Ned L. Sherwood and ZS Edu v. ChinaCast Education Corp

8/3/2019 Ned L. Sherwood and ZS Edu v. ChinaCast Education Corp.

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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

NED L. SHERWOOD and ZS EDU, L.P., Directly

and Derivatively on Behalf of ChinaCast Education

Corporation,

Plaintiff,

v.

RON CHAN TZE NGON, MICHAEL J. SANTOS,JUSTIN TANG, and ANTONIO SENA

Defendants,

and

CHINACAST EDUCATION CORPORATION,

Nominal Defendant.

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C.A. No. 7106-VCP

VERIFIED AMENDED COMPLAINT

Plaintiffs Ned L. Sherwood (Sherwood) and ZS EDU, L.P. (ZS EDU), by their

undersigned attorneys, bring this action on their own behalf and derivatively on behalf of

Nominal Defendant ChinaCast Education Corporation (ChinaCast or the Company) against

Defendants Ron Chan Tze Ngon, Michael J. Santos, Justin Tang, and Antonio Sena (together, the

Individual Defendants), and allege upon personal knowledge as to themselves, and upon

information and belief as to all other allegations herein, as follows:

NATURE OF THE ACTION

1. This is the outrageous story of the three rogue Director Defendants who,desperate to hold onto control of ChinaCast, have taken the unlawful step of casting aside tens of

millions of stockholder votes for Plaintiff Sherwood and his competing slate at the recent Annual

Stockholders Meeting. After realizing that the Sherwood slate would win the election by a

substantial margin, they threw out the slates stockholder votes on the grounds that the


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Sherwood proposal and nominees were improper because of ChinaCasts advance notice by-

laws. Defendants actions directly contravene the clear language of this Courts December 20,

2011 Order and Memorandum Opinion mandating that the ChinaCast Annual Stockholders

Meeting would be moved from December 22, 2011 to January 20, 2012 so that stockholders

would have the chance to vote on Mr. Sherwoods slate of nominees (along with managements

slate). The Director Defendants blatant disenfranchisement of the stockholders, taken in

violation of this Courts Order and Memorandum Opinion, should not be countenanced.

2. Plaintiffs seek a declaration that Defendants have breached their fiduciary dutiesof loyalty, good faith, and due care; a declaration that Plaintiff Sherwood, Derek Feng, and

Daniel Tseung were validly elected to ChinaCasts Board of Directors (Board); an order

maintaining the status quo; and an order holding Defendants in contempt of court with sanctions

against Defendants.

3. Defendants disenfranchisement gambit arose only because they lost the election.Since this Courts ruling on December 20, 2011, the Director Defendants have been running an

aggressive campaign to defeat the Sherwood slate. They have repeatedly urged stockholders to

vote for their slate of nominees and against Sherwood and his slate. ChinaCast and Defendant

Chan have issued numerous press releases and have filed supplemental proxy materials, and

Defendants Chan and Santos and others at managements direction have met with stockholders

throughout the United States to solicit support for their slate and to attack the Sherwood slate,

actions that make clear that Defendants have deemed this a contested election.

4. The Director Defendants, by running such a campaign, recognized that they werein a contested election against Mr. Sherwood and his slate. Indeed, at the Annual Stockholders

Meeting on January 10, 2012, the ballot that was made available to attendees included the


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Sherwood nominees. In other words, the ballot prepared by the Director Defendants themselves

allowed stockholders to vote for Mr. Sherwood and his nominees.

5. However, once the Annual Stockholders Meeting began, it became evident thatMr. Sherwood and his nominees had won three seats on the Board by a substantial margin.

6. Not willing to respect either the vote of the stockholders or this Courts December20, 2011 Order and Memorandum Opinion, the Director Defendants summarily announced

without allowing any discussion that they deemed improper Mr. Sherwood, his slate, and the

proposals, citing Sections 2.2 and 3.3 of the Companys bylaws. In doing so, the Director

Defendants acted in blatant disregard of this Courts clear and unequivocal Order and

Memorandum Opinion. In that Order, this Court issued a temporary restraining order (TRO)

which moved the date of the Annual Stockholders Meeting for the express purpose of allowing

Plaintiff Sherwood to solicit proxies in support of his slate of nominees. The Court specifically

stated that the TRO enable[d] Plaintiffs [Sherwood and ZS EDU] to solicit proxies for their

competing short slate of directors at the Annual Meeting notwithstanding Defendants contrary

construction of Section 3.3 of the Companys bylaws.

