The Role of Corporate Law in Preventing a Financial Crisis: Reflections on 'In Re Citigroup Inc. Shareholder Derivative Litigation'

Abstract

This article uses recent events and litigation involving Citigroup to ask whether corporate law as created and enforced by state legislatures and courts - such as the legislature and courts of the State of Delaware - is capable of reducing the possibilities for a replay of the recent financial crisis. Specifically, after presenting the activities within Citigroup as a case study in excessive risk taking by financial institutions, this article outlines generally the tools available to the law to limit the sort of excessive risk taking that occurred at Citigroup and elsewhere. These tools include: regulation of business activities; capital requirements; rules for executive compensation; imposing liability on directors and officers for unreasonable risks; and rules governing the selection of directors and officers. This article then divides these tools into those addressed by banking law (regulation of business activities and capital requirements) and those for which state corporate law plays a role (compensation limits, personal liability for unreasonable risks, and director and officer selection). This article then uses the results in the recent Citigroup litigation as a case study in the limited willingness of state legislatures and courts to use the important tools allocated, at least in part, to corporate law to curb excessive risk taking by financial institutions. Specifically, the article contrasts the weaker standards and application for finding directors and officers liable for their inattention to risk in Citigroup with the probable analysis under a banking law or other regulatory regime. This article also explains why this result is inherent in a regime in which directors and shareholders select which state’s corporate law will govern. The article concludes with a discussion of normative implications.