Delaware Supreme Court Holds That Insider Trading Claims Alleging Misuse of Confidential Corporate Information Need Not Show Injury To the Corporation

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In Kahn et al v. Kolberg Kravis Roberts & Co., L.P., No. 1808, 2011 WL 2447690 (Del. June 20, 2011), the Delaware Supreme Court reversed the dismissal of breach of fiduciary duty claims brought by minority shareholders against corporate officers and a controlling shareholder. The Supreme Court held that plaintiffs could state a claim seeking disgorgement by fiduciaries who allegedly profit from using confidential corporate information, even if the corporation did not suffer actual harm. In so holding, the Court rejected earlier, lower court precedent, and declined to limit the disgorgement remedy to a usurpation of corporate opportunity or cases where the insider used confidential corporate information to compete directly with the corporation.

Shareholders of Primedia, Inc. brought a derivative action against officers and directors of Primedia and against Kohlberg, Kravis, Roberts & Co. (“KKR”), which indirectly controlled a majority of Primedia’s common stock. Plaintiffs alleged that the defendants breached their duty of loyalty by causing Primedia to call hundreds of millions of dollars of preferred stock that it was not yet obligated to redeem, enriching KKR at Primedia’s expense. The complaint was amended several times — most recently to add a “Brophy claim” that the KKR defendants breached their fiduciary duties to Primedia by purchasing the preferred stock at a time when they possessed material, non-public information. A “Brophy claim” (see Brophy v. Cities Serv. Co., 70 A.2d 5(Del. Ch. 1949)), is one in which a corporate fiduciary possesses material nonpublic company information and the corporate fiduciary uses that information improperly by making trades because he or she was motivated, in whole or in part, by the substance of that information. See, e.g., In re Oracle Corp. Deriv. Litig., 867 A.2d 904, 934 (Del. Ch. 2004), aff’d, 872 A.2d 960 (Del. 2005).

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