7. The Director Defendants disregard for both the vote of the stockholders and thisCourts Order and Memorandum Opinion is chilling and must be corrected.

8. Plaintiffs seek a declaration that Defendants have breached their fiduciary dutiesof loyalty, good faith, and due care; a declaration that Plaintiff Sherwood, Derek Feng, and

Daniel Tseung were validly elected to ChinaCasts Board; an order maintaining the status quo;

and an order holding Defendants in contempt of court with sanctions against Defendants.


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PARTIES

9. Plaintiff Sherwood beneficially owns 3,400,629 shares of ChinaCast commonstock, representing approximately 7% of ChinaCasts outstanding common stock. Sherwood has

been a director of ChinaCast since December 11, 2009. Until September 25, 2011, Sherwood

also served on the Audit Committee and Nominating and Corporate Governance Committee of

ChinaCast.

10. Plaintiff ZS EDU is a Delaware limited partnership that beneficially owns2,625,488 of the 3,400,629 shares of ChinaCast common stock beneficially owned by Plaintiff

Sherwood. Plaintiff Sherwood is a member of the general partner of ZS EDU.

11. Nominal Defendant ChinaCast is a corporation incorporated under the laws ofDelaware with its principal place of business at Suite 08, 20F, One International Financial

Centre, 1 Harbour View Street, Central, Hong Kong. ChinaCast is a leading provider of post-

secondary education and e-learning services in China.

12. Defendant Chan has been a director and Chairman of the Board of Directors ofChinaCast since 2007. Chan also has been the CEO of ChinaCast since its combination with

ChinaCast Communications Holdings Limited in 2007.

13. Defendant Santos has been a director of ChinaCast since 2009. He also is thePresident of ChinaCasts International division.

14. Defendant Justin Tang has been a director of ChinaCast since 2007.15. Defendant Antonio Sena joined ChinaCast in 2004 and currently serves as Chief

Financial Officer.

16. Defendants Chan, Santos, and Tang, as directors of the Company, and DefendantSena, as an officer of the Company, collectively owe fiduciary duties to the stockholders of the


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Company, including Plaintiffs, and owe to the stockholders duties of loyalty, disclosure, good

faith, fair dealing, and due care. As senior officers of the Company, Defendants Chan and

Santos owe the same fiduciary duties to the Companys stockholders as they do as directors.

BACKGROUND

17. On November 14, 2011, ChinaCast filed its definitive proxy statement for its 2011Annual Stockholders Meeting (hereinafter, Proxy Statement), naming Plaintiff Sherwood as a

candidate for reelection to the Board. The Company also set the Annual Stockholders Meeting

for December 2, 2011, at 9:00 a.m. Beijing Standard Time (December 1, 2011 at 8:00 p.m. U.S.

Eastern Standard Time), to be held in Beijing.

18. Via press release on November 30, 2011, the Company announced that it hadpostponed its Annual Stockholders Meeting to December 17, 2011 at 9:00 a.m. Beijing Standard

Time (December 16, 2011 at 8:00 p.m. U.S. Eastern Standard Time).

19. On December 8, 2011, in a supplemental proxy statement (hereinafter, ProxySupplement), the Board disclosed that it had removed Sherwood from the Companys slate of

nominees and had withdrawn its support for Sherwood given Sherwoods alleged improper

behavior, as detailed in the Proxy Supplement. It also publicly announced the second

postponement of the Annual Stockholders Meeting, from December 17, 2011, until December

21, 2011 at 9:00 a.m. Beijing Standard Time (December 20, 2011 at 8:00 p.m. U.S. Eastern

Standard Time).

20. On December 9, 2011, Sherwood sent a letter to the Board regarding his intentionto solicit proxies in favor of a slate of directors that he would nominate at the Annual

Stockholders Meeting. In order to run a competing slate of directors and comply with filing


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requirements under the SEC rules, Sherwood sought relief from this Court to delay the Annual

Stockholders Meeting.

