Pfeiffer v. Toll

Toll Brothers, Inc. (Toll Brothers) (defendant) was a Delaware public corporation in the business of designing, building, marketing, and arranging financing for single-family homes in luxury-residential communities nationwide. In 2003 and 2004, the demand for luxury-residential communities grew substantially, as did Toll Brothers’ revenues. However, by mid-2005, there was worry in the markets about a housing bubble. Nevertheless, during the first 11 months of 2005, Toll Brothers’ leadership asserted publicly and to the shareholders that a housing bubble would not significantly affect the company’s growing business. Meanwhile, during the summer and fall of 2005, eight of Toll Brothers’ directors (collectively, the directors) (defendants), including some outside directors, sold substantial percentages of their Toll Brothers stock in a pattern that did not track their trading history, which negatively affected Toll Brothers. Eventually, in December 2005, the directors admitted to the shareholders that fewer prospective customers had visited its communities for “about a year” and that the rate of new contracts had slowed throughout 2005. Additionally, the regulatory-approval process had become increasingly difficult. Milton Pfeiffer (plaintiff), a Toll Brothers shareholder, sued the directors for breach of their fiduciary duty to the corporation pursuant to an old Delaware case that recognized a corporation’s right to recover from its fiduciaries for harm caused by insider trading. The directors moved to dismiss Pfeiffer’s claim and argued that Delaware should no longer follow such precedent because it was outdated. The outside directors also argued that the complaint failed to state a claim against them for breach of the duty of loyalty based on insider trading because the complaint failed to allege facts showing that the outside directors had knowledge that the housing bubble was significantly affecting Toll Brothers’ business when they sold their shares.