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Originally published in the Delaware Business Court Insider
As explained in Brophy v. Cities Services, 70 A.2d 5 (Del. Ch. 1949), and its progeny, the duty of loyalty prohibits fiduciaries from profiting by trading on the basis of material, non-public information. In the recent case of In re Rocket Companies Stockholder Derivative Litigation, 2021-1021-KSJM, 2025 WL 1554632 (Del. Ch. June 2, 2025), the Delaware Court of Chancery held that stockholder-plaintiffs failed to prove at trial that stock sales by the controlling stockholder of the Rocket Companies (Rocket) were in fact motivated by material, nonpublic information. The court accordingly entered judgment in favor of the controlling stockholder.
For background, Daniel Gilbert founded Rocket in 1985. It subsequently grew into one of the United States’ largest mortgage lenders. By 2020, Gilbert and Rocket’s management decided to take Rocket public to provide the business liquidity and similarly to provide Gilbert, who held his 100% ownership interest through Rock Holdings, Inc. (RHI), liquidity to fund certain philanthropic endeavors. RHI sold roughly 6% of its interest in the August 2020 IPO, and retained 94%.
The IPO only raised $2 billion of its $3.5 billion target. Accordingly, shortly after it closed, Rocket and RHI began to consider a secondary offering. They were advised in October 2020 that any sales would have to be in the mid-$20s or above to achieve parity with the IPO price and avoid harming the stock price. They began to plan to sell additional shares when the stock appreciated to that level. Gilbert personally did not participate in the process, which was overseen by the companies’ chief executive officer and the chief investment officer for Gilbert’s entities.
In early March 2021, one of Rocket’s competitors announced it would not do business with any mortgage brokers that also did business with its competitors, including Rocket. As a result, mortgage originators like Rocket began to anticipate needing to offer improved terms to brokers, thus reducing their own operating margins. RHI sold roughly $500 million in a secondary offering in late March, before Rocket had announced the likely reduction in its operating margins. Rocket subsequently reduced its earnings guidance, resulting in a stock drop.
In its post-trial decision, the court reasoned that a plaintiff bringing a Brophy claim must show that a fiduciary both possessed material, non-public information and actually “used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.” While the plaintiff’s arguments about RHI’s motives were based on the sale’s timing, the court found that the record instead supported the timing was based on a long-standing plan to sell in the mid-$20s when it became possible to do so. The court explained that Rocket and RHI “put the wheels in motion when the trading window opened on March 1, prepared to ‘pull the trigger’ mid-way through the trading window when the stock price started to rise, sought formal approval mid-way through the window, and involved internal counsel, external counsel, and the independent audit committee members in a sale process with a documented paper trail.” The sales at the end of March also did not neatly line up with dates when the plaintiff argued the potential downturn became known to the decision-makers. Rather than try to sell right away after those alleged developments, RHI continued to delay a sale because it was motivated by the plan to hold those shares until the stock price rose into the mid-$20s. Moreover, Rocket’s and RHI’s then-CEO, who led the sale process, tellingly did not try to sell any of his roughly $5 million shares during this period. He accordingly experienced a loss of roughly $800,000 in the value of his own shares when Rocket’s price fell in May 2021 after the release of updated guidance.
Accordingly, because the plaintiffs failed to show that the March 2021 sales were in fact motivated by material, nonpublic information, the Court of Chancery entered judgment in favor of RHI.