21. On December 12, 2011, Sherwood filed a Verified Complaint against ChinaCastand Defendants Chan, Santos, and Tang, asserting, among other things, that ChinaCasts proxy

materials contained false and misleading statements about Sherwood. In the Verified Complaint,

Plaintiff Sherwood asserted that his removal from the Companys slate was retaliatory in nature

and resulted from his opposition to various actions taken by other Board members, including a

slowdown of the Companys publicly announced share buyback program. Thus, Sherwood

asserted that the Companys Proxy Statement filed on December 8, 2011, which accused him of

various improprieties, failed to disclose the true reason the Board removed him from its slate: to

silence an independent voice. Concurrently with his Verified Complaint, Plaintiffs filed for a

TRO that, if granted, would enjoin ChinaCast from going forward with the scheduled Annual

Stockholders Meeting so that ChinaCast stockholders could consider: (1) additional disclosures

that corrected the false and misleading statements about Plaintiff Sherwood in ChinaCasts Proxy

Statement; and (2) Plaintiff Sherwoods competing slate of nominees.

PROCEDURAL HISTORY

22. On December 20, 2011, this Court ruled that Plaintiffs had met the requirementsof a TRO: that the Verified Complaint asserted at least a colorable disclosure claim; that

irreparable harm would result absent a TRO; and that the balance of harms weighed in favor of

injunctive relief. This Court temporarily enjoined Defendants from holding the Annual

Stockholders Meeting for twenty days, until January 10, 2012 at 9:00 a.m. Beijing Standard

Time (January 9, 2012 at 8:00 p.m. U.S. Eastern Standard Time).


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23. This Court moved the date of the Annual Stockholders Meeting for the expresspurpose of allowing Plaintiff Sherwood enough time to solicit proxies in support of his slate of

nominees. This Court recognized that SEC rules would have effectively prevented Plaintiffs

from soliciting proxies in connection with an Annual Stockholders Meeting held on the

scheduled date, and it was persuaded that Sherwood adequately pled that the ChinaCast

stockholders would be irreparably harmed absent an injunction because they would be prevented

from considering a competing slate of directors.

24. This Court explicitly rejected Defendants argument that Section 3.3 of theCompanys bylaws (the advance notice provision) precluded Plaintiff from nominating his

opposing slate of director nominees. This Court ordered that: Plaintiffs may solicit proxies for

their competing short slate of directors at the Annual [Stockholders] Meeting notwithstanding

Defendants contrary construction of Section 3.3 of the Companys bylaws .

25. Noting that the Companys Board did not inform Plaintiff Sherwood that he wasremoved from the Companys slate of nominees until after the opportunity for a meaningful and

transparent proxy contest had passed, this Court commented that Defendants arguments about

the Companys advance notice bylaw are particularly shortsighted. This Court explained that

while provisions such as the advance notice provision are designed to establish orderly meetings

and election contests and to give fair warning to the corporation to have sufficient time to

respond to stockholder nominations, the purpose of an orderly process and response time is to

benefit the stockholders by providing them ample time to thoughtfully consider nominations and

receive full information and competing arguments. Here, Defendants seek to use the relatively

unique circumstances of this case to frustrate that purpose.


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26. This Court noted further that the interest of the ChinaCast stockholders tipped thebalance of equities in favor of Plaintiff Sherwood, given the importance of the stockholder

franchise under Delaware law: The corporate election process, if it is to have any validity,

must be conducted with scrupulous fairness and without any advantage being conferred or

denied to any candidate or slate of candidates. In the interests of corporate democracy, those in

charge of the election machinery of a corporation must be held to the highest standards in

providing and conducting corporate elections. Defendants have not simply expressed their

disagreement with Sherwoods positions or dissatisfaction with his personal behavior; they have

also excluded him from merely running for election.

