Pfeiffer v. Toll

Delaware Court of Chancery · 2010 · Corporations

989 A.2d 683 (2010)

Updated August 22, 2026

CorporationsDerivative suitsInsider tradingFiduciary dutyDemand futilityBrophyRalesduty of loyalty

Facts

The complaint alleged that eight of eleven Toll Brothers directors sold large amounts of stock between December 2004 and September 2005 while possessing material, nonpublic information that the company's repeated projections of 20% net income growth for 2006 and 2007 lacked a reasonable basis. According to the complaint, defendants knew throughout 2005 that key internal metrics central to Toll Brothers' core operations—customer traffic, signed contracts, and the pace of opening new selling communities—were trending negatively and undercut those projections. Even as management publicly reaffirmed the projections and made highly optimistic statements, the company's stock price significantly outperformed a homebuilders index and more than doubled. In December 2005, Toll Brothers sharply cut its 2006 growth projection to 0.5%, after which analysts and the market reacted negatively; all individual defendants were also defendants in a companion federal securities action that had survived a motion to dismiss.

Issue

Whether the derivative complaint adequately pleaded demand futility, tolling of the statute of limitations, and a Brophy claim for breach of fiduciary duty based on insider trading against officers and outside directors. The court also had to decide whether Delaware should continue to recognize Brophy as a cause of action and whether the contribution and indemnification claim could proceed.

Rule

Under Rales, demand is futile when directors face a sufficiently substantial threat of personal liability or other disabling conflict such that they cannot impartially consider a demand. A plaintiff asserting a Brophy claim ultimately must show that a corporate fiduciary possessed material, nonpublic company information and used that information improperly by trading because the fiduciary was motivated, at least in part, by that information; at the pleading stage, Rule 9(b) does not apply because the claim is for breach of fiduciary duty, not fraud. When insider-trading allegations rest on internal information inconsistent with prior projections, the complaint must allege information creating a substantial likelihood of an extreme departure from projected results, and equitable tolling may suspend limitations where stockholders reasonably rely on fiduciaries despite self-dealing and the disclosures do not provide fair inquiry notice.

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Summit Ridge Outfitters, a Delaware retailer based in Denver, repeatedly projected 18% earnings growth while several directors sold large blocks of stock. A stockholder in Oregon brings a derivative suit in Delaware after a federal securities class action in Colorado, naming five of the seven directors and alleging the same projections were knowingly unreasonable, survives a motion to dismiss.

Is demand on the board most likely excused?

Explanation. Under Rales, the question is whether the board could impartially consider a demand. The opinion held demand futile where a majority of the board was named in a companion federal securities action that had survived dismissal, because causing the corporation to press parallel claims would undercut that defense and disable impartial consideration. The rule does not require ignoring the federal case, nor does it require a trial or proof that each director drafted the statements.