In re China Agritech, Inc. Shareholder Derivative Litigation

China Agritech, Inc. (Agritech) was a fertilizer manufacturer headquartered in China. Albert Rish (plaintiff), a shareholder, filed a derivative suit in the Delaware Court of Chancery against Agritech’s board of directors (defendants), which included Agritech’s two co-founders. Among other claims, Rish asserted that the defendants breached their obligation of good faith due to a systematic lack of oversight at Agritech. In 2008, Agritech established an Audit Committee comprised of directors. In 2009 and 2010, Agritech engaged in a series of major transactions, including acquiring additional interest in a company Agritech’s co-founders owned. At the time, Agritech had five directors including the co-founders. The three other directors sat on the Audit Committee. Despite this and other major transactions, there is no evidence that the Audit Committee met in 2009 or 2010. In August 2010, Agritech disclosed in its Securities and Exchange Commission (SEC) 10-Q filing that material weaknesses had undermined its controls and procedures. In its following 10-Q, Agritech claimed that the weaknesses were fixed and, days later, fired its outside auditor. The Audit Committee approved the firing, but there is no record of the Audit Committee meeting during this time. In addition, Rish alleged that in four of five years, Agritech reported significant profits to the SEC, but reported losses to the parallel regulatory agency in China. Rish argued that making a litigation demand on the defendants would have been futile. The defendants moved to dismiss Rish’s claims on the ground that Rish did not successfully plead demand futility.