27. This Court explained that by removing Plaintiff Sherwood from ChinaCasts slateof nominees less than two weeks before the scheduled Annual Stockholders Meeting and

effectively precluding him from running a competing slate of nominees, Defendants Chan,

Santos, and Tang failed to comport with the scrupulous fairness required of corporate

elections. This Court moved the Annual Stockholders Meeting so that there would be a free

and open election, which included Plaintiff Sherwoods slate: Plaintiffs may solicit proxies for

their competing short slate of directors at the Annual Meeting notwithstanding Defendants

contrary construction of Section 3.3 of the Companys bylaws.

FACTUAL ALLEGATIONS

28. A mere three weeks after this Court reprimanded Defendants for their actions inviolating the scrupulous fairness required of corporate elections by excluding Plaintiff

Sherwood from merely running for election, Defendants have now taken the extraordinary step

of preventing stockholders votes for Mr. Sherwods slate from being counted. The result is that


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the stockholders have been disenfranchised because their votes, which have elected the

Sherwood slate, have been thrown out.

29. When it became abundantly clear at the delayed start of the Annual StockholdersMeeting that stockholders would elect Plaintiff Sherwoods three nominees by a substantial

margin, ChinaCast senior management and its advisors, without Board consultation or approval,

unilaterally ordered a 14-hour recess to delay the completion of the Annual Stockholders

Meeting, thereby throwing out all stockholder votes properly cast in favor of Sherwoods

nominees and proposals. Flouting this Courts Order of December 20, 2011, Defendants have

unquestionably disenfranchised ChinaCasts stockholders in a desperate attempt retain control of

the Board.

A. Defendants Actions Demonstrated Their Recognition of Sherwood and his

Slate as Validly-Nominated Director Nominees

30. Since December 9, 2011, Defendants have known about and acknowledged thatPlaintiff Sherwood and his competing slate were running for election to the ChinaCast Board. In

at least twelve separate public announcements during the past month, the Company and

Defendant Chan have urged ChinaCast stockholders to vote for managements slate and/or

against Sherwoods slate.

31. Indeed, the possibility of Sherwoods competing slate being elected was so realand so threatening to Defendants that Defendant Chan, in a gross breach of his fiduciary duties to

ChinaCast stockholders, publicly announced on December 14, 2011 that if the Sherwood slate

were elected, the entire ChinaCast management team would resign. Chan even went so far as to

convince four executives, as well as Defendants Santos and Sena, to sign statements that they

would not work for the Company, were Sherwood to obtain control of the Board.


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32. Further, Defendants Chan, Santos, and others at their behest have been on aweeks-long road show across the United States, meeting with large ChinaCast investors in an

unsuccessful attempt to convince them to vote for managements slate and against Sherwoods

slate. They also have been calling stockholders seeking their votes. Such actions have taken up

an extraordinary amount of time and Company assets.

33. Defendants also filed a twenty-page investor presentation with ISS ProxyAdvisory Services on December 27, 2011 setting forth detailed arguments urging stockholders to

vote for Defendants slate of six director nominees and against Plaintiff Sherwoods slate, and

explicitly characterizing Plaintiff Sherwood and his nominees as the Dissidents nominees.

Defendants acknowledged that Mr. Sherwoods pursuit of a costly proxy contest could result in

the removal of current key management executives and members of the [Special Committee],

and expressed a concern that the Sherwood nominees would create a hung Board. Thus,

Defendants publicly recognized that they were in the midst of a heated election contest with

Plaintiff Sherwood and his nominees.

34. Defendants actions during the past month constitute evidence that, in the daysleading up to the Annual Stockholders Meeting, Defendants considered Plaintiff Sherwood to be

a legitimate, competing director nominee with a high probability of being elected to the Board,

along with the other nominees on his slate. In other words, Defendants considered this to be a

contested election. In fact, Defendants believed their competition to be so steep so as to require

massive expenditures of Company money and time spent lobbying stockholders in person in the

United States and over the telephone. Indeed, until the very moment before the Annual

Stockholders Meeting when they realized that Sherwoods slate had garnered enough votes to

win, Defendants consistently, and with increasing urgency, acknowledged Sherwood and his


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nominees as strong competitors in the election race. Suddenly, once the votes were counted at

the start of the Annual Stockholders Meeting, Defendants refused to even recognize Sherwood

and his slate as having been properly nominated.

