Kahn v. Kolberg Kravis Roberts & Co., L.P.

Investment partnership Kohlberg, Kravis, Roberts & Co. (KKR) (defendant) controlled roughly 60 percent of the stock of Primedia, Inc. (defendant) and had three designees on Primedia’s board (the KKR directors). In late 2001 and early 2002, Primedia’s board approved plans for Primedia to buy back up to $200 million in Primedia’s preferred shares at a price below redemption value in exchange for common stock. On May 21, 2002, the KKR directors wrote an advisory memo to KKR’s investment and portfolio committees encouraging the purchase of Primedia’s preferred shares. That memo contained nonpublic information about Primedia. Later in 2002, KKR sought permission from Primedia’s board to purchase Primedia’s preferred shares. On July 8, 2002, the board gave written consent for KKR to purchase up to $50 million in preferred stock. That same day, a KKR investment vehicle called ABRA III LLC (ABRA) began purchasing Primedia’s preferred shares. On September 26, 2002, Primedia’s board approved a $115 million sale of one of Primedia’s biggest assets, but Primedia did not publicly disclose the sale until November 4, 2002. On November 5, 2002, Primedia’s board decided to explore repurchasing Primedia’s outstanding preferred shares. Through ABRA, KKR purchased over $75 million in Primedia preferred stock between July 8 and November 5. Two Primedia shareholders, Linda Kahn and Alan Spiegal (plaintiffs), brought a shareholder-derivative action against Primedia, KKR, and other Primedia officers and directors (defendants), alleging violations of fiduciary duty. Kahn and Spiegal sought disgorgement under Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949), contending that KKR had traded on material, nonpublic information about Primedia, including Primedia’s higher-than-anticipated earnings and planned redemption of outstanding preferred stock. The chancery court dismissed the complaint, holding, among other things, that disgorgement was an improper remedy for a Brophy claim under the holding in Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010). Kahn appealed, and the Delaware Supreme Court took the opportunity to discuss Pfeiffer and the availability of disgorgement for a Brophy claim.