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

Business Law Today
April 30, 2014, Timothy R. Dudderar and Samuel L. Closic

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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