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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