OPINION
I. OVERVIEW
Thе Plaintiff here, a stockholder, made a demand to the Defendant corporation, asking the corporation to prosecute claims against its officers and directors for violating their Caremark duties. The individual Defendants not only failed to respond to the demand over the next two years, but allegedly took actions making a meaningful response to the demand unlikely if not impossible. Under these facts, the Plaintiff may pursue an action on behalf of the
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This Opinion concerns a motion brought by Defendant Fuqi International, Inc. and its directors to dismiss a derivative complaint alleging breaches of fiduciary duty. Fuqi, a Delaware entity whose sole asset is stock of a Chinese jewelry company, completed a public offering in the United States in 2009. In March 2010, Fuqi announced the need for restatement of its 2009 financial statements. Following this 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 George 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. Fuqi’s independent directors have since resigned.
Plaintiff Rich brought this action in June 2012, alleging breaches of fiduciary duty under Caremark. Now, the Defendants have moved to dismiss the Complaint under Rule 23.1, because the Fuqi board has not yet rejected the Plaintiffs demand. Having found that the Plaintiff has pled particularized facts that raise a reasonable doubt that the directors acted in good faith in response to the demand, I deny the Rule 23.1 Motion. Second, Fuqi moved to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Notwithstanding the well-known difficulty of prevailing on a Caremark claim, the Plaintiff has pled facts that, assumed true, lead me to reasonably infer that the Fuqi directors knew that its internal controls were deficient, yet failed to act. Therefore, I deny the Motion to Dismiss under Rule 12(b)(6). Finally, the Defendant has moved to dismiss or stay this case under the McWane doctrine, in favor of several prior-filed cases in New York. I deny that Motion as well, because I doubt that courts sitting in New York have personal jurisdiction over the Defendants.
In summary, the Defendants’ Motion to Dismiss or Stay this case is denied.
II. BACKGROUND FACTS
A. Parties
Plaintiff Georgе Rich, Jr. is, and at all relevant times has been, a stockholder of Fuqi International, Inc. (“Fuqi”).
Defendant Yu Kwai Chong (“Chong”) is the principal founder of Fuqi and has served as Chairman of the Board since Fuqi’s inception.
B. Fuqi’s Background and Organizational Structure.
Fuqi’s primary operаtions are conducted through a wholly-owned subsidiary, Fuqi International Holdings Co., Ltd., a British Virgin Islands corporation (“Fuqi BVI”) and its wholly owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd. (“Fuqi China”), a company established under the laws of China.
Fuqi was born of a reverse-merger transaction (the “Reverse Merger”) involving Fuqi BVI and VT Marketing Services, Inc. (“VT”), a corporation formed as part of the Chapter 11 reorganization plan ofvi-sitalk.com, Inc.
C. Fuqi’s Public Offering and Associated Disclosures.
Fuqi’s Reverse Merger facilitated Fuqi’s access to the U.S. capital markets.
D. Fuqi Announces Material Weakness in Accounting Methods.
On March 16, 2010, Fuqi announced that its fourth quarter 10-Q and 10-K for 2009 would be delayed because Fuqi had discovered “certain errors related to the accounting of the Company’s inventory and cost of sales.”
B. Fuqi Stockholders File Securities and Derivative Actions Outside of Delaware.
After Fuqi announced that its 2009 financial statements needed restatement, Fuqi stockholders filed several securities and derivative lawsuits on behalf of Fuqi against the Individual Defendants in federal and state courts. Ten securities class action lawsuits were filed in the United States District Court for the Southern District of New York within weeks of the March 16, 2010 press release.
F. Plaintiff Rich Makes a Demand to the Fuqi Board of Directors.
On July 19, 2010, Plaintiff Rich made a demand to the Fuqi Board to commence an action against certain directors and executive officers of Fuqi (the “Demand Letter”).
G. Fuqi Appoints the Special Internal Investigation Committee.
On October 29, 2010, Fuqi announced the appointment of Kim K.T. Pan as a new independent member of the board of directors.
