Tag: bad business calls

As the financial world approaches a possible AI and tech bubble, you might be wondering, at what point does a bad business call about AI become a reason for your investors to sue you? 

This may seem like a crazy notion. If you think so, you probably haven’t heard of the shareholder case against Citigroup in 2009. After the collapse of the market in 2008, shareholders sued the board of directors of Citigroup for breach of duty for allowing the company to take on excessive subprime mortgage risk prior to the collapse, resulting in significant losses.  

Taken to court

A lawsuit against your company is never great news. In this case, not only had Citigroup suffered economic losses in the 2008 financial crisis, but the shareholders were also suing the company and the board for a lot more. At the time, the situation didn’t look good for Citigroup. The mob rule mentality and the legal community were looking for scapegoats. The investment bank Lehman Brothers had been allowed to collapse. Citigroup was in a tight spot. 

The case of the Delaware Chancery Court came down to the legal notion of “business judgment.” Was the business judgment of the Citigroup board of directors sufficient or was it actionable? As a media attorney and professor at USC Gould School of Law, I teach my students and advise my clients, who are executives and board members, about the business judgment rule. I’m also working on a new book—TILT the Room, coming out in 2026—which explains how you can use timing, influence, leverage, and trust to better negotiate. 

What is the business judgment rule? 

The business judgment rule protects corporate directors and officers from personal liability for bad business decisions. This is only true provided that the decisions were made in good faith, with the same care a reasonably prudent person would have used, and with the reasonable belief that the director or directors were acting in the best interests of the corporation.  

The courts implement the business judgment rule with the idea that business decisions are better determined in the boardroom than the courtroom. This also helps keep the caseload down in the court system. So, what did this mean in the case of Citigroup? What does this mean for you and your company if you happen to be making business decisions about AI tech before a possible AI tech bubble? 

The case of Citigroup 

In the case of Citigroup, the shareholders claimed that the directors breached their “duty of care” by failing to monitor the bank’s risk profile and failing to control risk-taking by the bank. The evidence included “red flags” before the financial collapse that should have guided the directors’ business judgment.  

One of these flags was raised by New York Times columnist and noted economist Paul Krugman, who pointed out in 2005 that there was a potential bubble in the market. Second, there was the incident of Ameriquest Mortgage closing 229 offices and dismissing 3,800 employees in 2006. Ameriquest was one of the largest subprime mortgage lenders in the United States, and it went under in 2007. With evidence like that, the case didn’t look good for Citigroup. 

Hindsight is 20/20

However, one of the key aspects of any evaluation of the business judgment rule is something known as “ex-ante” review. This basically means there is no Monday-morning-quarterbacking in the law when it comes to business judgment. The Delaware Chancery Court evaluated the Citigroup business decision based on the information at the time, not after the fact, when it turned out to be bad. 

Though the Citigroup board of directors had access to information about deteriorating market conditions, that didn’t mean they knew where the market conditions were going. It also didn’t that those conditions would lead to the worst financial crisis of the 21st century. 

When the Chancery Court looked at the evidence available to Citigroup directors at the time, they determined the directors did not act in bad faith. They were acting in the best interests of the company, which ultimately was to make a profit. Citigroup and its board won that case because it had made a business judgment in good faith, which was an informed decision and ultimately determined to be in the best interests of the company.  

So, as you consider your own AI tech business decisions in the face of chatter in the media and on the internet about a potential AI tech bubble, ask yourself this question: Are you and the executives and board of your company informed, acting in good faith, and doing so in the best interests of the corporation? 

The business judgment rule could save your career, finances, and long-term viability of your company.