B. Defendants Engage in Blatant Breaches of Fiduciary Duty During the

Annual Stockholders Meeting

35. On January 8, 2012, the Board voted by unanimous written consent to allowDefendant Sena to be the Acting Chairman during the Annual Stockholders Meeting, if

Defendant Chan were unable to attend the Annual Stockholders Meeting in person. Little did the

Board, or at least Mr. Sherwood, know, however, that Defendant Chan would be unable to chair

the Annual Stockholders Meeting because he was campaigning in the United States, on the day

of the meeting in an eleventh-hour attempt to get votes.

36. Further, the Board, or at least Mr. Sherwood, was never told that DefendantsChan, Santos, Tang, and Sena, as well as their legal advisors, had hatched a last-minute scheme

to subvert the will of the stockholders and the order of this Court whereby Defendant Sena would

collect Sherwoods proxies before the start of the Annual Stockholders Meeting, would

conveniently use those proxies to declare a quorum, and then, in the next breath, would deem

improper the nominees and proposals properly brought by Plaintiff Sherwood on the very

grounds rejected by this Court and recess the Annual Stockholders Meeting.

37. In an attempt to plan for and ensure an orderly and fair meeting and electionprocess, counsel for Plaintiffs sent a letter to counsel for Defendants on January 3, 2012,

requesting confirmation of a series of reasonable requests to allow Plaintiff Sherwood to be

heard fairly and fully during the Annual Stockholders Meeting. Plaintiff Sherwood, through his

counsel, informed Defendants of the following, among other things, in this letter: Sherwood

stated that his representatives would attend the Annual Stockholders Meeting; he requested an


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opportunity to address stockholders concerning his proposals; he asked for confirmation from

Defendants counsel that the Company would not adjourn the Annual Stockholders Meeting if a

quorum were present; he stated that because the Annual Stockholders Meeting involved a

contested solicitation, he requested confirmation that the Company would retain IVS Associates,

Inc. (IVS) as independent inspectors of election to tabulate the votes cast in person or by

proxy; and he sought confirmation that the Company would take reasonable and appropriate

steps to ensure that the stockholders are treated fairly and equally in connection with the

tabulation and proxies by IVS.

38.

On January 6, 2012, Defendants counsel responded in writing, assuring Plaintiff

Sherwood that he was permitted to bring up to five guests to the Annual Stockholders Meeting

and that he was permitted to present his proposals and to address the stockholders for three

minutes about these proposals, as long as he agreed in writing to the Rules of Conduct governing

the Annual Stockholders Meeting.

39. Having been assured by the Company that Sherwood would be recognized duringthe Annual Stockholders Meeting as a proper nominee, Sherwood sent Mr. Scott S. Winter of

Innisfree M&A Incorporated to Beijing, at great cost, to attend the Annual Stockholders

Meeting. On January 10, 2012, the Company induced Sherwoods proxy solicitor (Mr. Winter)

to arrive at the Annual Stockholders Meeting and, before the commencement of the meeting, to

hand his proxies to the inspector of elections so that Defendants could establish a quorum and

hold the Annual Stockholders Meeting.

40. On January 10, 2012 at 9:22 p.m. Beijing Standard Time (January 9, 2012 at 8:22a.m. U.S. Eastern Standard Time), Defendant Sena, as Acting Chairman, called the Annual

Stockholders Meeting to order. The IVS inspector of elections handed out a paper ballot to those


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in attendance (the Stockholder Ballot). Item 1 of the Stockholder Ballot contains a section

titled Nominees Proposed by Ned Sherwood, in which stockholders can indicate their votes

(For, Withhold, or Abstain) with respect to Derek Feng and Ned Sherwood. Item 1

contains a footnote indicating: [i]f you would like to vote on Daniel Tseungs election, his name

is under the Companys slate of nominees even though he was nominated by both the Company

and Mr. Sherwood. Items 5 and 6 on the Stockholder Ballot are preceded by a header stating

the following Proposals were made by Ned Sherwood and not the Company. This Stockholder

Ballot evidences Defendants mindset that Plaintiff Sherwood and his slate were proper

nominees, which they communicated to stockholders on the Stockholder Ballot.