H. Fuqi Discloses Material Weaknesses and Cash-Transfer Transactions.
From the time the Plaintiff sent the Demand Letter to the present, Fuqi has released additional negative information about its accounting errors, lack of internal controls, and mismanagement of corporate resources. For instance, on March 16, 2011, Fuqi filed a Form NT 10-K with the SEC announcing that the financial statements for the quarterly periods ending March 31, 2009; June 30, 2009; and September 30, 2009 would be restated due to accounting errors.
(i) incorrect carve-out of the retail segment from the general ledger;
(ii) unrecorded purchases and accounts payable, (iii) inadvertent inclusiоn of consigned inventory, (iv) incorrect and untimely recordkeeping of inventory movements of retail operation; and (v) incorrect diamond inventory costing, unrecorded purchases and unrecorded accounts payable.47
In other words, Fuqi’s financial statements were replete with basic accounting errors. The Form NT 10-K further disclosed that Fuqi had identified material weaknesses in its disclosure controls, procedures, and internal control over financial reporting.
Two weeks later, Fuqi announced that its Audit Committee was conducting an investigation relating to certain cash-transfer transactions that had been discovered by Fuqi’s independent auditor during
In essence, Fuqi transferred cash out of the company to third parties, outside of the U.S., who have yet to be verified as legitimate businesses. Fuqi has asserted, but not demonstrated, that the cash has been restored. The press release disclosing these events concluded with “[t]he internal investigation is ongoing.”
The following day, because of Fuqi’s ongoing failure to file timely financial statements, NASDAQ delisted Fuqi stock from the exchange.
I. Fuqi’s Investigation.
Although there is no evidence that the Special Committee performed any investigation, the Audit Committee did begin an investigation into Fuqi’s accounting problems. Fuqi’s Audit Committee, which apparently predates its disclosure problems, consisted of board members Hollander, Brody and Liu.
Fuqi’s auditors requested that the Audit Committee perform ah expedited investigation of the cash-transfer transactions.
Whatever рrogress the Audit Committee made in uncovering and correcting the causes of Fuqi’s problems has allegedly stalled. According to Brody and Hollander (two of the three former members of the Audit Committee), Fuqi management failed to pay the fees of the Audit Committee’s outside legal counsel, forensic specialists, and auditor.
Because the Audit Committee has failed to complete its audits of years 2009, 2010, and 2011, Fuqi has not filed any audited financial statements for over three years. As of March 28, 2012, Fuqi has represented to the SEC and to this Court that it is unable to estimate when it will file its audited financial statements.
Although Fuqi has still not completed its investigation, Fuqi has disclosed to its stockholders that the cash-transfer transactions were the result of material weaknesses in Fuqi’s internal controls.
J. Fuqi Experiences Mass Defections in Leadership.
From June 2010 until March 2012, Fuqi’s board of directors and executive team experienced mass defections. These defections are detailed below:
• On June 11, 2010, Xi Zhou Zhuo resigned as Marketing Director of Fuqi;
• On June 16, 2011, Wong resigned as a director but remained as Fuqi’s CFO;
• On June 17, 2011, Chong resigned as Fuqi’s CEO and was replaced by the previously independent director, Kim Pan;
• On July 30, 2011, Wong resigned as Fuqi’s CFO, and CEO Pan also became Interim CFO, which he remained until the time of the Complaint;
• On January 3, 2012, Brody and Hollander resigned as directors;
• On January 16, 2012, Frederick Wong resigned as Vice President of Special Projects; and
• On March 31, 2012, Chen resigned as a director.73
Xi Zhou Zhuo, Wong, Chong, Frederick Wong, and Chen reportedly resigned for “personal reasons.”
Fuqi responded publicly to Brody and Hollander’s grievances in a Form 8-K filed on January 3, 2012.
K. The Allegations against the Individual Defendants.
As a procedural matter, the Plaintiff argues that he should not have to prove demand futility because (1) he made a demand, and (2) “the Board has not acted, is not acting, and will not act in response to the Demand.”
Substantively, the Plaintiff alleges that the Individual Defendants breached their fiduciary duty of lоyalty.
