## Facts

- Fuqi International, Inc., a Delaware corporation operating a jewelry business in China, went public in the United States in 2009.
- In 2010, Fuqi disclosed the need to restate financial statements and reported serious inventory and recordkeeping problems, followed by exchange compliance warnings and eventual delisting.
- Fuqi disclosed that its chairman (later CEO), Yu Kwai Chong, caused approximately $120–$130 million in company cash to be transferred to third parties in China without adequate documentation and without full board awareness.
- In July 2010, stockholder George Rich, Jr. made a written pre-suit demand that the board investigate and cause Fuqi to pursue fiduciary-duty claims and remediate internal-control weaknesses.
- The audit committee initiated a special internal investigation and retained advisors, but the effort stalled; management allegedly stopped paying the advisors, and the investigation was abandoned in January 2012.
- Independent directors resigned amid alleged management interference and non-cooperation, and a formerly independent director later became CEO.
- In June 2012, Rich filed a Delaware derivative action alleging Caremark oversight failures and loyalty breaches based on ignored red flags, financial reporting failures, and the large cash transfers.
- Defendants moved to dismiss under Court of Chancery Rule 23.1 and Rule 12(b)(6), and alternatively sought dismissal or a stay under the McWane first-filed doctrine in favor of New York litigation.

## Issues

1. Whether a stockholder who made a pre-suit demand may proceed derivatively under Rule 23.1 when the board did not formally refuse the demand but allegedly delayed for years and impaired a meaningful response.
2. Whether the complaint stated a non-exculpated Caremark claim by pleading particularized facts supporting a reasonable inference of bad-faith oversight failures.
3. Whether the action should be dismissed or stayed under the McWane doctrine due to earlier-filed New York litigation.

## Decision

- The court denied the Rule 23.1 motion to dismiss, holding the complaint pled particularized facts creating a reasonable doubt that the board acted in good faith in responding to the demand.
- The court denied the Rule 12(b)(6) motion to dismiss, finding the allegations supported a reasonable inference that directors knew of serious control and reporting problems and failed to act, plausibly alleging a bad-faith loyalty breach under Caremark.
- The court denied dismissal or a stay under McWane, citing Delaware’s interest in adjudicating internal-affairs claims of a Delaware corporation and concerns about New York jurisdiction over defendants.

## Legal Principles

- When a stockholder makes a demand, Rule 23.1 requires pleading particularized facts showing the board’s demand response is not entitled to business-judgment deference; prolonged, bad-faith inaction may functionally constitute wrongful refusal.
- A Caremark claim requires well-pled facts supporting an inference of bad faith, including conscious failure to monitor or to respond to known problems; pervasive red flags combined with non-response and interference with investigation can satisfy the pleading standard.
- McWane comity deference to a first-filed action is not warranted where the alternative forum’s ability to bind parties is uncertain and Delaware is the appropriate forum for fiduciary-duty internal-affairs claims.

## Conclusion

The court allowed the derivative action to proceed, holding that a board’s extended, bad-faith failure to address a stockholder demand may be treated as wrongful refusal under Rule 23.1, and that pleaded red flags and an obstructed internal investigation stated a plausible Caremark oversight claim; it also declined to defer to related New York litigation under McWane.


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