41. After Defendant Sena opened the Annual Stockholders Meeting, he askedwhether there was a proxy solicitor in attendance on behalf of Sherwood and asked whether the

solicitor would like to put forward the nominations and proposals of Sherwoods slate of

nominees. At that point, Mr. Winter addressed those in attendance at the Annual Stockholders

Meeting in less than three minutes. He properly put forward the nominations and proposals of

Plaintiff Sherwood and his nominees.

42. Defendant Sena then declared that Mr. Winter did not properly bring thoseproposals under Articles 2.2 and 3.3 of the Companys bylaws. Defendant Sena then declared

that the Company would retain the stockholder votes for inspection, at which point Mr. Winter

objected promptly to this manipulation. Mr. Winter was immediately silenced by an unidentified

attendee to the Annual Stockholders Meeting, who took over the role of Chairman of the meeting

without identifying himself, his role, or his purpose for attending the meeting. The Rules of

Conduct governing the Annual Stockholders Meeting expressly required that [i]n order to speak

at the meeting, you must be either a stockholder of record on October 24, 2011 or must be named


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in a proxy by a stockholder of record as of October 24, 2011. It remains a mystery who this

unidentified attendee was and why he was permitted to violate the Rules of Conduct established

for the meeting.

43. Nevertheless, the unidentified attendee then stated that the Annual StockholdersMeeting would be adjourned until 11:59 p.m. on January 10, 2012 (Beijing Standard Time). Mr.

Winter (Sherwoods proxy solicitor) then objected to the adjournment and moved for a vote on

it. The unidentified attendee silenced Mr. Winter yet again, stating that the Company would not

engage in a legal discussion of the merits of the adjournment and was reserv[ing] its rights

pursuant to some fictitious authority to do so. Then, realizing his mistake in using the word

adjournment, the unidentified attendee stated that he was calling a recess of the Annual

Stockholders Meeting, not an adjournment, and that he would not take a vote on a recess, even

though Mr. Winter requested that he do so.

44. The unidentified attendee stated that the recess was required because theCompany had received a proxy from an unnamed investment advisor fund purporting to

withdraw its votes for Defendants slate. The unidentified attendee declared that in so doing, this

institutional stockholder had violated its fiduciary duty to its shareholders as a registered

investment advisor. He said that this stockholders failure to vote for any issues might indicate a

technical issue. Ironically, after Defendant Sena had disenfranchised all stockholders who had

voted for the Sherwood slate by deeming improper Sherwoods nominees and proposals, this

unidentified attendee stated, on behalf of Defendants, that the recess was needed so that this

institutional stockholder could clarify its intentions and exercise its right to express its vote, a

right that the Company had stolen from Plaintiff Sherwood just moments earlier.


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45. The unidentified attendee then concluded the Annual Stockholders Meeting bystating that the polls would remain open until 11:59 p.m. on January 10, 2012 (Beijing Standard

Time), that a recess would ensue until that time, and that the meeting was officially in recess.

The Company also issued a press release stating that ChinaCast had recessed its Annual

Stockholders Meeting until 11:59 p.m. on January 10, 2012 (Beijing Standard Time), providing

absolutely no reasons or justification for doing so.

C. Sherwood Promptly Notifies the Board of His Objects to Defendants

Conduct During the Annual Stockholders Meeting

46. Within hours of Defendants and their advisors egregious display at the AnnualStockholders Meeting, Plaintiff Sherwood wrote a letter to the Board notifying it of Defendant

Chans and Senas violations of this Courts December 20, 2011 Order and their breaches of

fiduciary duty in manipulating the corporate election machinery and disenfranchising

stockholders.

47. In his letter to the Board dated yesterday, Plaintiff Sherwood exposed Defendantsoffensive and illegal conduct during the Annual Stockholders Meeting for what it was a blatant

attempt to disenfranchise the stockholders and keep control of the Board.

48. In the interest of all ChinaCast stockholders, Plaintiff Sherwood urges this Courtto hold Defendant ChinaCast and the Individual Defendants in contempt of Court for their

manipulation of election machinery and their disenfranchisement of ChinaCast stockholders.

