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.