Chapter 8: The Role of Corporate Law in Preventing a Financial Crisis – Reflections on In re Citigroup Inc Shareholder Derivative Litigation
Franklin A. Gevurtz INTRODUCTION 1 As we survey the wreck of the economy left in the wake of the recent financial crisis, the question inevitably becomes what to do in order to prevent another such meltdown. This question, in turn, divides into two subsidiary inquiries: (1) What substantive rules are necessary to prevent another crisis; and (2) Who should impose such rules? This chapter looks at one aspect of the latter question. The debates over who should impose rules to prevent another financial crisis tend to focus on agencies that regulate financial institutions (for example, bank regulators) and agencies that regulate financial markets (for example, securities regulators) (Paletta 2009). Commentators have given less attention to the role of government bodies that create and enforce corporate law more generally. The lack of attention given to those responsible for enforcing corporate laws in preventing a future financial crisis seems surprising. After all, one would not assume a priori that corporate law is irrelevant to preventing a crisis involving the collapse or bailout of major corporations. Indeed, among the potentially more significant legal actions to date from the recent crisis has been a shareholder derivative lawsuit seeking to hold the directors of the mega financial firm, Citigroup, liable under Delaware corporate law for the massive losses suffered by the firm (In re Citigroup 2009). This chapter seeks to fill the gap. Specifically, it looks at the role of state legislatures and courts – such as those of the State of Delaware – which are the...
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