The Board's Duty to Monitor Risk after Citigroup

Abstract

When Citigroup suffered billions of dollars in losses on subprime securities, some of its shareholders sued the bank’s directors alleging that the losses resulted from breaches by the directors of their duty to properly monitor the risks that the bank was running by holding and dealing in such securities. After the Delaware Court of Chancery dismissed the complaint on the pleadings, many academic commentators argued that the court should have taken the opportunity to articulate more stringent legal standards governing director oversight. This contribution to a symposium at the University of Pennsylvania Law School argues that any significant expansion of oversight liability would necessarily involve three things: (a) deleting the scienter requirement of oversight claims articulated in Caremark and Stone in order to recognize oversight suits sounding only in the duty of care; (b) amending or judicially re-writing Section 102(b)(7) of the Delaware General Corporation Law to make exculpation provisions adopted thereunder inapplicable to such duty-of-care oversight claims; and (c) significantly abridging the cardinal principle of Delaware business judgment jurisprudence that courts will not review on the merits the substantive content of a board’s business judgments. Critics of the court’s decision in Citigroup have generally not recognized how extreme are the consequences of their views.

Keywords: oversight, duty to monitor, caremark, risk, risk management, citigroup