As the Court explained, once a stockholder has made a demand on the board, it can no longer argue that demand be excused on the basis of a claim that the board is conflicted or unable to evaluate the demand. The board becomes entitled to a reasonable period of time to respond to the demand, and any actions it takes in response to the demand are entitled to the protections of the business judgment rule if taken in good faith and in an informed manner. However, the business judgment rule does not protect the board in cases of either:

Consequently, if the plaintiff can raise reasonable doubt surrounding the directors' care, the presumptions of the business judgment rule for purposes of allowing a derivative claim to proceed will not apply. This is so, even if, for purposes of liability, the directors are indemnified from liability under a Section 102(b)(7) provision in the certificate of incorporation.

In light of the facts of the case, the Court had little trouble finding that the presumptions of the business judgment rule should not apply. The plaintiff had pled facts with particularity showing that the board had abdicated its responsibilities by leaving the investigations in limbo for several months and refusing to pay for professional advisers.

The plaintiff argued that the directors had consciously and in bad faith failed to implement any reporting or accounting systems or controls, a failure of oversight known as a Caremark claim (see Practice Note, Fiduciary Duties of the Board of Directors: Duty of Oversight). The Court warned that a Caremark claim, which alleges a breach of the duty of loyalty arising from a failure of oversight, is "possibly the most difficult theory in corporation law" for a plaintiff to prevail on. As the Stone v. Ritter decision emphasized, hindsight after a bad outcome should not dictate a finding of bad faith.

To successfully assert a Caremark claim, the Delaware Supreme Court in Stone v. Ritter outlined two possible scenarios for the plaintiff to prove:

A conscious failure in either of these scenarios meets the standard of a "conscious disregard" of the directors' duties.

In Chong, the Court found that although Fuqi nominally had controls in place, its own disclosures of its material weaknesses showed that it had no "meaningful" controls (emphasis in original). In particular, although the board had regular meetings and its audit committee existed, it had no system at all for regulation of the company's operations "in China" (emphasis in original). In highlighting this shortcoming, the Court referenced its recent bench ruling in Puda Coal, in which Chancellor Strine warned that directors of a Delaware corporation with foreign operations cannot be "dummy directors" and must have a formal system for monitoring those operations (see Legal Update, In re Puda Coal: Delaware Court of Chancery Describes Efforts Required of Directors of Foreign-based Delaware Corporations). The Court also highlighted the board's repeated failure to identify and respond to "red flags" that should have warned of the company's material weaknesses in its controls, which rose to the level of a conscious failure to monitor. Taken together with the board's failure to utilize its audit committee, the Court found sufficient evidence to allow the plaintiff's Caremark claim to proceed.

In ruling against the individual defendants, the Court specifically addressed the two independent directors who resigned from the board in protest. Here as well, the Court made note of the ruling in Puda Coal, which explained that directors cannot avoid liability by resigning. In both cases, the Court found it "troubling" that independent directors would abandon a troubled company to the sole control of those who have harmed the company.