Delaware Case Makes it Easier for Duped Shareholders to Sue

In May of this year, the Delaware Supreme Court handed down a decision with major implications for shareholder litigation. It held that shareholders could sue Citigroup directly for losses they suffered when, relying on misrepresentations made by the company and its directors, they abandoned plans to sell securities.

The case, AWH Inv. P’ship v. Citigroup Inc., concerned shareholders who said they suffered over $800 million in losses when they put off liquidating their Citigroup stock due to Citigroup statements that concealed the financial condition of the company. It had been widely assumed that shareholders lacked standing to bring such claims directly under Delaware law because “corporate mismanagement” claims are derivative of the corporation. That is, the shareholders cannot show an injury independent from the harm suffered by the company.

In a victory for shareholders, the Delaware Supreme Court held that the claims pled against Citigroup were direct. The decision is significant because it states that the old test, emphasizing the measure of damages first and foremost, is inapplicable to whether a shareholder has standing to sue a company directly when the company misrepresents material information and thereby induces a shareholder to hold stock instead of selling it. The Delaware Supreme Court indicated it would recognize a direct holder claim if it is based on a right belonging to the plaintiff personally. In light of Delaware’s influence in corporate and securities law, the importance of this case should not be underestimated.