Here's an explanation for the abrupt resignation of former Citigroup CEO Vikram Pandit that I bet you haven't heard before: Pandit quit in October, along with Citi COO John Havens, because of a say-on-pay suit against Citi's board underway for several months in federal court in Manhattan.

Yep: Shareholder lawyers in the derivative suit want to take discovery on the supposed "causal connection between the actions of the plaintiffs and their counsel" and the Citi departures, with an eye toward claiming fees based on the resignations and the subsequent forfeiture of millions of dollars of compensation by Pandit and Havens. Skeptical? So is Citi, which filed a letter Thursday with U.S. District Judge Paul Oetken arguing that the say-on-pay case had no merit to begin with and conferred no benefit on Citi shareholders.

The dispute is an interesting twist in the brief annals of say-on-pay litigation, which has generally been a disappointment for plaintiffs' lawyers. The first wave of cases, in which lawyers filed derivative suits against corporate boards after shareholders voted no on executive pay packages, crashed ineffectually, with all but a couple of cases tossed because plaintiffs didn't serve demand notices on board members and couldn't show such demands would have been futile. A second wave of say-on-pay injunction suits, filed in advance of shareholder meetings, has produced some settlements, but corporations have more recently been resisting these claims as well.

The Citi case fell into the first category. Plaintiffs' lawyers rushed to bring breach-of-duty claims in April, after Citi shareholders embarrassed the board by rejecting pay packages for Pandit and other top executives. The derivative suits were eventually consolidated, with The Weiser Law Firm and Robbins Umeda named co-chairs of the plaintiffs' executive committee. Shareholders filed an amended complaint in August. Citi (represented by Sidley Austin) and the individual defendants (represented by Paul, Weiss, Rifkind, Wharton & Garrison and Willkie Farr & Gallagher) moved to dismiss the suit on Oct. 11.

Less than a week later, Pandit and Havens quit. The plaintiffs wrote to the board to protest the severance packages the departing officials were reportedly slated to receive. Soon thereafter, Citi filed a report with the Securities and Exchange Commission disclosing that Pandit and Havens had agreed to forfeit some of their compensation, as much as $43 million, according to plaintiffs' lawyers.

The shareholder firms opted not to oppose the defense motion to dismiss the case against board members, but informed Judge Oetken that they intended to seek fees for the benefits their suit had brought to shareholders. They cited an analyst report by GMI Ratings that asserted their derivative suit "was likely a source of contention between Mr. Pandit and the board." They also argued that in order to be awarded fees under Delaware Supreme Court precedent in Chrysler v. Dann, they had only to show that they had "some reasonable hope" of withstanding a motion to dismiss.

"Defendants bear the burden of demonstrating that there was no causal connection between the lawsuit and the corporate benefit in order to defeat an application for fees and expenses," the plaintiffs' firms wrote in a letter to Oetken requesting discovery -- including depositions of Citi board members -- to support their fee request. "The need for discovery here is especially critical because in ruling on the fee application, the court will look to what actions defendants may have taken in response to the actions of plaintiffs and their counsel in determining whether it can reasonably infer that the action was meritorious."

Citi and the individual defendants responded with a letter on Thursday that argued the plaintiffs were wrong about the standard for a fee award. "They are not entitled to an award of fees unless they demonstrate that their claims were meritorious when filed, which is a dispositive threshold issue," wrote Willkie in a joint defense letter. "Plaintiffs cannot meet that threshold burden, as defendants' unopposed motion to dismiss has already shown. It would be unprecedented to permit plaintiffs to take the broad and intrusive discovery they seek under the guise of a fee application when they lacked standing to bring their meritless complaint in the first place."

The judge has given plaintiffs until Jan. 25 to submit their fee application, with briefing to follow in February and March. I left messages for plaintiffs' lawyer Robert Weiser and defense counsel Mary Eaton of Willkie but didn't hear back.

(Reporting by Alison Frankel)

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