The Delaware Court of Chancery recently dismissed a shareholder suit that claimed Palantir Technologies officers and directors reaped exorbitant profits by using insider trading and deceptive disclosures to sell their stock in the analytic software platform maker to investors when the private firm went public through a direct listing, in Central Laborers’ Pension Fund, et al. v. Karp, et al., C.A. No. 2023-0864-LWW (Del. Ch. April 25, 2025).

The Court granted the defendants’ motion to dismiss a derivative suit for failure to show that a majority of the Palantir board could not objectively review it because of their likely liability on Brophy charges–Delaware law’s equivalent of a federal law insider trading charge. She said plaintiffs did not meet the high standard of proof to plead demand futility for such a claim. Brophy v. Cities Servs. Co., 70 A.2d 5 (Del. Ch. 1949). 

The vice chancellor also dismissed the suit’s disclosure charges because purported material non-public information that plaintiffs say, at least four directors of the seven-member board traded on, “is either immaterial in view of the complete board documents relied on or was publicly disclosed.”

Quality over quantity

Corporate law specialists will want to examine the vice chancellor’s analysis of the likelihood of director liability with regard to the demand pleading requirement. Citing the guidepost Zuckerberg decision and related rulings, she said demand is satisfied more often by the quality rather than the quantity of allegations against directors. “The assembled facts must qualitatively meet the plaintiffs’ pleading burden and reasonable inference that the defendants acted with scienter”, she said. Zuckerberg, 262 A.3d at 1059.

Background

In 2003, defendants Alexander Karp, Steven Cohen, and Peter Thiel co-founded Palantir Technologies Inc., a Delaware corporation with its principal executive offices in Colorado. Palantir built and deployed software platforms for big data analytics as a private company for 17 years before going public through a direct listing of the officers and directors’ stock, rather than creating new shares for sale. 

Some of the defendants also filed a 10b5 plan that allowed them to sell certain amounts of stock on predetermined days, which the court said could allow the sellers to avoid insider trading charges. Palantir insiders sold their stock for roughly $475 million during nearly two years of the offering period. Seventy-five percent of these trades (by total proceeds) were made under 10b5-1 plans or automatically to cover tax withholding obligations. The majority of the remaining sales occurred shortly after the direct listing, the court said.

Meanwhile, Palantir invested in certain special-purpose acquisition companies in a program that would allegedly increase its worth. 

The litigation

Some shareholders filed suit in federal court in Colorado, but it was dismissed, and this litigation was filed in the Chancery, charging:

• Breach of fiduciary duty by directors for “causing the Company to engage in the SPAC scheme” and for false and misleading disclosures to raise the stock price.
   
• Beach of fiduciary by certain Palantir officers focused on disclosures.
   
• A Brophy claim for alleged insider trading against insiders who sold Palantir shares during and after the direct listing.
   
• A related unjust enrichment claim.

The applicable demand standard

Defendants moved for dismissal for failure to make a demand on the board. The Vice Chancellor noted that In United Food & Commercial Workers Union v. Zuckerberg, 262 A.3d 1034, 1058 (Del. 2021), the Delaware Supreme Court adopted a three-part “universal test” for demand futility requiring the court to determine whether each director:

(i) received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;

(ii) faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and

(iii) lacks independence from someone who received a material personal benefit from the alleged demand-related misconduct

Demand is excused as futile if “the answer to any of the questions is ‘yes’ for at least a majority of the demand board, the court said, but it found:

• No particularized allegation that the directors face likely liability for a non-exculpated claim.
   
• No personal benefit as a result of alleged misconduct, as Zuckerberg requires.

No support for Brophy claim

There is no rational inference to be drawn that the directors had MNPI when they traded, much less that they exploited MNPI for a trading advantage, the vice chancellor ruled. She found that the information must be of such “magnitude” that its disclosure would have “actual significance in the deliberations” of a reasonable investor, but “No such information is described in the Complaint.”

Plaintiffs advance no specific facts about each defendant’s purported conduct or knowledge for each trade, the vice chancellor wrote. “They instead engage in group pleading, ignoring that the defendants entered into 10b5”.

No stitched-together bad faith

Mixing together “odds and ends” of minor critiques is not a recipe for bad faith, even with a hearty serving of plaintiff-friendly inferences, the court said. ‘Disinterested business decisions that are imprudent in hindsight are not indicative of bad faith.”

Material personal benefits proof?

Absent “special circumstances,” Delaware law permits officers and directors to freely trade their corporations’ stock. The bar to Brophy liability is set high in recognition of the benefits gained by “aligning [fiduciaries’] interests with the company,” the court concluded, finding that the plaintiffs have not adequately pleaded that the directors “received a material benefit from wrongdoing.’”

“It would be inequitable to consider demand futile simply because the directors made large profits selling their stock to the public,” the vice chancellor ruled.

No rigid Zuckerberg checklist

“Zuckerberg did not transform the demand futility analysis into a rigid checklist,” the vice chancellor concluded. “The test remains a contextual one that allows the court to consider multiple, interrelated factors.“