Paul v. China Mediaexpress Holdings, Inc.

2012 WL 28818 (Ch.Del. 2012)

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Nature of the Case

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Facts

P owned stock in D. Citron Research, a financial analyst firm, released a report alleging that D was engaging in fraudulent accounting practices and that most of D's business could be a fraud. Short sellers then piled on and released reports making similar allegations that DE's financial statements and operations were fraudulent. D denied any fraud and accusing the short sellers of acting in concert to promote their own objective of driving down D's stock price. D's independent auditor, Deloitte Touche Tohmatsu ('DTT') formally resigned. In a press release following DTT's resignation, D acknowledged that DTT had stated in its resignation letter that it was 'no longer able to rely on the representations of management,' that certain issues raised in the audit should be addressed through an independent investigation, and that the issues may have adverse implications for prior periods' financial reports. That same day, D requested that NASDAQ temporarily suspend trading in its stock. D's CFO, resigned citing concerns over senior management's failure to respond properly to information which he had 'learned in the past few days' following the resignation of DTT. Dorothy Dong, another D director, resigned shortly after Lam, citing similar concerns over senior management's response to accounting irregularities related to DTT's resignation. Trading was suspended. The Audit Committee of the board retained the DLA Piper law firm to conduct an internal investigation of the concerns raised by DTT. A federal action was filed against D. P then served D with a written demand for inspection of the books and records of the Company pursuant to 8 Del. C. § 220. D did not respond, and P filed this action. P asserts two purposes: (1) to investigate 'possible mismanagement and breaches of fiduciary duties by the directors and officers and (2) to determine whether D's directors are independent and have acted, and are capable of acting, in good faith with respect to the Company's potential misconduct. D opposes inspection demands on the basis that P has failed to state a proper purpose.