Kenneth v. Yeung Chi Shing Holding Inc.

Background

Yeung Bing Kwong Kenneth, Prestige Holdings Ltd., and Commercial Triumph Ltd. sued Yeung Chi Shing Holding (Delaware), Inc. ("Yeung Holding"), Mount Oscar Limited ("Mt. Oscar"), and four individual directors. The plaintiffs alleged an ongoing earnings-stripping and tax-evasion scheme involving nearly $15 million in purported management and advisory fees paid by Yeung Holding to Mt. Oscar, along with other payments and expenses. They asserted six derivative claims on behalf of the entity, including claims under the Racketeer Influenced and Corrupt Organizations Act and claims for breach of directors’ duties. Kenneth also asserted an individual claim under Delaware law alleging wrongful removal as a director and an individual claim seeking a declaration that he was not liable for the directors’ conduct.

Three motions were before the court. The individual defendants moved to dismiss Kenneth’s individual wrongful-removal claim under Federal Rule of Civil Procedure 12(b)(1), or alternatively Rule 12(b)(6), and to strike requests seeking Kenneth’s reinstatement as a director. Yeung Holding moved to dismiss the second amended complaint under Rule 12(b)(6) and Rule 23.1, and Mt. Oscar joined that motion. The plaintiffs opposed the motions and argued that the entity plaintiffs were adequate representatives for the derivative claims.

Rule 23.1 Adequacy Requirement

Rule 23.1 permits a shareholder derivative action only when the representative plaintiff will fairly and adequately protect the interests of similarly situated shareholders or members. The court explained that an adequate representative must be able to prosecute the case vigorously and conscientiously and must not have economic interests antagonistic to the interests of the shareholders represented.

The court found that Kenneth and the entity plaintiffs were inadequate representatives. It concluded that Kenneth, rather than Prestige or Commercial, was the true party in interest because he controlled the entities and drove the litigation. The court also found that Kenneth had conflicts arising from his alleged participation in the events at issue: he had served as a director of Yeung Holding and Mt. Oscar, had approved the agreement underlying the alleged scheme twice, and had received the fees that he claimed were improper. Those circumstances gave him a monetary interest in limiting his own potential liability.

The court also determined that Kenneth’s requested relief reflected personal interests that conflicted with the derivative claims. He sought treble damages against other directors while seeking relief that would protect himself, including a declaration that he was not liable and reinstatement to corporate boards. The court considered these interests, Kenneth’s alleged involvement in approving the agreement, and his multiple related lawsuits in Hong Kong in concluding that he and the entity plaintiffs could not adequately represent the other shareholders.

Disposition

The court granted Yeung Holding’s and Mt. Oscar’s motions to dismiss the second amended complaint because Kenneth and the entity plaintiffs were inadequate representatives under Rule 23.1. The derivative claims included the RICO claims that supplied the asserted federal-question jurisdiction. After dismissing those derivative claims, the court stated that it no longer had subject-matter jurisdiction and that the supplemental-jurisdiction issue was moot.

Because of the seriousness of the allegations, the court granted the plaintiffs leave to amend by substituting an appropriate representative individual or entity that was unaffiliated with and not owned by Kenneth. The order required a third amended complaint by February 21, 2020. It stated that failure to do so would result in dismissal without prejudice for lack of subject-matter jurisdiction effective February 24, 2020.

The court denied as moot the individual defendants’ motion to dismiss Kenneth’s individual Claim 7 and to strike the requests for Kenneth’s reinstatement. The order terminated Docket Numbers 42, 45, and 55. Judge Yvonne Gonzalez Rogers signed the order.