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American International Group Inc.’s directors decided Wednesday not to participate in a lawsuit that accuses the U.S. government of taking advantage of the company in its rescue from the financial crisis. … “The AIG Board has determined to refuse Starr’s demand in its entirety, and will neither pursue these claims itself nor permit Starr to pursue them in AIG’s name,” the company said in a release. …
Mindful of the potential backlash, a number of AIG directors entered Wednesday’s meeting leaning toward rejecting Starr’s request to join its suit, two people familiar with their thinking said
If you read as much of the Internet as I do, you probably noticed that a lot of people yesterday freaked the fuck out over the pseudo-fact that AIG was considering joining the lawsuit, brought by its ex-CEO Hank Greenberg and his investment company Starr International, against the U.S. government for basically being too mean in bailing out AIG. Some of these people were regulators, Senators, and Congressmen, three of whom penned this cheery missive to AIG:
According to The New York Times, AIG is actively considering suing the U.S. government for monetary damages after American taxpayers rescued your company from its reckless conduct with a $182 billion bailout.
Don’t do it.
Don’t even think about it.
“Don’t even think” is about the advice you’d expect to get from a Congressman, but it is not great advice for a corporate directors, who after all are tasked with thinking carefully and deliberately about things affecting their shareholders. AIG’s directors, as various cooler heads reminded everyone yesterday, actually had a fiduciary duty to think about Greenberg’s lawsuit, and had committed to do so as part of an ongoing federal court case. They didn’t just wake up one day and decide to put “sue government” on the agenda.
To be fair to the freakout brigade, this was not necessarily obvious. If you just hear “AIG is spending Wednesday morning debating whether to sue the government,” your natural conclusion might well be, “assholes.” To reach the correct conclusion – “oh, yeah, I suppose they’re obliged to give Greenberg a hearing, but they’re not going to actually sue the government, that would be insane” – you’d have to know a little bit about the law of Delaware shareholder derivative lawsuits, and as I said yesterday,1 that is such a boring thing to know about that it’s easy to forgive even a Congressman for not knowing about it.
Nonetheless, you are smarter and more devoted to the pursuit of knowledge for its own sake than Congressmen are, so I’m going to tell you about derivative lawsuits. Or rather Carole F. Wilder is, because she already wrote about it in the Pace Law Review in 1985 and what am I, gonna explain derivative lawsuits? No I am not. Here she is:
A shareholder derivative suit is an action brought by a corporate shareholder on behalf of the corporation to enforce a corporate right that the officers and directors of the corporation have failed to enforce. In bringing a derivative suit, a shareholder is asserting that the corporation was harmed, that the corporate officers and directors failed to take action to redress that harm, and that the corporate cause of action has therefore accrued to the corporation’s shareholders in place of its directors. …
One of the oldest and most important of the procedural rules [applicable to derivative suits] is the requirement that prior to instituting a derivative action a shareholder must make a demand on the board of directors to bring the suit. Once demand has been made and rejected, the burden is on the plaintiff shareholder to show why the directors’ decision not to take action should not be respected by the court. Only rarely have courts allowed shareholders to proceed with a derivative suit after a rejected demand. … In these circumstances, some courts have allowed shareholders to proceed with the derivative action, despite director opposition, on the theory that the directors in such cases were either too self-interested or too controlled by the alleged wrongdoers to make a valid business decision to dismiss the suit.2
I quote this for two reasons. First of all, to show why it was so important for AIG’s board to actually have a mock trial this morning – to give Greenberg a real chance to make his best case, so that if the directors said no the court wouldn’t second-guess them for not “mak[ing] a valid business decision.” Thus AIG’s careful listing – to the court that is hearing Greenberg’s lawsuit – of the procedures it would follow, with written submissions from Greenberg and the government, oral argument, and then deliberation among the board. The goal was to create a good record of careful deliberation.
But the second reason to understand the rules is to show how counterproductive the Congressional-regulatory freakout was. All AIG had to do was give Greenberg a careful and dispassionate hearing, wait a week to make it seem like they were thinking hard about his arguments, and then sometime before their self-imposed end-of-January deadline notify the court that they were not joining Greenberg’s lawsuit. That would pretty much be that: Greenberg would have a tough time making out that AIG had not made a “valid business decision” to dismiss the suit, so the suit would be dismissed.3
But now … what now? I will tell you what now. Actually David Boies will tell you what now:
David Boies, who represents Starr, said in an email that his team believes the AIG board’s move “is contrary to the shareholders’ interests.” He said Starr would seek to pursue the claims AIG opted not to back. Whether the AIG board “will be successful in blocking Starr’s efforts to recover damages for their shareholders will ultimately be decided” by the court, he said.
And what will David Boies be saying to the court? I’ll tell you that too. He’ll say that “the directors’ decision not to take action should not be respected by the court.” He’ll say that AIG’s directors “were either too self-interested or too controlled by the alleged wrongdoers to make a valid business decision to dismiss the suit.” He’ll say that “the directors are personally involved or interested in the alleged wrongdoing so that they stand in a ‘dual relation’ to the corporation, which would impair their business judgment or reflect bad faith.” And he’ll base that on the fact that they were threatened and called names and made pariahs and subjected to “ad hominem attacks”4 for even considering joining Greenberg’s lawsuit.
And he’ll note that, despite their promises to the court of “further deliberation” and a “process … designed to ensure to the maximum extent possible that AIG’s Board will have the information and time necessary to make an informed decision on the difficult issues raised by Starr’s demand,” the board made its decision within hours after – and, from news accounts, probably before – this morning’s mock trial. And that they threw their promised deliberative process out the window under pressure.
And he’ll sort of have a point, no? And Greenberg’s lawsuit will drag on. Which is kind of the best he could have hoped for. AIG wasn’t going to join his lawsuit! Really! No matter what any politicians did or didn’t say about it! But what they did say about it, and the results of their pressure, gives him a chance to continue it anyway.
1. In the course of reaching that correct conclusion, by the way, not to brag or anything.
2. A footnote reads in part:
To maintain the suit despite director opposition, the shareholder must show that the suit satisfies the classic test for appropriate derivative action described in Hawes v. Oakland … In addition, the Supreme Court and lower federal courts following it, have held that the decision whether to enforce a corporate cause of action in the courts is ordinarily a business decision that should be left to the discretion of the directors unless the directors are personally involved or interested in the alleged wrongdoing so that they stand in a “dual relation” to the corporation, which would impair their business judgment or reflect bad faith.
Everything I know about excessive footnoting I learned from law reviews.
3. Except, again, as to some claims that Greenberg was asserting directly as a shareholder, rather than derivatively on behalf of AIG. Which are not nothing.
4. Most of the quote marks in that paragraph are from Wilder’s description of derivative-suit law, but “ad hominem attacks” really is Boies’s, from his USA Today piece yesterday. He doesn’t explain what hominem those attacks were ad, which is odd because most of the press and political fury was of the form “we hate AIG for this,” not “we hate individual AIG directors.” But the phrasing is tactical: Boies wants to create the impression that AIG’s directors voted against suing for personal reasons, because they were threatened/berated/etc. themselves, and not for corporate reasons. “Let’s not sue because if we do everyone will hate our company and won’t do business with us” is actually a perfectly good business reason not to join Greenberg’s suit. “Let’s not sue because if we do everyone will think that we personally, the directors, are dicks” is not.