In Re China Agritech, Inc. Shareholder Derivative Litigation

2013WL 2181514 (Del.Ch 2013)

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Nature of the Case

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Facts

D purportedly operates a fertilizer manufacturing business in China. D purportedly operates a fertilizer manufacturing business in China. For the most part, Chang and Teng control the company by ownership of most of the stock. Ps claim D is a fraud. Ps sued derivatively to recover damages resulting from (i) D's purchase of stock from a corporation owned by Chang and Teng, (ii) the suspected misuse of $23 million raised by D in a secondary offering, (iii) the mismanagement that occurred during a remarkable twenty-four month period that witnessed the terminations of two outside auditing firms and the resignations of six outside directors and two senior officers, and (iv) the Company's failure to make any federal securities filings since November 2010 and concomitant delisting by NASDAQ. Before filing suit, Ps used Section 220 of the General Corporation Law, 8 Del. C. § 220, to obtain books and records, and his complaint relies both on materials that D produced and on the glaring absence from the production of books and records that the Company should have readily possessed and provided. Chang founded D. Chang has served as the Company's President, Chief Executive Officer, Secretary, and Chairman of the board since February 2005. He owns approximately 55% of D's outstanding common stock, holding 34.1% directly and another 20.8% beneficially through China Tailong Group Limited. By virtue of his stock ownership and positions with the Company, Chang controls China Agritech. Teng co-founded D. Teng has served as a director of the Company since June 2005. From February 3, 2005, until March 13, 2009, she served as the Company's Chief Operating Officer. She owns 1.68% of the Company's common stock directly. Chang and Teng own 85% and 15%, respectively, of Sammi Holdings Limited. This entity owns another 8.4% of the Company's outstanding common stock. For the most part, D does not have in place financial controls required to comply with U.S. financial reporting standards. D attempted to fix the problem but individuals employed and accounting firms under contract were, for the most part, fired, removed or quit. What brought the “fraud” to an end was the McGee Report. Lucas McGee was investigating D and discovered all the alleged plant, equipment, and materials that D claimed it owned was a fraud. D had no licenses to conduct the business it claimed in corporate reports. No one could find or identify any customers of D nor any of 21 alleged distribution centers. McGee tried to purchase at least one bottle of D's product and was unable to even find any anywhere on the planet. D posted a press release on its website denying the allegations and fired i, auditors. Despite the allegations in the McGee Report, the discharge of two outside auditors, and the serial director and officer resignations Ps used Section 220 to conduct a pre-suit investigation. At first, D refused to produce any documents in response. After the litigation began, D began a rolling production of documents which produced 227 pages of documents, approximately half of which were in Chinese. D motioned to dismiss Ps’ lawsuit.