[E]ach of the Individual Defendants knowingly, and in a sustained and systematic manner, failed to institute and maintain adequate internal controls over Fuqi’s accounting and financial reporting, failed to make a good faith effort to correct or prevent the deficiencies and accounting and financial problems caused thereby, and knowingly caused or allowed the Company to disseminate to shareholders false and misleading financial statements.85
The Plaintiff alleges that the Individual Defendants were aware that Fuqi’s public
L. Related Actions and Procedural History.
It should be noted that these parties are involved in a contemporaneous suit before this Court and before a federal court. On July 21, 2010, before filing this action, the Plaintiff filed a complaint seeking an order compelling Fuqi to hold its annual stockholder meeting as required by 8 Del. C. § 211.
Fuqi then sought relief from my Order from the United States District Court for the District of Delaware, seeking “a declaration that Regulations 14A and 14C promulgated by the Securities and Exchange Commission under Section 14 of the Exchange Act preempt Section 211 of the Delaware General Corporation Law.”
The Complaint in this action was filed on June 13, 2012. Fuqi moved to dismiss the Complaint on July 16, 2012.
III. ANALYSIS
A. The Demand Requirement.
As a threshold matter, I must decide whether Fuqi’s failure to respond to the Demand justifies the Plaintiffs prosecution of this suit derivatively. Court of Chancery Rule 23.1 permits a stockholder to pursue an action on behalf of a corporation derivatively, where “the corporation ... [has] failed to enforce a right which may properly be asserted by it....”
By making a litigation demand on a board of directors, a stockholder concedes that the board is able to evaluate the demand, free from concerns of conflicts of interest or lack of independence.
Relatively few Delaware cases have arisen in which a stockholder attempts to move forward with a derivative suit before a board formally responds to the stockholder’s demand. Where the board has taken no action and has simply failed to address the demand, the stockholder satisfies Rule 23.1 and may proceed derivatively if he demonstrates that the failure to act is wrongful, an analysis that in past cases has turned on the time available to the board for response in light of the allegations in the demand.
In Thorpe v. CERBCO, Inc., then-Chancellor Allen applied a business judgment rule analysis to the actions of the CERB-CO board in considering a stockholder demand.
Then-Chancellor Allen found that, since the plaintiff had made a pre-suit demand on the CERBCO board of directors, the plaintiff had conceded the board’s independence and ability to investigate the alleged wrongdoing.
It may be that the special committee did function in good faith and prudently.... One cannot know that yet, but the alleged resignation of the members of the committee from the board following submission of the report is not inconsistent with that possibility. The board however has apparently not acted on that report. No action at all has been taken so far as the complaint (or the record otherwise) shows. How in these circumstances can the committee’s investigation, even if it is presumed to be in good faith and reasonable, itself preclude judicial review of the claim of corporate injury by the self-interested controlling shareholder? Even if one is required to presume the independence of a majority of the board and if one assumes that the special committee operated in good faith and reasonably, nevertheless, the circumstances alleged (the failure of the board to act on the report, the failure to disclose it to the stockholders after request and the resignation of the committee members from the board), if considered to be true, do raise a reasonable doubt concerning the whole board’s good faith and justify my conclusion that the requisites of Rule 23.1 have been satisfied here.128 As in Thorpe, the Fuqi board has taken action in response to the Plaintiffs demand, and asks that I allow it to continue its consideration of the demand, a consideration that has occupied, theoretically, some two-and-one-half years.129 Also consistent with Thorpe, the Plaintiff here has pled facts providing me reason to doubt the good faith of the Fuqi board. The Plaintiff sent the Demand Letter to the Fuqi board of directors on July 19, 2010.130 As a result, the Plaintiff will be deemed to have conceded the independence and disinterestedness of the board.131 Because Fuqi has not formally rejected theDemand Letter, I must determine whether the Plaintiff has pled particular facts creating a reasonable doubt that the Fuqi board is acting in good faith and with due care in investigating the facts underlying the Demand to assess whether the Plaintiff has satisfied Rule 23.1 and may proceed derivatively.
The Plaintiff has alleged that (1) he made a demand; (2) Fuqi took steps to begin an investigation; (3) that investigation appears to have uncovered some amount of corporate mismanagement; (4) Fuqi has not acted on the information uncovered; (5) the Special Committee appointed by the Board to investigate the demand became defunct before making a recommendation; (6) by de-funding the ad-visors to the Audit Committee, Fuqi has deliberately abandoned that investigation, and has taken no action through the Audit Committee for at least 12 months; and (7) the independent directors have left the company, some in protest of management’s actions.
