Introduction
This article examines the legal concept of fiduciary duty within the context of a shareholder derivative action. It specifically delves into the case of Kahn v. Kolberg Kravis Roberts & Co. L.P., exploring allegations of insider trading and breach of loyalty owed to a corporation and its shareholders.
Background of the Case
The case involved a prominent investment firm specializing in management buyouts. This firm, holding a controlling interest in a media company (approximately 60% of its stock), also had designated representatives on the company’s board of directors.
In the early 2000s, the media company’s board approved a share buyback program, authorizing the repurchase of up to $200 million in preferred shares at a discounted price in exchange for common stock. Subsequently, the investment firm’s directors circulated an internal memo recommending the purchase of the media company’s preferred shares, based on non-public information.
Acting on this information, the investment firm obtained permission from the media company’s board to purchase up to $50 million of the preferred shares. They then proceeded to acquire a substantial amount of the shares.
Allegations and Legal Action
Two shareholders of the media company initiated a shareholder derivative action against the investment firm, certain officers and directors of the media company, and the media company itself. The lawsuit alleged a breach of fiduciary duty, specifically citing insider trading based on the investment firm’s use of material non-public information. This information included knowledge of the media company’s better-than-expected earnings and its plans to redeem outstanding preferred stock.
The shareholders sought disgorgement of the investment firm’s profits, invoking the legal precedent set in Brophy v. Citiservice. They argued that the investment firm’s actions constituted trading on material non-public information, a violation of their fiduciary duty to the company and its shareholders.
The Special Litigation Committee and Initial Ruling
In response to the lawsuit, the media company formed a special litigation committee to investigate the allegations. The committee recommended dismissing the case, a motion that was granted by the Chancery Court. The court’s decision rested partly on the argument that disgorgement, as a remedy for a Brophy claim, was deemed inappropriate based on the precedent established in Pfeiffer v. Toll.
Appeal to the Delaware Supreme Court
Dissatisfied with the lower court’s ruling, the shareholders appealed the case to the Delaware Supreme Court. The appeal brought the case into a higher court, seeking a review of the Chancery Court’s interpretation of the law and its application to the facts of the case.
Conclusion
This case highlights the complexities surrounding fiduciary duty, insider trading, and the remedies available to shareholders in derivative lawsuits. The outcome of the Delaware Supreme Court’s review would likely set important precedents for future cases involving similar issues of corporate governance and shareholder rights.