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Central Laborers' Pension Fund v. Karp, C.A. No. 2023-0864-LWW (Del. Ch. April 25, 2025)
The Court of Chancery dismissed a derivative action asserting claims of insider trading under Brophy (and other theories of liability) in connection with a direct stock listing involving Palantir Technologies on the grounds that plaintiffs failed to adequately plead demand futility under Delaware’s “stringent” Rule 23.1 standard.
The Court applied the universal test for demand futility—that a plaintiff must show at least half of the board at the time of the complaint was not disinterested and independent due to receiving a material personal benefit from the alleged misconduct, facing a substantial likelihood of liability, or lacking independence from an interested party. The plaintiffs claimed that demand was excused because six of the seven directors faced a substantial likelihood of liability for breach of fiduciary duties in connection with alleged insider trading, four directors who sold their stock during the direct listing allegedly received a material personal benefit, and various directors lacked independence from other interested directors.
The Court first held that plaintiffs had failed to plead particularized allegations supporting a reasonable inference that the directors faced a substantial likelihood of liability for insider trading. Plaintiffs’ various theories of trading on material nonpublic information were flawed—the information was either immaterial or public. The Court also declined to find that demand was futile based on four directors making lucrative stock sales. Despite the large profits involved, the directors had retained most of their stock holdings, undermining the plaintiffs’ allegations of interest, and the benefit received was not the result of alleged misconduct. As before, the sales were not based on material non-public information. And, according to the Court, the size of the trade proceeds alone did not impugn the directors’ impartiality. The Court explained that Delaware law “sets the bar to insider trading liability high to avoid restricting legitimate market activity” and “[i]nsiders are not penalized for making investment decisions based on public information—even if their trades are lucrative.” Accordingly, the Court concluded that plaintiffs had failed to adequately plead demand futility and dismissed the complaint.
