Brophy Revisited

In 2010, the Court of Chancery had the opportunity to re-visit the continued viability of Brophy. In Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010), the Court of Chancery rejected the argument that Brophy is a “misguided vehicle for recovering the same trading losses that are addressed by the federal securities laws.” Instead, the Court of Chancery declared, the “federal insider trading regime as currently structured rests on a foundation of state law fiduciary duties.” However, in so ruling, the Pfeiffer court limited Brophy by observing that the harm addressed is “not measured by insider trading gains or reciprocal losses,” as under the federal regime, but rather by “harm to the corporation” measured by its “ costs and expenses for regulatory proceedings and investigations, fees paid to counsel and other professionals, fines paid to regulators, and judgments in litigation.”

Then, in June 2011, the Delaware Supreme Court was called upon to consider whether Pfeiffer correctly limited Brophy to an action to recover only such litigation and regulatory-related “costs and expenses.” In Kahn v. Kohlberg, Kravis, Roberts & Co., L.P., 23 A.3d 831 (Del. 2011), the Supreme Court rejected Pfeiffer's application of Brophy, concluding instead that Brophy claims should be analyzed “without any assumption that an element of harm to the corporation must exist before a disgorgement equitable remedy is available” against a fiduciary for improperly trading on material, nonpublic information. In so ruling, the Delaware Supreme Court not only re-established that Brophy permits a corporate fiduciary to be sued for insider trading ' without proof of harm to the corporation ' but re-asserted the Delaware courts' role in an area that is more often associated with actions under the federal securities laws.