Fuqi’s argument that these allegations are insufficient to raise a reasonable doubt that the Board has acted in good faith is unpersuasive.
The Plaintiff has pled with particularity facts that create a reasonable doubt that the Fuqi board has acted in good faith in investigating the Plaintiff’s demand. Therefore, I find that the requirements of Rule 23.1 have been satisfied. I assess the remainder of Fuqi’s grounds for dismissal under the more lenient pleading standards of Rule 12(b)(6).
B. Caremark Claim and 12(b)(6) Analysis.
The Plaintiff alleges that Fuqi’s directors are liable for failure to oversee the operations of the corporation. Fuqi ar
1. Standard of Review Under 12(b)(6).
Under Court of Chancery Rule 12(b)(6), the Court will dismiss a complaint if the plaintiff has failed to state a claim upon which relief can be granted.
When considering a defendant’s motion to dismiss, a trial court should accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as “well-pleaded” if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.141 Dismissal is improper if, accepting all such inferences, “therе is a reasonable possibility that a plaintiff could recover.”142
2. The Elements of a Caremark Claim.
The essence of a Caremark claim is a breach of the duty of loyalty arising from a director’s bad-faith failure to exercise oversight over the company.
In Stone v. Ritter, the Supreme Court clarified that Caremark claims are breaches of the duty of loyalty, as opposed to care, preconditioned on a finding of bad faith. The Supreme Court affirmed this Court’s language in Caremark holding that “only a sustained or systematic failure of the board to exercise oversight — such as an utter failure to attempt to assure a reasonable information and reporting system exists — will establish the lack of good faith that is a necessary condition to liability.”
(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.148
Under either scenario, a finding of liability is conditioned on a plaintiffs showing that the directors knew they were not fulfilling their fiduciary duties.
I must analyze the facts alleged here under the lenient pleading standard of Rule 12(b)(6), drawing all reasonable inferences in favor of the Plaintiff, to see if it is reasonably conceivable that he may prevail.
In re American International Group, Inc. (“AIG’’) illustrates how Rule 12(b)(6)’s lenient pleading standard eases this Court’s scrutiny of a Caremark claim at the motion-to-dismiss stage. In AIG, the underlying bases of the Caremark claims were several transactions, practices, and deceptive behaviors that caused AIG to restate its shareholder equity by $3.5 billion and to pay $1.6 billion to settle government investigations.
The defendant directors, officers, and employees each moved to dismiss the complaint. In deciding whether the complaint should be dismissed, then-Vice Chancellor Strine illustrated the effect of the requirement, under 12(b)(6), that he draw all reasonable inferences in favor of the plaintiffs:
Although the Stockholder Plaintiffs provide detailed allegations about the illegal transactions and schemes that proliferated at AIG, they are not able to tie all of the defendants directly with the specific facts to all of the schemes. In some instances ... the Complaint only outlines the misconduct that occurred, or plеads the involvement of other [defendants]. But, as discussed above, this is a motion to dismiss, and thus I must grant the Stockholder Plaintiffs the benefit of all reasonable inferences. Even the transactions that cannot be tied to specific defendants support the inference that, given the pervasiveness of the fraud, [the defendants] knew that AIG was engaging in illegal conduct.158
The Court explained that, if the case was analyzed under Rule 23.1, certain defendants would be “well positioned” to argue that the complaint needed more specifics to adequately plead knowledge on the part of the defendants.
a. Fuqi Had No Meaningful Controls in Place.
One way a plaintiff may successfully plead a Caremark claim is to plead facts showing that a corporation had no internal controls in place.
(i) incorrect carve-out of the retail segment from the general ledger;
(ii) unrecorded purchases and accounts payable, (iii) inadvertent inclusion of consigned inventory, (iv) incorrect and untimely recordkeeping of inventory movements of retail operation; and (v) incorrect diamond inventory costing, unrecorded purchases and unrecorded accounts payable.165
These disclosures lead me to believe that Fuqi had no meaningful controls in place. The board of directors may have had regular meetings, and an Audit Committee may have existed, but there does not seem to have been any regulation of the company’s operations in China.
b. The Board of Directors Ignored Red Flags.
