## Facts

- Stockholders of Primedia, Inc. brought a derivative fiduciary-duty action against Primedia’s controlling stockholder, Kohlberg Kravis Roberts & Co., L.P. (KKR), and certain directors and affiliates.
- The complaint included a loyalty-based insider trading claim under Brophy v. Cities Service Co., seeking disgorgement of trading profits allegedly obtained through misuse of material, nonpublic corporate information.
- Primedia’s board formed a Special Litigation Committee (SLC) to investigate the derivative claims and determine whether they should proceed.
- After investigation, the SLC moved to dismiss the derivative action.
- The Court of Chancery applied Zapata Corp. v. Maldonado, found the SLC independent, acting in good faith, and conducting a reasonable inquiry (first prong), and dismissed the action with prejudice.
- In evaluating dismissal under Zapata’s second prong, the Court of Chancery treated the Brophy claim as failing absent actual harm to the corporation, relying on Pfeiffer v. Toll’s view that disgorgement is unavailable without corporate injury.
- The stockholders appealed the dismissal of the Brophy claim.

## Issues

1. Whether a Brophy fiduciary insider-trading claim requires pleading and proof of actual harm to the corporation as a prerequisite to disgorgement.
2. Whether a Zapata second-prong dismissal of a derivative Brophy claim is sustainable when based on the premise that corporate injury is required for disgorgement.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s findings under Zapata’s first prong that the SLC was independent, acted in good faith, and conducted a reasonable investigation.
- The Court held that Brophy does not require proof of harm to the corporation as an element before disgorgement is available.
- The Court rejected Pfeiffer v. Toll to the extent it required corporate injury for Brophy disgorgement.
- Because the Court of Chancery’s Zapata second-prong analysis rested on the erroneous corporate-harm requirement, the Supreme Court reversed the dismissal in part and remanded for further proceedings consistent with the corrected Brophy standard.

## Legal Principles

- A derivative Brophy claim is grounded in loyalty and restitutionary equity: it targets unjust enrichment from a fiduciary’s misuse of confidential corporate information.
- Disgorgement of an insider’s trading profits may be available even if the corporation cannot show measurable, out-of-pocket loss.
- A Brophy claim requires allegations that (1) a fiduciary possessed material, nonpublic corporate information and (2) used it improperly by trading, motivated at least in part by that information; actual corporate harm is not an additional element.
- Under Zapata, a court separately evaluates (1) SLC independence, good faith, and reasonable investigation and (2) the court’s own judgment whether dismissal is in the corporation’s best interests; a second-prong decision cannot rest on an incorrect view of governing law.

## Conclusion

The court clarified that Brophy disgorgement is not conditioned on proof of corporate injury and reversed a discretionary Zapata second-prong dismissal that relied on a contrary legal premise, while leaving intact the SLC’s satisfaction of Zapata’s first-prong requirements.


Kahn v. Kohlberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011)