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In re Oracle Corp. Derivative Litigation11/24/2004
stock because having, as Ross Perot would say, "skin in the game" will tend to align their interests with those of the public stockholders. For legitimate reasons, directors and officers who own options and stock will at times have to, or find it useful to, sell or buy shares. One can acknowledge that there is an ongoing debate regarding whether, on balance, corporate compensation schemes involving equity have been either prudently designed or sized without obscuring equally obvious points: the use of equity as a compensation tool is a legitimate choice under our law and Delaware statutory law permits and its common law creates incentives for stockholders to serve as directors and officers.
To subject corporate insiders to a possible disgorgement remedy under our law whenever a court, in hindsight, concludes that the insiders should, under some type of due care standard, have suspected that their company would later miss the mark, would cabin the breadth of discretion afforded to Delaware companies to design their own compensation systems and - perhaps worse - raise the barriers that already dissuade large, but not controlling, stockholders from serving on company boards. The plaintiffs admit that their argument depends on treating insider trades as a form of self-dealing. The reasons for this are obvious, and include the plaintiffs' wish to escape another common feature of corporate charters that is authorized by our law: the exculpatory provisions sanctioned by 8 Del. C. § 102(b)(7).
By construing all insider trading as self-dealing, the plaintiffs can argue with a straight face that a trading fiduciary ought to be held strictly responsible for trading profits made at a time when the court concludes that a more careful fiduciary would have refrained from trading, not necessarily because the fiduciary possessed material information in the traditional sense, but because the fiduciary possessed information that cast some doubt on the company's ability to meet its projections. In the nomenclature of §102(b)(7), the trading fiduciary would have, in the plaintiffs' view, received an "improper personal benefit" and (given the redundancies pervading §102(b)(7)) breached her "duty of loyalty" through self-dealing.
For law professors, the good news is that a blind trip down this windy road would not just raise epistemologically difficult questions under §102(b)(7). It would also create a plaintiff-friendly scheme of insider trading enforcement under state law that would be based on strict liability or negligence principles, and that would be in competition with a federal regime that requires proof of scienter, i.e., an illicit state of mind. The resulting policy clash might provide good fodder for academic writing. It might also fuel further legislative developments, as what was understood by Congress to be a narrow and fixed "Delaware carve-out" for traditional fiduciary duty claims turns out to be an expanding excavation site that unsettles the structure of federal securities law. By way of example, a common law rule of the kind that the plaintiffs advocate would tend to discourage companies from providing forward-looking estimates to the market, a disincentive that leans in precisely the opposite direction from recent federal initiatives. In its current and traditional form, Brophy's recognition of a scienter-based derivative claim is not out of step with federal law. But the evolution of a non-scienter, insider trading-based type of derivative action would create policy incongruence.
Although there is no doubt that corporate insiders ought to be careful about trading in their own companies' stock, there is more than tolerable doubt that they should be subjected to an enforcem
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