66 A.3d 963
Del. Ch.2013Background
- Stockholder Rich demanded action for breaches of Caremark duties; Fuqi failed to respond within two years and effectively stalled any meaningful response.
- Fuqi announced restatement of 2009 financials in March 2010 and disclosed about $130 million cash transfers to Chinese entities; NASDAQ later warned of delisting and SEC opened an investigation.
- Fuqi appointed a Special Internal Investigation Committee in Oct. 2010; committee allegedly conducted no meaningful investigation and later dissolved; independent directors resigned by early 2012.
- Fuqi’s Audit Committee investigated cash transfers but lacked funding from management, leading to withdrawals of outside counsel and advisors; by Jan 2012 two independent directors resigned.
- From 2010–2012 Fuqi experienced mass leadership defections, including the CEO, CFO, and several directors, amid governance and control failures.
- Rich filed a derivative complaint in June 2012; court denied 23.1 and 12(b)(6) motions and declined to stay the case under McWane; ruling left derivative action intact.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Demand futility under Rule 23.1 | Rich pled facts raising reasonable doubt of good faith. | Fuqi argues board acted in good faith and investigation ongoing. | Rule 23.1 demand futility satisfied; plaintiff may proceed derivatively. |
| Caremark liability viability | Plaintiff alleges sustained failure to monitor internal controls. | Defendants contend no bad-faith failure shown. | Caremark claim viable under lenient 12(b)(6) standard. |
| Stay or dismissal under McWane | First-filed or pending actions do not justify stay in Delaware. | Prefer NY action; case should stay/dismiss. | McWane stay/dismissal denied; Delaware court will proceed. |
Key Cases Cited
- Thorpe v. CERBCO, Inc., 611 A.2d 5 (Del.Ch. 1991) (business judgment rule applies to demand response where board acted in good faith)
- In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del.Ch. 1996) (failure to oversee may establish duty of loyalty violation)
- AIG (In re American International Group, Inc.), 965 A.2d 763 (Del.Ch. 2009) (lenient 12(b)(6) pleading can support Caremark claims given pervasiveness of wrongdoings)
- Stone v. Ritter, 911 A.2d 362 (Del. 2006) (two pathways to Caremark liability: utter failure to implement controls or conscious failure to monitor)
- Dodge v. Woolsey, 59 U.S. 331 (Supreme Court 1855) (derivative standing from director refusal to act as breach of trust)
- Hawes v. City of Oakland, 104 U.S. 450 (U.S. 1881) (predecessor foundations of derivative suits and demand requirements)
- McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970) (stay considerations and comity in multi-forum actions)