As the Supreme Court held in Stone v. Ritter, if the directors have implemented a system of controls, a finding of liability is predicated on the directors’ having “consciously failed to monitor or oversee [the system’s] operations thus disabling themselves from being informed of risks or problems requiring their attention.”
First, Fuqi was a preexisting Chinese company that gained access to the U.S. capital markets through the Reverse Merger. Thus, Fuqi’s directors were aware that there may be challenges in bringing Fuqi’s internal controls into harmony with the U.S. securities reporting systems.
It seems reasonable to infer that, because of these “red flags,” the directors knew that there were deficiencies in Fuqi’s internal controls. Furthermore, NASDAQ’S letter to Fuqi put the board on notice that these deficiencies risked serious adverse consequences. The directors acknowledged as much in their March 2010 press release.
An analysis of the dates of Fuqi’s disclosures demonstrates that it is reasonable, based on the facts pled, to infer that the directors knew that the internal controls were inadequate and failed to act in the face of a known duty. Fuqi announced to stockholders that it was restating its 2009 financial statements and investigating possible “material weaknesses” in its controls in March 2010. Rich sent the Demand Letter in July 2010, and the board appointed the Special Committee in October 2010. In March 2011, Fuqi announced that the cash transfer transactions had occurred between September 2009 and November 2010. These dates indicate that (1) Fuqi’s directors knew that there were material weaknesses in Fuqi’s internal controls at the latest in March of 2010; (2) Rich’s stockholder demand in July 2010 (as well as the myriad securities litigation suits filed) put the directors on notice that the stockholders would carefully scrutinize what was going on at Fuqi; (3) Fuqi had purportedly already begun to “act” on Rich’s demand by November 2010; and (4) despite their knowledge of the weaknesses in Fuqi’s internal controls, the directors allowed $130 million
That these cash transfers were not discovered until March of 2011, when Fuqi’s auditor discovered them, reinforces the inference that the internal controls were (and possibly still are) grossly inadequate. That Chong was able to transfer $130 million out of the company’s coffers, without the directors knowing about it for over a year, strains credulity. Either the directors knew about the cash transfers and were complicit, or they had zero controls in place and did not know about them. If the directors had even the barest framework of appropriate controls in place, they would have prevented the cash transfers.
When faced with knowledge that the company controls are inadequate, the directors must act, i.e., they must prevent further wrongdoing from occurring. A conscious failure to act, in the face of a known duty, is a breach of the duty of loyalty. At the very least, it is inferable that even if the Defendants were not complicit in these money transfers, they were aware of the pervasive, fundamental weaknesses in Fuqi’s controls and knowingly failed to stop further problems from oecur-
Finally, as then-Vice Chancellor Lamb explained in David B. Shaev Profit Sharing Account v. Armstrong, failing to establish an audit committee or failing to utilize an existing audit committee are examplеs of directors’ “disabling themselves from being informed.”
For the reasons above, I find that the Plaintiff has stated a claim under Care-mark upon which relief can be granted.
C. Whether this Suit Should he Stayed.
The decision of whether to stay a ease in favor of a first-filed action is discretionary. As a general rule, litigation should be confined to the state in which the first suit is filed. However, Delaware actions will not be stayed as a matter of right in favor of a prior-filed, out-of-state action.
Here, Fuqi argues that this Court should stay or dismiss this suit in favor of cases that are consolidated and pending before the United States District Court for the Southern District of New York.
1. A Stay in Favor of the Restatement Process or SEC Investigation is Not Appropriate at this Time.
I must deny the Defendants’ request that this suit should be stayed until
2. This Court has the Discretion Not to Stay this Matter in Favor of the Federal Action.
McWane instructs me to freely exercise my discretion in favor of a stay where there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.
IV. CONCLUSION
Having found that the Plaintiff pled particularized facts that raise a reasonable doubt that the directors acted in good faith in failing to respond to the demand, I deny the Motion to Dismiss under Rule 23.1. Likewise, I deny the Defendants’ Motion to Dismiss under Rule 12(b)(6) because the Plaintiff has pled facts that, when assumed true, lead me to reasonably infer that the Fuqi directors knew that its internal controls were deficient, and failed to correct such deficiencies. Finally, I deny the Defendants’ Motion to Stay or Dismiss under McWane, as well, because I doubt that courts sitting in New York have personal jurisdiction over the Defendants. In summary, the Defendants’ Motion to Dismiss or Stay this case is DENIED. An appropriate order accompanies this Opinion.
