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Rich ex rel. Fuqi International, Inc. v. Yu Kwai Chong

66 A.3d 963 (2013)

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Rich ex rel. Fuqi International, Inc. v. Yu Kwai Chong

Delaware Court of Chancery

66 A.3d 963 (2013)

Facts

Fuqi International, Inc. (Fuqi) sold jewelry made with precious metals and gemstones. Fuqi, originally a Chinese company, became a Delaware corporation after merging with a firm in the United States but kept its principal place of business in China. In 2010 Fuqi experienced financial troubles that revealed problems with its recordkeeping. Fuqi’s board of directors (the board) (defendant) disclosed that Fuqi had engaged in incorrect and error-filled recordkeeping of its inventory, including unrecorded purchases and inclusion in its inventory of items it no longer owned. NASDAQ sent Fuqi letters notifying the board that its recordkeeping errors would have adverse consequences. Later, Fuqi was delisted from NASDAQ. It was also revealed that Yu Kwai Chong, the chairman of the board, transferred $130 million from Fuqi to unknown parties in China without the rest of the board’s knowledge. George Rich (plaintiff), a Fuqi shareholder, filed a shareholder derivative suit in Delaware Chancery Court against the board, alleging that the directors breached their duty of loyalty by failing to oversee Fuqi’s actions. The board filed a motion to dismiss, arguing that Rich failed to show they had acted in bad faith.

Rule of Law

Issue

Holding and Reasoning (Glasscock, J.)

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