's CEO. When considering a motion to dismiss for failure to state a claim under Rule 12(b)(6), the Court is required to accept as true all well-pleaded factual allegations in the complaint and make all reasonable inferences that logically flow from the face of the complaint in the plaintiff's favor. The Court can only dismiss the complaint if it "determines with `reasonable certainty' that the plaintiff could prevail on no set of facts that may be inferred from the well-pleaded allegations in the complaint."

The standard for pleading demand futility under Rule 23.1 is more stringent than the standard under Rule 12(b)(6), and "a complaint that survives a motion to dismiss pursuant to Rule 23.1 will also survive a 12(b)(6) motion to dismiss, assuming that it otherwise contains sufficient facts to state a cognizable claim." Accordingly, for the same reasons stated in the demand futility analysis, the Complaint contains well-pleaded factual allegations regarding the claim for waste for the approval of the Prince letter agreement that make it impossible for me to conclude with reasonable certainty that the plaintiff could prevail on no set of facts that could be reasonably inferred from the allegations in the Complaint.

 

CONCLUSION

Citigroup has suffered staggering losses, in part, as a result of the recent problems in the United States economy, particularly those in the subprime mortgage market. It is understandable that investors, and others, want to find someone to hold responsible for these losses, and it is often difficult to distinguish between a desire to blame someone and a desire to force those responsible to account for their wrongdoing. Our law, fortunately, provides guidance for precisely these situations in the form of doctrines governing the duties owed by officers and directors of Delaware corporations. This law has been refined over hundreds of years, which no doubt included many crises, and we must not let our desire to blame someone for our losses make us lose sight of the purpose of our law. Ultimately, the discretion granted directors and managers allows them to maximize shareholder value in the long term by taking risks without the debilitating fear that they will be held personally liable if the company experiences losses. This doctrine also means, however, that when the company suffers losses, shareholders may not be able to hold the directors personally liable. …

An Order has been entered consistent with this Opinion.