Notes
. One formerly independent director is currently serving as Fuqi’s CEO.
. Compl. ¶¶ 11, 61, June 13, 2012.
. Id. HI.
. Id. ¶ 2.
. Id. ¶ 9.
. Id. ¶ 2.
.Id. ¶ 13.
. Id.
. Id. ¶ 15.
. Id. ¶ 14.
. Id. ¶ 16.
. Id. ¶¶ 17, 18.
. Id. ¶ 27.
. Id. ¶¶28, 29.
. Id.
. Id.
. Id. ¶29.
. Id. ¶ 30.
. VT had previously reincorporated in November 2006 from Arizona to Nevada. Id.
. Id.
.Id. ¶ 2.
. For example, on May 15, 2009, Fuqi issued a press release stating that "[r]evenues for the first quarter of 2009 incrеased 41.0%...." and that "Net Income ... increased 52%....” Id. at ¶ 32. The press release also contained revenue projections of approximately $90 million for the second quarter of 2009 as well as $450 million for the full year 2009. Id. at ¶ 33. The same day, Fuqi filed a Form 10-Q with the SEC confirming the , financial results and projections of the press release. Id. ¶ 34. The May 15 press release and 10-Q were followed by a July 22, 2009 press release. The July 22 press release claimed that earnings per share would be at or higher than Previously released forecasts. Id. ¶ 35.
. Id.
. Id.
. Id. ¶ 40.
. Id. ¶¶40, 41.
. Id. ¶ 42.
. Id.
. Reed Aff. Ex. B (July 26, 2010 Consolidation Order). These actions arose out of Fuqi’s announcement of accounting errors and alleged material misstatements of Fuqi’s 2009 quarterly public filings in violation of Section 10(b), Rule 1 Ob-5, and Section 20(a) of the Exchange Act. Id.
. Reed Aff. Ex. C., Frank Vanky v. Yu Kwai Chong, et al, Cause No. 10-CV-4028 (S.D.N.Y. Apr. 15, 2010); Reed Aff. Ex. D, Richard C. Starkey v. Yu Kwai Chong, et al, Cause No. 10-CV3346 (S.D.N.Y. Apr. 20, 2010).
. Reed Aff. Ex. F., Gilbert v. Chong, Index No. 601141/2010 (N.Y.Sup.Ct. Apr. 29, 2010). This action was stayed on June 29, 2010 in deference to the federal derivative actions. Reed Aff. Ex. G, Gilbert v. Chong, Index No. 601141/2010 (N.Y. Sup.Ct. June 29, 2010).
. See Reed Aff. Exs. C, D.
. Reed Aff. Ex. B, In re Fuqi Int'l, Inc. Sec. Litig., Cause No. 10-CIV-02515 (July 26, 2010) (the "Federal Action”).
. Reed Aff. Ex. H, Stipulation and Order Regarding Filing of Consolidated Compl. & Am. Compl. and Br. Sched., Feb. 11, 2010. In June 2011, the parties to the Federal Action entered into a protective order to allow the sharing of certain information for the purpose of settlement discussions. Reed Aff. Ex. I, Stipulation and Protective Order Governing Production of Settlement Negotiation Materials, June 3, 2011.
. It is unclear whether a federal court sitting in New York has personal jurisdiction over all or any of the Defendants here. Unlike New York, Delaware has jurisdiction over each of the Defendants here, since Fuqi is a Delaware corporation and its directors are therefore subject to Delaware jurisdiction.
. Id. ¶ 43; Compl. Ex. A, Letter to Yu Kwai Chong, July 19, 2010.
. Compl. ¶ 43.
. Id.
. Id. ¶¶ 64, 65 ("Approximately three months after making the Demand, Fuqi's prior counsel informed Plaintiff’s counsel that the Demand had been referred to the Special Committee for consideration and investigation. Plaintiff has never received a written response to the Demand, but over the course of the ensuing two years Plaintiff’s counsel has had periodic telephonic communications with pri- or counsel for the Company and counsel for the Special Committee.”).
