Chancery Addresses State Law Insider Trading Claim for Second Time in Two Weeks

Chancery Addresses State Law Insider Trading Claim for Second Time in Two Weeks

 Silverberg v. Gold, C.A. No. 7646-VCP (Del. Ch., Dec. 31, 2013) [an enhanced version of this opinion is available to subscribers].

Issue addressed: This Chancery opinion addressed a state law insider trading claim, called a Brophy claim in Delaware. This is the second time in as many weeks that such a claim was discussed in a Chancery opinion. This 40-page decision denied a motion to dismiss based on an alleged failure to make pre-suit demand on the board. The prior Chancery decision earlier this month to address a Brophy claim is described below:

 Chancery Addresses Equitable Tolling of Brophy Claim for Insider Trading

In re Primedia, Inc. Shareholders Litigation, Cons. C.A. No. 6511-VCL (Del. Ch. Dec. 20, 2013) [enhanced version].

Issue Addressed:  Whether equitable tolling of state insider trading claim applied to extend the statute of limitations.

Short Answer:  Yes, in part.

Brief Overview: The procedural background and factual details about this case were highlighted on these pages in connection with several prior decisions by the Court of Chancery and the Delaware Supreme Court.

This case involved a motion for judgment on the pleadings regarding claims that Kohlberg Kravis Roberts & Co. L.P. traded on inside information when purchasing shares of preferred stock of Primedia, Inc.  The specific issues at this procedural stage were whether the claims were barred by laches or if the doctrine of equitable tolling applied to suspend the statute of limitations.  The typical statute of limitations for fiduciary duty claims is 3 years in Delaware.  However, for example, when fiduciaries conceal their misconduct, the statute of limitations can be tolled until the plaintiff is on “inquiry notice” of a cause of action.  This decision provided a description of when inquiry notice would be imputed.

This opinion is also helpful for providing the elements of a Brophy claim for insider trading based on state law, as well as when an inference of scienter will be permitted based on “unusual” timing regarding sales by insiders of company stock.

The Court also discussed Delaware Rule of Evidence 201 regarding judicial notice and when it would be appropriate to take judicial notice of publicly filed documents.  In connection with the claims for insider trading, the Court noted that unless the documents are incorporated by reference in the complaint, if they are not publicly filed, such as a press release, the Court, based on the facts of this case, would not consider them and to that extent the motion to strike was granted in part, and the motion for judgment on the pleadings was granted in part and denied in part.

 Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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