A derivative shareholder lawsuit against AIG was recently dismissed by a federal court judge in New York. Should this give comfort to other directors and officers in litigation resulting from the financial crisis? After all, if a court did not allow claims against management in the wake of the stunning collapse of AIG -- a collapse which almost brought down the entire financial system with it -- how could claims against management of other companies that run into to trouble succeed? However, because the dismissal was based on the defendant shareholders failure to make a pre-suit demand on the board of directors to file a suit against the company's management, the case may not give much solace to other directors and officers.
In the AIG case, the plaintiff-shareholders alleged that the defendants had failed to properly oversee the company’s credit default contracts and had made misleading statements about the company’s financial health and risk management. The plaintiffs also allege defendants wasted corporate resources and breached their fiduciary duties when they caused AIG to increase its dividend and buy back its stock in the months leading up to the company's collapse and government rescue.
The case was brought by shareholders on behalf of the company in what is known as a derivative shareholder suit. Because of the nature of these derivative actions, there are special procedures to allow the company to intervene and decide whether it is in the company's best interests to assert any claims against its own current or former officers and/or directors. One procedural rule requires shareholders who wish to bring derivative actions to first issue a demand upon the corporation to bring the claims. The demand requirement may be excused where the shareholder demonstrates that a demand would be futile.
In the AIG case, the defendants moved to dismiss the case because the plaintiff failed to make a presuit demand. The plaintiff-shareholder contended that demand would have been futile because AIG's board was conflicted and inherently biased against asserting the claims. The judge disagreed and granted the defendant's motion, reasoning that five of the nine directors at AIG in June 2009, when the lawsuit was filed, were disinterested and therefore demand was not excused.
The plaintiffs tried to argue that all of the directors were interested because they faced personal liability even though they were not directly involved in any of the problems in AIG's credit default swap/derivatives unit which took the company down. Plaintiffs claimed that these directors breached their duty of oversight. The court notably rejected this argument, and relied on the Delaware Chancery Court's decision dismissing a similar derivative lawsuit against Citigroup, and wrote that plaintiffs "may not support a claim based on the duty of oversight…merely by identifying signs of general difficulty in the market in which the company participates and asserting that the defendants should be held liable for exercising their business judgment in a manner that appears to have been inconsistent with those indications."
As to the allegations about the issuing dividends and the stock buy-back, the court also found that AIG directors did not face liability:
"AIG’s decision to increase its dividend by a modest ten percent redounded to the benefit of all
shareholders equally and presumably, in the short term, made AIG’s stock more attractive to
investors, thereby heightening demand for the stock, increasing the share price, and potentially
lowering the Company’s cost of capital. Although Plaintiff baldly alleges that “the dividend
declaration was directly tied to the desire to compensate certain Officer Defendants,” Plaintiff
pleads no particularized facts to render this inference plausible. The Court cannot conclude that
this decision was “so egregious or irrational that it could not have been based on a valid
assessment of the corporation’s best interests.”
The case is American International Group Inc 2007 Derivative Litigation, U.S. District Court, Southern District of New York (Manhattan), No. 07-10464.