D. Defendants Wrongful Actions Continue During the Conclusion of the

Annual Stockholders Meeting

49. At approximately 12:04 a.m. on January 11, 2012 Beijing Standard Time (11:04a.m. on January 10, 2012 U.S. Eastern Standard Time), Defendant Sena reconvened the Annual

Stockholders Meeting. He opened the meeting and then declared that business had ended. This

portion of the Annual Stockholders Meeting lasted approximately one minute.


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DEMAND IS FUTILE

50. Plaintiffs have not made any demand on the Board of ChinaCast to institute thisaction because doing so would be futile. The Individual Defendants dominate the Board.

Moreover, the Individual Defendants have demonstrated a pattern of misconduct, including

breaching their duty of loyalty and being beholden to the CEO and Chairman of the Board, such

that they would be incapable of responding appropriately to any demand for ChinaCast to

institute this action. The wrongful acts complained of herein demonstrate overt breaches of

fiduciary duty, excusing demand as a matter of law. In addition, the wrongful acts are not the

product of a valid exercise of business judgment and cannot be ratified by the Board.

51. Further, the Individual Defendants approved the wrongs alleged herein to haveoccurred and they are therefore not disinterested parties. Each of the Individual Defendants

exhibited a sustained and systemic failure to fulfill his fiduciary duties, which could not have

been an exercise of good faith business judgment and amounted to gross negligence and extreme

recklessness. Additionally, each of the Individual Defendants has engaged in a course of

conduct demonstrating a history of blind allegiance to ChinaCast management, further

demonstrating his self-interest and lack of independence, making demand futile.

52. In order to bring this suit, the Individual Defendants would be forced to suethemselves and persons with whom they have extensive business and personal entanglements,

which they will not do, thereby excusing demand.

53. And, if the Individual Directors were to bring this derivative action againstthemselves, they would thereby expose their own misconduct, which underlies allegations

contained herein, which admissions would impair their defense of this and any future lawsuits.

In essence, they would be forced to take positions contrary to the defenses they will likely assert


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in this action and future actions. This they will not do, especially in circumstances of fiduciary

breaches as egregious as those at issue in this action. Thus, demand would be futile.

54. Moreover, given the specific facts alleged herein, each of the IndividualDefendants faces a substantial likelihood of liability for breach of their fiduciary duties, which

further excuses demand.

COUNT I

(Direct Claim for Breach of Fiduciary Duties Against the Individual Defendants)

55. Plaintiffs repeat and reallege the allegations set forth in paragraphs 1 through 54as if fully set forth herein.

56. The Individual Defendants owe the utmost fiduciary duties to Plaintiffs asChinaCast stockholders, as well as to all ChinaCast stockholders, and these fiduciary duties

include the duties of loyalty, good faith and due care.

57. The Individual Defendants have breached their fiduciary duties of loyalty, goodfaith and due care in disenfranchising stockholders in the following ways:

a. consistently acknowledging Sherwood and his nominees as strong

competitors in the election race, collecting Sherwoods proxies to declare

a quorum, and then, deeming improper the nominees and proposals

properly brought by Plaintiff Sherwood;

b. improperly silencing objections to the illegal conduct invoking the

advance bylaw notice provision to prevent a competing slate from being

presented;

c. illegally calling for a recess of the Annual Stockholders Meeting without

reason or justification in order to manipulate the outcome of the election;

and


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d. failing to count properly submitted stockholder votes for any of

Sherwoods director nominees.

58. As a result of the Individual Defendants breaches of fiduciary duty, Plaintiffshave been damaged.

59. The Court should therefore issue a declaration that Defendants have breachedtheir fiduciary duties of loyalty, good faith and due care. The Court should also grant an

injunction prohibiting Defendants from continuing to commit such breaches.

COUNT II

(Direct Claim for Breach of Fiduciary Duties Against the Individual Defendants)


61. Plaintiffs bring this claim derivatively on behalf of ChinaCast.62. The Individual Defendants owe the utmost fiduciary duties to Plaintiffs as

ChinaCast stockholders, as well as to all ChinaCast stockholders, and these fiduciary duties

include the duties of loyalty, good faith and due care.

