## Facts

- Peregrine Systems, Inc. was incorporated in Delaware but headquartered and principally operated in California.
- The trustee of Peregrine’s successor entity sued former officers and directors, alleging they sold Peregrine stock in 1999 while possessing material, nonpublic information.
- The complaint alleged Peregrine’s public statements overstated profit margins and that defendants knew the statements were inaccurate when they traded.
- The trustee asserted insider trading claims under California Corporations Code § 25402 and sought the issuer remedy under § 25502.5, which authorizes recovery of up to three times the insider’s trading profits without requiring proof of issuer harm.
- Defendants demurred, arguing § 2116 and the internal affairs doctrine required Delaware law to govern director liability to the corporation and barred use of California’s disgorgement remedy.
- The trial court sustained the demurrers without leave to amend as to the insider trading causes of action.
- The trustee sought writ relief directing the trial court to vacate its order sustaining the demurrers.

## Issues

1. Whether California Corporations Code § 25502.5 may be applied to officers and directors of a Delaware corporation for securities transactions occurring in California.
2. Whether Corporations Code § 2116 and the internal affairs doctrine preclude applying California’s insider trading remedial scheme to such defendants because the corporation is incorporated in Delaware.

## Decision

- The Court of Appeal granted writ relief in part and held the trial court erred in sustaining the demurrers on internal-affairs grounds.
- The court concluded § 2116 did not bar applying §§ 25402 and 25502.5 to insider trading transactions occurring in California, even when the issuer is a foreign corporation.
- The court directed the trial court to vacate its order sustaining the demurrers to the insider trading causes of action and to conduct further proceedings consistent with the appellate court’s reasoning.

## Legal Principles

- Corporations Code § 25402 regulates insider trading in securities transactions that occur in California.
- Corporations Code § 25502.5 authorizes an issuer (or a person acting in the issuer’s name) to recover from an officer, director, or controlling person who violates § 25402 up to three times the amount gained from the insider trading, without requiring proof of harm to the issuer.
- Absent an express statutory limitation, the California insider trading provisions may apply to transactions in California even when the securities are issued by a corporation incorporated outside California, if statutory prerequisites are met.
- Corporations Code § 2116 and the internal affairs doctrine govern matters of internal corporate governance, but they do not categorically displace California’s application of generally applicable securities regulation to conduct occurring in California.
- California has a substantial interest in regulating securities transactions within the state and deterring insider trading affecting California markets and investors.

## Conclusion

The court held that § 2116 and the internal affairs doctrine did not preclude applying California’s insider trading disgorgement remedy under § 25502.5 to insiders of a Delaware corporation for stock sales occurring in California, and it ordered further proceedings after vacating the trial court’s demurrer ruling on that ground.


Friese v. Superior Court, 134 Cal. App. 4th 693, 36 Cal. Rptr. 3d 558 (Ct. App. 2005)