Citigroup Inc. v. AHW Investment Partnership, MFS, Inc.
140 A.3d 1125
| Del. | 2016Background
- Plaintiffs (the Williamses and related entities) were long-time holders of 17.6 million Citigroup shares and sold 16.6 million in March 2009 at $3.09 after retaining shares from May 2007 when they sold 1 million at $55.
- Plaintiffs sued Citigroup and certain officers/directors in federal court asserting Florida-law negligent misrepresentation and common-law fraud "holder" claims: that Citigroup’s misstatements induced them to hold stock and caused their losses.
- Plaintiffs’ damages theory: they would have sold all shares in May 2007 (or at later specified dates) but for Citigroup’s misrepresentations; they seek the difference between those hypothetical sale prices and the March 2009 sale price.
- District Court dismissed the complaint, treating the claims as direct under Delaware law and then applying New York substantive law; it dismissed negligent misrepresentation for lack of special relationship and dismissed the fraud/holder claim as speculative.
- The Second Circuit certified the discrete question whether holder claims based on continuing to hold stock in reliance on issuer misstatements are direct or derivative, given confusion about Tooley’s application and choice-of-law (Delaware vs. NY/FL).
- Delaware Supreme Court held the holder claims are direct under New York or Florida law because those claims belong to the individual holder (not the corporation), and Tooley’s two-part test for fiduciary/derivative claims is inapplicable to holder claims that arise from the holder’s personal rights.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "holder" claims (damages from continuing to hold stock in reliance on issuer misstatements) are direct or derivative | Williamses: These are direct tort claims belonging to holders (negligent misrep. and common-law fraud) and may be brought under NY or FL law | Citigroup: Claims are derivative and governed by Delaware law (so Tooley applies), depriving plaintiffs of standing to pursue direct relief | Held: Holder claims are direct because they belong to the individual holder under NY or FL law; Tooley (a fiduciary-duty/derivative framework) is not the correct analytic tool |
| Whether Delaware law (internal affairs doctrine) controls characterization of the claims | Williamses: Substantive law governing the claims is NY or FL; the claims are personal to holders and not internal-affairs issues | Citigroup: As a Delaware corporation, characterization (direct vs derivative) should follow Delaware law | Held: Delaware cannot convert a claim that another state’s law grants to holders into a corporation-owned claim; characterization follows the nature of the claim under the governing substantive law (here NY/FL) |
| Whether negligent misrepresentation and common-law fraud holder claims must be treated differently for directness | Williamses: Both theories are "holder" claims with identical damages theory; scienter difference does not change ownership of the claim | Citigroup: Distinctions could affect whether claim implicates fiduciary duties or internal-affairs concerns | Held: The scienter distinction affects proof but not ownership—both negligent misrep. and common-law fraud holder claims (if recognized) are direct to holders |
| Whether Tooley’s two-pronged test applies to non-fiduciary tort/contract claims | Williamses: Tooley governs fiduciary-duty derivative claims only; it should not be generalized to all torts | Citigroup: Relied on Tooley to argue claims are derivative under Delaware law | Held: Tooley applies to fiduciary/derivative claims; it does not control analysis when a plaintiff asserts a claim that belongs to her personally (e.g., holder, purchaser, seller, or contract claims) |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (establishes two-pronged test for when fiduciary-duty claims are derivative vs. direct)
- NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175 (Del. 2015) (clarifies Tooley’s limited scope and confirms Tooley is directed to fiduciary/derivative questions, not general tort/contract claims)
- Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (defines the maker of a statement for Rule 10b‑5 purposes and limits personal liability to the entity/person who "makes" the statement)
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) (recognizes purchaser/seller standing distinctions and treats misrepresentations that induce holding or refusing to buy/sell as actionable in analogous ways)
- Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913 (Tex. 2010) (surveyed holder-claim treatment and described requirements, including direct communication and reliance issues)