The Slow But Sure Evolution of Brophy: Delaware's Common Law Action for Insider Trading

Timothy R. Dudderar and Samuel L. Closic
Business Law Today

Many corporate practitioners both inside and outside of Delaware, at least until re­cently, may likely have considered a com­mon law fiduciary duty claim for insider trading an antiquated notion with only his­torical significance given the federal regime of securities laws developed over the past half-century. Think again. A string of recent Delaware decisions demonstrates that the fi­duciary insider trading claim – known as a “Brophy” claim after the 1949 case that first recognized it as a cause of action in Dela­ware – is anything but antiquated and war­rants attention by not only traditional cor­porate insiders (i.e., directors and officers), but also significant stockholders with board representation or observation rights. Indeed, in certain circumstances, stockholder plain­tiffs may find a higher likelihood of success asserting a fiduciary insider trading claim under Delaware law as opposed to assert­ing a claim arising from the same acts under federal securities laws. Given the Delaware Supreme Court’s recent clarification that disgorgement of any gain realized by the im­proper trades at issue is an available remedy, the incentives for plaintiffs bringing such claims have only increased.

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