fiduciary duty issues in m&a transactions - Jackson Walker LLP

good faith attempt to follow the procedures put in place or fail[ing] to assure thatadequate and proper corporate information and reporting systems existed thatwould enable them to be fully informed regarding Citigroup’s risk to the subprimemortgage market.” Plaintiffs point to so-called “red flags” that should have putdefendants on notice of the problems in the subprime mortgage market and furtherallege that the board should have been especially conscious of these red flagsbecause a majority of the directors (1) served on the Citigroup board during itsprevious Enron related conduct and (2) were members of the ARM Committeeand considered financial experts.Although these claims are framed by plaintiffs as Caremark claims,plaintiffs’ theory essentially amounts to a claim that the director defendantsshould be personally liable to the Company because they failed to fully recognizethe risk posed by subprime securities. When one looks past the lofty allegationsof duties of oversight and red flags used to dress up these claims, what is leftappears to be plaintiff shareholders attempting to hold director defendantspersonally liable for making (or allowing to be made) business decisions that, inhindsight, turned out poorly for the Company.The Court commented that the doctrines of the fiduciary duty of care and the business judgmentrule have been developed to address those situations, which placed the burden on the plaintiffsnot only to show gross negligence, but also to rebut the business judgment rule’s presumptionthat the directors acted in an informed basis, in good faith and in the honest belief that the actionwas taken in the best interests of the company.Since Citigroup had a DGCL § 102(b)(7) provision in its certificate of incorporation 90and the plaintiffs had not alleged that the directors were interested in the transaction, theplaintiffs had to allege with particularity that the directors acted in bad faith. The Court said thata plaintiff can “plead bad faith by alleging with particularity that a director knowingly violated afiduciary duty or failed to act in violation of a known duty to act, demonstrating a consciousdisregard for her duties.” In addressing whether the director consciously disregarded anobligation to be reasonably informed about the business and the risks or consciously disregardthe duty to monitor and oversee the business, the Court wrote:The presumption of the business judgment rule, the protection of an exculpatory§ 102(b)(7) provision, and the difficulty of proving a Caremark claim togetherfunction to place an extremely high burden on a plaintiff to state a claim forpersonal director liability for failure to see the extent of a company’s businessrisk.To the extent the Court allows shareholder plaintiffs to succeed on atheory that a director is liable for a failure to monitor business risk, the Court risksundermining the well settled policy of Delaware law by inviting Courts toperform a hindsight evaluation of the reasonableness or prudence of directors’business decisions. Risk has been defined as the chance that a return on an90See supra notes 63 and 64 and related text.5446095v.124