Kahn v. Kolberg Kravis Roberts & Company

Supreme Court of Delaware · 2011 · Corporations

23 A.3d 831 (2011)

Updated August 22, 2026

CorporationsDerivative litigationInsider tradingFiduciary dutySpecial litigation committeesBrophyPfeifferdisgorgement

Facts

Primedia's board approved plans in 2001 and 2002 for the company to acquire preferred shares, and KKR, which indirectly controlled a majority of Primedia's common stock and had designees on the board, later sought permission to buy Primedia preferred shares when Primedia was not buying them. A May 21, 2002 memo authored by KKR directors to KKR committees contained nonpublic information about Primedia, and KKR, through ABRA III LLC, bought more than $75 million of Primedia preferred stock between July 8 and November 5, 2002. Primedia's board approved the sale of the American Baby Group on September 26, 2002, but did not publicly disclose the sale until November 4, 2002; during that interval KKR continued buying preferred shares. Plaintiffs later asserted a Brophy claim alleging KKR traded while knowing Primedia's earnings would exceed market forecasts and that the company anticipated redeeming its outstanding preferred stock.

Issue

Whether a derivative plaintiff asserting a Brophy claim must show actual harm to the corporation before disgorgement is available as a remedy. Also, whether the Court of Chancery's dismissal under Zapata could stand when its second-prong analysis may have relied on the contrary view stated in Pfeiffer.

Rule

Under Delaware law, a Brophy claim does not require proof that the corporation suffered actual harm. A plaintiff must show that the corporate fiduciary possessed material, nonpublic company information and used that information improperly by trading because the fiduciary was motivated, in whole or in part, by the substance of that information. Disgorgement may be available to prevent unjust enrichment from misuse of confidential corporate information, and is not limited to corporate-opportunity or direct-competition settings.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Sierra Harbor Media, a Delaware corporation headquartered in Denver, has a director, Marcus Velez, who learns at a closed board meeting that the company is about to announce a lucrative asset sale that will substantially improve its balance sheet. Before any public disclosure, Marcus buys a large block of the corporation’s preferred shares on the market and later sells at a profit after the announcement. The corporation cannot identify any out-of-pocket loss caused by his trades.

In a derivative action seeking disgorgement from Marcus, what is the strongest argument under Delaware law?

Explanation. A Brophy claim does not require proof of actual harm to the corporation before disgorgement is available. The key concern is unjust enrichment from misuse of confidential corporate information by a fiduciary. Delaware law, as explained in the majority opinion, rejects limiting relief to cases of corporate loss, corporate opportunity, or direct competition.