63. The Individual Defendants have breached their fiduciary duties of loyalty, goodfaith and due care in disenfranchising stockholders in the following ways:

a. consistently acknowledging Sherwood and his nominees as strong

competitors in the election race, collecting Sherwoods proxies to declare

a quorum, and then, deeming improper the nominees and proposals

properly brought by Plaintiff Sherwood;

b. improperly silencing objections to the illegal conduct invoking the

advance bylaw notice provision to prevent a competing slate from being

presented;


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c. illegally calling for a recess of the Annual Stockholders Meeting without

reason or justification in order to manipulate the outcome of the election;

and

d. failing to count properly submitted stockholder votes for any of

Sherwoods director nominees.

64. As a result of the Individual Defendants breaches of fiduciary duty, Plaintiffshave been damaged.

65. Plaintiffs are excused from making a demand on the ChinaCast Board becausedoing so would be futile, as set forth in paragraphs 50 to 54 above.

66. The Court should therefore issue a declaration that Defendants have breachedtheir fiduciary duties of loyalty, good faith and due care. The Court should also grant an

injunction prohibiting Defendants from continuing to commit such breaches.

COUNT III

(Declaratory Judgment Declaring The Valid Election of Ned Sherwood, Derek Feng, and

Daniel Tseung to ChinaCasts Board)


68. Based upon the overwhelming number of stockholder votes for Sherwoodsnominees, the Court should confirm the stockholder vote and issue a declaration that Ned

Sherwood, Derek Feng, and Daniel Tseung were validly elected to ChinaCasts Board.

69. Defendants impermissibly deemed improper the nominees and proposals properlybrought by Plaintiff Sherwood and illegally called a recess when they realized that Sherwoods

slate had garnered enough votes to win.


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70. Defendants should not be permitted to disenfranchise stockholders by refusingcounting any votes for Sherwoods slate and certifying an outcome contrary to the will of the

stockholders.

71. Plaintiffs are entitled to a declaration that Ned Sherwood, Derek Feng, and DanielTseung were validly elected to ChinaCasts Board.

COUNT IV

(Finding Defendants in Contempt of Court and Imposing Sanctions)


73. As set forth more fully in Plaintiffs Expedited Motion to Hold Defendants inContempt of Court and for Sanctions, the defendants have violated the Courts TRO by invoking

Sections 2.2 and 3.3 of the Companys bylaws as a basis to deem improper the nominees and

proposals properly before the Annual Stockholders Meeting.

74. Defendants actions are in direct violation of the spirit and letter of this CourtsDecember 20, 2011 TRO which specifically ordered that Plaintiffs be enable[d] [] to solicit

proxies for their competing short slate of directors at the Annual Meeting notwithstanding

Defendants contrary construction of Section 3.3 of the Companys bylaws.

75. The Court should therefore find Defendants in contempt of this Courts TRO andimpose the sanctions set forth in Plaintiffs Expedited Motion to Hold Defendants in Contempt

of Court and for Sanctions.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs respectfully request that the Court enter its order and judgment

as follows:

A. Declaring that the Individual Defendants have breached their fiduciary duties;


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B. Declaring that that Ned Sherwood, Derek Feng, and Daniel Tseung were validly

elected to ChinaCasts Board;

C. Finding Defendants in contempt of this Courts TRO and imposing sanctions;

D. Ordering that the Company compensate Plaintiffs for the expenses of solicitation

and all costs and expenses incurred as a result of Defendants misconduct alleged herein; and

E. Granting such other and further relief as the Court may deem just and proper.

OF COUNSEL:Adam H. Offenhartz

Brian M. Lutz

Mary Kay DunningAbraham Shaw

Gibson, Dunn & Crutcher LLP200 Park Avenue

New York, New York 10166(212) 351-4000

Dated: January 10, 2012

/s/Raymond J. DiCamillo________________

Raymond J. DiCamillo (#3188)Kevin M. Gallagher (#5337)

Susan M. Hannigan (#5342)Richards Layton & Finger, P.A.

920 N. King Street

Wilmington, Delaware 19801(302) 651-7700

Attorneys for Plaintiffs Ned L. Sherwood and

ZS EDU, L.P.

Documents

Ned L. Sherwood and ZS Edu v. ChinaCast Education Corp