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

The Court compared Citigroup with the American International Group, Inc.Consolidated Derivative Litigation 91 where, unlike the allegations against the Citigroupdirectors, the defendant directors in the AIG case were charged with failure to exercisereasonable oversight over pervasive fraudulent and criminal conduct:This Court’s recent decision in American International Group, Inc.Consolidated Derivative Litigation demonstrates the stark contrast between theallegations here and allegations that are sufficient to survive a motion to dismiss.In AIG, the Court faced a motion to dismiss a complaint that included “well-pledallegations of pervasive, diverse, and substantial financial fraud involvingmanagers at the highest levels of AIG.” In concluding that the complaint stated aclaim for relief under Rule 12(b)(6), the Court held that the factual allegations inthe complaint were sufficient to support an inference that AIG executives runningthose divisions knew of and approved much of the wrongdoing. The Courtreasoned that huge fraudulent schemes were unlikely to be perpetrated without theknowledge of the executive in charge of that division of the company. Unlike theallegations in this case, the defendants in AIG allegedly failed to exercisereasonable oversight over pervasive fraudulent and criminal conduct. Indeed, theCourt in AIG even stated that the complaint there supported the assertion that topAIG officials were leading a “criminal organization” and that “[t]he diversity,pervasiveness, and materiality of the alleged financial wrongdoing at AIG isextraordinary.”Contrast the AIG claims with the claims in this case. Here, plaintiffs arguethat the Complaint supports the reasonable conclusion that the director defendantsacted in bad faith by failing to see the warning signs of a deterioration in thesubprime mortgage market and failing to cause Citigroup to change its investmentpolicy to limit its exposure to the subprime market. Director oversight duties aredesigned to ensure reasonable reporting and information systems exist that wouldallow directors to know about and prevent wrongdoing that could cause losses forthe Company. There are significant differences between failing to overseeemployee fraudulent or criminal conduct and failing to recognize the extent of aCompany’s business risk. Directors should, indeed must under Delaware law,ensure that reasonable information and reporting systems exist that would putthem on notice of fraudulent or criminal conduct within the company. Suchoversight programs allow directors to intervene and prevent frauds or otherwrongdoing that could expose the company to risk of loss as a result of suchconduct. While it may be tempting to say that directors have the same duties tomonitor and oversee business risk, imposing Caremark-type duties on directors tomonitor business risk is fundamentally different. Citigroup was in the business oftaking on and managing investment and other business risks. To imposeoversight liability on directors for failure to monitor “excessive” risk wouldinvolve courts in conducting hindsight evaluations of decisions at the heart of thebusiness judgment of directors. Oversight duties under Delaware law are not91See supra note 87 and related text.5446095v.126