Primedia, Inc., Shareholders Litigation, Cons., C.A. No. 6511-VCL (Del.
Ch. May 10, 2013) [an enhanced version of this opinion is available to lexis.com
Whether insider trading claim based on state law should be allowed to proceed
despite motion to dismiss by special litigation committee.
Short Answer: Motion to dismiss denied.
Details of this case were previously highlighted on these
pages in connection with a decision by the Delaware Supreme Court to reverse a
prior ruling by the Court of Chancery in this matter. That Delaware Supreme Court decision, captioned Kahn v.
Kohlberg Kravis Roberts & Co., L.P., 23 A.3d 831, 842 (Del. 2011) [enhanced version], clarified Delaware law
regarding insider trading based on the Delaware Court of Chancery's opinion
in Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949).
This latest decision can be compared
with the recent Chancery decision highlighted in Wayport, highlighted on
these pages, and that discussed the fiduciary duty of disclosure and candor
owed by directors to shareholders, which involved some factual situations akin
to insider trading although those exact words were not directly used in the
opinion as allegations as they were in this case in the Brophy context.
Highlights of Case
The court describes the extensive procedural history which includes the motion
to dismiss filed by the special litigation committee in connection with claims
challenging the redemption, as well as an alleged usurping of corporate
opportunities and the insider trading claim based on Brophy case.
After that motion to dismiss was filed, the plaintiffs engaged in discovery for
approximately 18 months to consider the basis for that decision and the composition
of the committee, which they then used to oppose the motion to dismiss.
The court discussed at pages 17 and 18 the hearing that it conducted prior to
the appeal to the Delaware Supreme Court, and the factors that it considered
pursuant to Zapata Corp. v. Maldonado, 438 A.2d 779, 788 (Del.
1981) [enhanced version]. During that hearing, the
court inquired into the independence and good faith of the committee and the
bases supporting its conclusions. The second step that the court engaged
in during the Zapata hearing, which is a step that the court
takes in its discretion, was to apply its own independent business judgment
regarding whether the motion to dismiss should be granted. Even though
the SLC has the burden of proving its independence and good faith and that it
conducted a reasonable investigation, performing the second step of the
analysis means that the committee could establish its independence and sound
bases for its good faith decisions, but still have the motion to dismiss
court recited the elements of an insider trading claim based on the Court of
Chancery's Brophy decision. See page
The court listed the different cases by the Court of Chancery which over the
years took a different approach on, and had different interpretations of, an
insider trading claim based on the Brophy case. See page
The Court of Chancery in this opinion explained that if it were aware that the
Delaware Supreme Court decision would have allowed damages for full disgorgement
under Brophy, then it would not have dismissed the Brophy claim
in response to the motion to dismiss by the SLC. See page
27. Likewise, the court explained the impact of the Supreme Court
decision on its application of the second prong of the Zapata analysis. See page
Standing of Derivative Plaintiff Post-Merger
The court recited the three-part test under the Delaware Supreme Court decision
in Parnes to determine the standing of a derivative plaintiff
to sue post-merger to challenge the fairness of the merger. See pages
36 and 37. On page 35, the court explained the basis for the claim in
this case for alleging that the merger was not fair to the minority.
The court applied the three-part test to the facts of this case in a thorough
analysis to determine the standing of derivative plaintiffs post-merger. See pages
37 through 52.
Next, however, after determining standing, the court still had to address
whether or not the complaint stated a claim. That analysis was conducted
from pages 52 to 60.
The court concluded that the claims for breach of fiduciary duty against KKR
based on the grounds that the merger was not entirely fair to the minority in
light of the fact that no value was assigned or given to the Brophy claim,
would survive a motion to dismiss, and therefore the motion to dismiss as to
that claim was denied.
The court also rejected a defense based on DGCL Section 102(b)(7) because such
a defense is not available at this stage of the proceedings due to the loyalty
aspect of the entire fairness claim, regardless of what the court described as
"relatively insubstantial allegations of bad faith . . .."
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.
For more information about LexisNexis
products and solutions connect with us through our corporate site.