Opinion
C.A. No. 18732.
Decided: December 18, 2001.
Anne C. Foster, Lisa R. Stark, Richards, Layton Finger, P.A., Wilmington, DE 19899.
Norman H. Monhait, Rosenthal, Monhait, Gross Goddess, P.A., Wilmington, DE 19899.
Richard L. Horwitz, Matthew B. Fischer, Potter Anderson Corroon, Wilmington, DE. 19899.
James C. Strum, Stradley, Ronon, Stevens Young, LLP, Wilmington, DE 19899.
Dear Counsel:
I have considered your respective positions regarding the motion to dismiss in this case. Although both parties agreed that I could rule on the defendants' motion to dismiss without hearing argument, I believe, after reviewing your submissions and the recent decision from Judge Baird dismissing the related federal securities class action without prejudice, oral argument will be necessary in this matter. At argument, please be prepared to address the following issues:
1. In Count I, which alleges that the Selling Defendants misappropriated inside information and engaged in insider Wading based on that information, is it necessary for the plaintiff to allege harm to the corporation in the derivative complaint before seeking a constructive trust on any profits obtained by the Selling Defendants? In Brophy v. Cities Services Co., Del. Ch., 70 A.2d 5 (1949), this Court ruled that such a showing was unnecessary. That decision has been questioned in other jurisdictions, however. See, e.g., Freeman v. Decio, 584 F.2d 186 (7th Cir; 1978). Moreover, federal securities law, particularly Rule 10b-5, has changed a great cleat since 1949. Developments in federal law have led to the creation of various federal remedies for market participants injured by insider trading, which raises three further questions. First, these federal remedies were unavailable when Brophy was decided, and absent recovery in a derivative suit, the defendant may not have faced liability for his actions. What effect, if any, should changes in federal law and the risk of double liability have on the applicability of Brophy to this case? Second, the federal legislation on insider trading in the last two decades has arguably preempted claims like the one made in Count I. What effect, if any, should the related federal securities class action have on Count I? Finally, the Securities Litigation Uniform Standards Act of 1998 expressly preserved derivative claims. How does that provision affect Count I?
2. The defendants have attempted to invoke Guess's § 102(b)(7) provision, arguing that the allegations in Count II state, at most, a claim for breach of the duty of care. What is the status of § 102(b)(7) as it pertains to this ease in light of the Delaware Supreme Court's recent decision in Emerald Partners, Inc., v. Berlin, Del. Supr., C.A. No. 9700, Holland, J. (Nov. 28, 2001)? Is it possible to determine without having a trial which fiduciary duties, if any, were violated in connection with the allegedly inaccurate disclosure, or would such a determination be premature given that a majority of Guess's board of directors arguably was interested or lacked independence?
3.Under Brophy and its progeny, plaintiffs must establish a causal link between any confidential information allegedly possessed by insiders and any profits accumulated by those insiders. See, e.g., Rosenberg v. Oolie, Del. Ch., C.A. No. 11134, slip op. at 6-9, Berger; V.C. (Oct. 16, 1989). Are allegations that the Selling Defendants sold Guess common stock mere weeks before the announcement of negative information sufficient to establish both the Selling Defendants' knowledge of that information and the existence of such a causal link?
All parties are welcome to submit concise supplemental memoranda on their positions regarding the questions raised in this letter. Any such memoranda should be filed, with copies to me in Georgetown, by noon on Tuesday, January 15. The argument will commence at 1:30 p.m. on Wednesday, January 16, 2001, in Wilmington, if that is convenient to all counsel.