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Rich ex rel. Fuqi Int'l, Inc. v. Yu Kwai Chong - 66 A.3d 963 (Del. Ch. 2013)

Rule:

There are two possible scenarios in which a plaintiff can successfully assert a Caremark claim. They are either: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. Under either scenario, a finding of liability is conditioned on a plaintiff's showing that the directors knew they were not fulfilling their fiduciary duties. Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith. Examples of directors' "disabling themselves from being informed" include a corporation's lacking an audit committee, or a corporation's not utilizing its audit committee.

Facts:

In 2009, Defendant Fuqi International, Inc., (Fuqi) a Delaware entity whose sole asset was stock of a Chinese jewelry company, completed a public offering in the United States, and thereafter, announced the need for restatement of its 2009 financial statements. Following the announcement, Fuqi disclosed additional problems it had, including the transfer of $120 million of cash out of the company to third parties in China. In July 2010, plaintiff Rich, Jr., a Fuqi stockholder, made a demand to the board of directors to remedy breaches of fiduciary duty and weaknesses in Fuqi’s internal controls. Fuqi’s Audit Committee commenced an investigation, which was abandoned in January 2012 upon management’s failure to pay the fees of the Audit Committee’s advisors. Plaintiff then brought the present action alleging breaches of fiduciary duty under Caremark. The defendants have moved dismiss the complaint under Rule 23.1, because the Fuqi board has not yet rejected the plaintiff’s demand.

Issue:

Since plaintiff shareholder’s demand has not yet been rejected by the Board of defendant Fuqi, should the plaintiff’s complaint be dismissed?

Answer:

No.

Conclusion:

The court found that the plaintiff pleaded particularized facts that raised a reasonable doubt that the directors acted in good faith in response to the demand. Accordingly, dismissal under Rule 23.1 was not warranted. The facts as alleged allowed a reasonable inference that the directors knew that Fuqi's internal controls were deficient but they failed to act, such that they breached their fiduciary duty. Accordingly, a Caremark claim was sufficiently stated to survive challenge under Rule 12(b)(6). According to the court, dismissal or a stay under the McWane doctrine, based on prior-filed cases in New York, was not warranted, as it was doubtful that the New York courts had personal jurisdiction over defendants.

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