The business judgment rule is a "bedrock principle" of Delaware corporate law, and "is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Citigroup, No. 3338-CC, 2009 WL 448192, at *26 (citing Aronson v. Lewis, 473 A.2d 805 (Del. 1984)). The operation of the rule "prevents a judge or jury from second guessing director decisions if they were the product of a rational process and the directors availed themselves of all material and reasonably available information." Citigroup, No. 3338-CC, 2009 WL 448192, at *26.

"Caremark claims" find their name in the seminal case of In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). Caremark was a derivative action in which the directors of Caremark International, Inc. ("Caremark") were alleged to have breached their fiduciary duty of care to Caremark in connection with alleged employee violations of the anti-referral provisions of Federal Medicare and Medicaid statutes. In concluding that the settlement regarding the alleged violations was fair and reasonable, the court recognized a cause of action for "uninformed inaction:"

[A] director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that a failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.

Id. at 970. The court described such an action as "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment." Id. at 967. The court further qualified the cause of action by providing that (1) "only a sustained and systematic failure" of oversight could potentially give rise to director liability for uninformed inaction, and (2) the "level of detail that is appropriate" for the information and reporting systems contemplated in Caremark is a "question of business judgment." Id. at 971.

The Caremark standard was approved by the Delaware Supreme Court in Stone v. Ritter, 911 A.2d 362 (Del. 2006). The Court in Stone clarified that Caremark claims are premised upon the failure of a director to act in good faith, which is a component of the fiduciary duty of loyalty. Id. at 369. In Citigroup, Chancellor Chandler applied the good faith qualification of the Caremark standard by providing that "a showing of bad faith is a necessary condition to director oversight liability." For a more in depth discussion of Caremark and its progeny, see Byron F. Egan, Director Fiduciary Duties under Delaware and Texas Law, available HERE.

The plaintiffs asserted several claims of corporate waste based upon the directors' actions. The Chancellor dismissed each of the plaintiffs' claims for failure to adequately plead demand futility except for the corporate waste claim based upon the directors' approval of an executive compensation package for Citigroup's departing CEO. The executive compensation plan included the payment of $68 million upon the former CEO's departure from Citigroup, as well as "an office, administrative assistant, and a car and driver for the lesser of five years or until he commences full time employment with another employer." Citigroup, No. 3338-CC, 2009 WL 448192, at *55. Under Delaware law, directors have "the authority and broad discretion to make executive compensation decisions." Id. at *54. The court recognized such broad discretion afforded directors under Delaware law regarding executive compensation decisions, but noted that Delaware case law recognizes an "outer limit" to such discretion. Id. (emphasis added). The court reasoned this "outer limit" is breached when "a decision of the directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste." Id. at 51 (citing Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (quoting Saxe v. Brady, 184 A.2d 602, 610 (Del. Ch. 1962))).

The plaintiffs alleged that the multi-million dollar executive compensation package to a departing CEO whose failures were alleged to be partially responsible for the significant losses experienced by Citigroup was sufficient to constitute corporate waste. Citigroup, No. 3338-CC, 2009 WL 448192, at *56. Chancellor Chandler, taking the plaintiffs' well pleaded allegations as true, excused demand in connection with the executive compensation waste claim. In excusing demand, Chancellor Chandler held that (i) there was a reasonable doubt as to whether the board's decision regarding the executive compensation package was "so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration," or (ii) whether the awarded compensation was beyond the "outer limit" allowed under Delaware law. Id. at 51 (citing Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (quoting In re The Walt Disney Co. Derivative Litig., 731 A.2d 342, 362 (Del. Ch. 1998))).

Citigroup, No. 3338-CC, 2009 WL 448192, at *7.

Id. at *7-8.

Under Delaware law the board of directors is vested with the decision making authority regarding the initiation of lawsuits on behalf of the corporation. "Accordingly, in order to cause the corporation to pursue litigation, a shareholder must either (1) make pre-suit demand...to the corporation's directors...and show[] that they wrongfully refused to do so, or (2) plead facts showing that demand upon the board would have been futile." Id. at 18 (citing Stone v. Ritter, 911 A.2d 362, 366-67 (Del. 2006)). The standard for demand futility differs in the context of "board action" and "board inaction." In order to show demand futility the context of board action, a plaintiff must provide "provide particularized factual allegations that raise a reasonable doubt that (1) the directors or disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Id. at *18 (citing Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000)). In order to show demand futility in the context of board inaction, a "plaintiff must allege particularized facts that 'create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.'" Id. at *19 (citing Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)).

In Citigroup, the plaintiffs failed to satisfy the requirements for demand futility by alleging that the directors faced a "substantial threat of personal liability because their conscious disregard of their duties and lack of proper supervision and oversight caused the Company to be overexposed to risk in the subprime mortgage market." In rejecting the plaintiffs’ demand futility claims, the court made clear that "[d]emand is not excused solely because the directors would be...su[ing] themselves...[but] 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.'" Citigroup, No. 3338-CC, 2009 WL 448192, at *20 (quoting Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984)).

Citigroup, No. 3338-CC, 2009 WL 448192, at *24.

Id. at *25.

Id.

Id. at *42.

No. 769-VCS, 2009 WL 366613 (Del. Ch. Feb. 10, 2009).

Citigroup, No. 3338-CC, 2009 WL 448192, at *40.