. Id. ¶ 45.
. Id.
. Id.
. Id. ¶ 46.
. Id. ¶¶ 46, 66 ("According to the Special Committee’s counsel, during the time it existed the Special Committee held no meetings and conducted no investigation or any other activities beyond an introductory telephone call with counsel.”).
. Id. ¶ 67. Fuqi argues that Pan is still an active member of the Special Investigative Committee despite his рosition as the company's CEO. Defs.’ Op. Br. 11. However, Pan is also serving as Fuqi's acting CFO and is the leader of the Fuqi management team that failed to pay the fees of the Audit Committee’s legal counsel and consultants in investigating the alleged wrongdoing, as described below. Given these facts, I am content at this point to assume that Pan is not a member of the Special Committee, or at least not a member operating in good faith.
. Compl. ¶ 47.
. Id.
. Id. ¶ 48.
. Id.
. id. ¶ 50.
. Reed Aff. Ex. K, Form 8-K Attaching Press Release Disclosing Status of Audit, Mar. 28, 2011.
. Id.
. Id.
. Id.
. Id.
. Id.
. Compl. ¶ 50.
. id. ¶ 51.
. Id. ¶ 49.
. Id.
. Id. ¶¶ 26, 17-19. Brody and Hollander have since resigned, so it seems that Liu is now the sole member of the Audit Committee. Id. ¶ 58.
. Defs.’ Op. Br. 7.
. Reed Aff. Ex. K, Form 8-K, Mar. 28, 2011.
. id.
. Id.
. Id.
. See Reed Aff. Exs. L, M.
. Id.
. Id.
. Reed Aff. Ex. M, Form 12b-25, Notification of Late Filing (Mar. 28, 2012).
. Reed Aff. Ex. K, Form 8-K, Mar. 28, 2011.
. Id.
. Compl. ¶ 52.
. Id. ¶ 53.
. Id.
. Reed Aff. Ex. L, Form 8-K attaching Letters of Resignation from Brody and Hollander to Fuqi's Board of Directors, Jan. 3, 2012.
. Compl. ¶ 54.
.Id.
. Id.
. Id. ¶ 55.
. Id. ¶¶ 55, 56.
. Id. ¶68.
. Id. ¶¶68, 69.
. Id. ¶ 72.
. Id.
. Id. ¶ 38.
. Id.
. Id. ¶ 39.
. W. ¶ 73.
. See Rich v. Fuqi Int'l, Inc.,
. Id. at *2.
. Id.
. Id. at *5-6. I also denied Fuqi’s request for a partial final judgment, because my ruling left open the possibility of a different result, pending future action by the SEC, and thus was not final. Id. at *5.
. Fuqi Int'l, Inc. v. Rich,
. See Letter to Court from Fuqi Int'l, Inc. 1, Nov. 14, 2012.
. Id.
. In re Fuqi Int'l, Inc., Civil Action No. 12-1457-UNA, at 37:3-6 (D.Del. Nov. 16, 2012) (TRANSCRIPT).
. In re Fuqi Int’l Inc.,
. Defs.’ Mot. Dismiss 1, July 16, 2012.
. Ct. Ch. R. 23.1.
. Id.
. Spiegel v. Buntrock,
. See Rales v. Blasband,
. See Thorpe v. CERBCO, Inc.,
. Spiegel,
. Abbey v. Computer & Commons Tech. Corp.,
. Charal Inv. Co., Inc. v. Rockefeller,
. Thorpe,
. Grimes v. Donald,
. See Ct. Ch. R. 23.1 (requiring a stockhоlder to allege with particularity "the efforts, if any, made by the plaintiff to obtain the action he desires from the directors ... and the reasons for his failure to obtain the action. ...” (emphasis added)).
. Grimes,
. E.g., Charal,
. Cf. Thorpe,
. In re Walt Disney Co. Derivative Litig.,
. Stone v. Ritter,
. Aronson v. Lewis,
. Because the relevant inquiry here is a determination of whether the demand requirement has been satisfied, rather than a determination of liability, a violation of the duty of care in response to the demand is sufficient to remove the board's actions from the business judgment rule presumption, regardless of whether the directors are insulated from liability under § 102(b)(7). The relevant standard of review for a care violation is gross negligence.
