June 28, 2016 Articles

Reexamination of Direct-Derivative Distinction Under Tooley for Common Law 'Holder Claims'

It can be a major barrier to shareholders seeking to recoup individual losses from falling stock prices caused by corporate mismanagement

by John T. Bender

On May 24, 2016, the Delaware Supreme Court held that stockholders could bring direct holder claims against a corporation for losses the plaintiffs allegedly suffered in reliance on misrepresentations made by the company and its directors. Citigroup Inc. v. AWH Inv. P’ship, 2016 Del. LEXIS 310 (May 24, 2016). The case was heard on certification from the U.S. Court of Appeals for the Second Circuit. AWH Inv. P’ship v. Citigroup Inc., 806 F.3d 695 (2d Cir. 2015). Although the court stopped short of officially recognizing holder claims in Delaware, the decision provides important guidance on the direct-derivative distinction in shareholder litigation and likely sets the stage for recognition of direct holder claims under Delaware law in the future.  

Citigroup Case Arises Out of Losses Suffered During the 2007–2008 Financial Crisis
The plaintiffs (an investment partnership and several grantor-retained annuity trusts) appealed a 2013 order of the Southern District of New York dismissing their fraudulent and negligent misrepresentation claims against Citigroup and several Citigroup executives for failure to state a claim. Citigroup cross-appealed the district court’s preliminary ruling that the shareholder claims were direct rather than derivative. The plaintiffs assert they suffered over $800 million in losses between May 2007 and March 2009, when they put off liquidating their Citigroup stock in reliance on public statements and financial reporting by Citigroup that allegedly concealed the financial state of the company. Specifically, the complaint alleges that Citigroup misrepresented “the full extent and impairment of billions in ‘toxic’ assets, including collateralized debt obligations backed by subprime assets” during the onset of the 2007–2008 financial crisis. 

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