Reaffirming the standard applied in Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949), the Delaware Supreme Court has upheld disgorgement as an acceptable remedy for a fiduciary’s improper use of material, non-public information for insider trading, even where the corporation suffers no actual harm. The opinion reversed the Chancery Court’s dismissal of plaintiff’s breach of fiduciary duty claims, finding that it is inequitable for fiduciaries to profit from confidential corporate information.

In the subject case, plaintiff-shareholders sued Primedia, Inc. (“Primedia”), its directors, Kohlberg Kravis Roberts & Co., L.P. (“KKR”), and Primedia’s controlling shareholder, alleging breaches of fiduciary duty relating to KKR’s purchase of Primedia preferred stock based on material, nonpublic information. It was alleged that KKR purchased the shares after learning Primedia intended to sell a materially significant asset. The Court, in rejecting multiple Chancery Court opinions, held that the corporation need not suffer harm prior to bringing an insider trading claim. The Court grounded its reasoning in the public policy of preventing unjust enrichment based on the misuse of corporate information and ultimately ordered the disgorgement of defendant’s profits gained from the insider trading. The decision reaffirms Brophy, which held that public policy required an insider to disgorge profits obtained through the use of confidential corporate information, even if the corporation suffered no loss as a result of that insider trading.

Kahn v. Kohlberg Kravis Roberts & Co., Inc., C.A. No. 1808 (Del. June 20, 2011)