. Thorpe,
. Id. at 10-11.
. Id. at 8. The plaintiff stockholders sought to rescind the transaction or to compel an accounting of the control premium the controlling stockholders received. Id.
. Id.
. Id.
. Id.
. Id.
. The report was finished by the end of 1990. Id. The Court’s opinion was published in November 1991. Id. at 5.
. Id. at 10.
. Id. at 10-11.
. Id. at 11.
. Compl. ¶¶ 68, 69.
. Compl. ¶ 43; Compl. Ex. A, Letter to Yu Kwai Chong, July 19, 2010.
. See Thorpe,
. See Defs.’ Op. Br. 10.
. See Aronson,
. Id.
. Fuqi’s explanation that the fees have not been paid because of insurance disputes or billing issues is unsatisfactory. First, the independent directors’ resignations expressly rebut this characterization of the facts. Second, more than one of the professional advis-ors has resigned due to lack of payment. In any event, the facts pled must only raise a reasonable doubt as to the Board’s good faith, which I find they do.
. Defs.' Op. Br. 1.
. See In re Caremark Int’l Inc. Derivative Litig.,
. It may be that some of the former independent directors, including Hollander and Brody, attempted to fulfill their duties in good faith. For example, based on the pleadings and Fuqi’s disclosures, the Audit Committee was attempting to investigate the demand before its efforts were thwarted by management. Nonetheless, even though Hollander and Bro-dy purported to resign in protest against mismanagement, those directors could still conceivably be liable to the stockholders for breach of fiduciary duty. As Chancellor Strine recently noted, it is troubling that independent directors would abandon a troubled company to the sole control of those who have harmed the company. See In re Puda Coal, Inc. S'holders Litig., C.A. No. 6476-CS 15-17, Feb. 6, 2013 (TRANSCRIPT). I do not prejudge the independent directors before evidence has been presented, but neither are those directors automatically exonerated because of their resignations.
. Ct. Ch. R. 12(b)(6).
. Wiggs v. Summit Midstream P'rs, LLC,
. Id. (quoting Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC,
. Id. at *5.
. Stone,
. See Caremark,
. See Stone,
. In re Am. Int’l Group, Inc.,
. Stone,
. Id. at 370 (emphasis added and internal citations omitted).
. Id.
. Id.
. Id.
. David B. Shaev Profit Sharing Account v. Armstrong,
. Compare AIG,
. AIG,
. Id. at 782.
. Id. at 782-83.
. Id. at 782.
. Id.
. Id. at 799.
. Id.
. Id.
. The Defendant has argued that Guttman v. Huang,
.Stone,
. Compl. ¶ 43.
. Id. ¶ 47.
. Chancellor Strine recently suggested that U.S.-based directors of companies with substantial operations outside the U.S. cannot be "dummy directors”; that is, they must actively monitor the extraterritorial operations of the Delaware entity. See Puda Coal, 21:1-4. As the Chancеllor noted, however, any analysis of liability under Caremark is a rigorous inquiry that will depend on the facts of the case. See id. at 18:21-24 ("[P]roportionality comes into play in assessing Caremark and the reasonableness of peoples' efforts at compliance because you can’t watch everybody everywhere. You have to have a system.”).
. Stone,
. In March 2010, Fuqi first disclosed the need for restatement of the 2009 financial statements.
. To the extent that Fuqi argues that it is entitled to extra latitude because it is a Chinese company attempting to comply with American securities regulations, I reject that argument. Fuqi is a Delaware company that must accept both the benefits and the responsibilities associated with being organized under the laws of this State.
. Compl. ¶¶ 40, 41 (acknowledging the likelihood of material weaknesses).
. The sum of the amounts transferred in 2009 ($86.3 million) and 2010 ($47.5 million) equals approximately $130 million.
. See AIG,
.
. McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co.,
. Id.
. Id.
. Id.
. Id.
. Defs.’ Op. Br. 2.
. Id.
. See Rich v. Fuqi Int'l, Inc.,
. McWane,
. See id.