Re Puda Coal, Inc., Stockholders Litig., C.A, No. 64676-CS (Del. Ch. Feb. 6, 2013) (TRANSCRIPT)
The Delaware Court of Chancery declined to dismiss a Caremark claim, among others, brought against the board of directors of a China-based corporation, Puda Coal, Inc. (“Puda”). Puda’s three, U.S.-based, independent directors resigned after learning of plaintiffs’ complaint and allegations that Puda’s chairman and fellow board member secretly transferred control of the company’s sole source of revenue to himself 18 months earlier. The independent directors’ resignations left control of Puda’s board and management in the hands of the alleged thief in China. The Court cautioned persons who agreed to serve as directors of Delaware corporations with substantial operations and assets in other countries with the following:
If you are going to have a company domiciled for purposes of its relations with its investors in Delaware and the assets and operations of the company situated in China that, in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating….What you can’t be is a dummy director in the sense of an actual dummy. Like somebody, a mannequin, somebody who allows themselves to be appointed something without any serious effort to fulfill duties…. I’m talking about the loyalty issue of understanding that if the assets are in Russia, if there’re in Nigeria, if they’re in the Middle East, if they’re in China, that you’re not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty.
In addition to finding that plaintiffs had stated a Caremark-style claim for breach of their oversight function, the Court found that plaintiffs had stated a claim that the independent directors breached their fiduciary duties by resigning when they learned about the allegations in the plaintiffs’ complaint.