Witmer v. Armistice Capital, LLC: Part 1

Who is a controlling shareholder?

We normally think of insider trading law as a matter of federal securities law rather than state corporate law. And, today, that’s largely true.

But it was not always so. A century ago, insider trading law was treated as a question of state corporate law fiduciary duties. Even today, moreover, there is a vestigial body of state law that occasionally comes into play.

I trace the history of the early state common law of insider trading, the assumption of primary responsibility for regulating it by the SEC, and the remaining scope of state law in my book, Insider Trading Law and Policy: Concepts and Insights (Foundation Press, 2nd edition, 2023) (AMAZON LINK)

As you might expect, Delaware has the most developed body of state insider trading law. It looks like we’re about due for another chapter of Delaware law in this area to be written, as the Delaware Supreme Court recently heard oral argument in Witmer v. Armistice Capital, LLC.¹

It’s a very interesting fact pattern, which raises a couple of issues that are worth considering as the Court ponders the decision. The first is the definition of a controlling shareholder, which is a topic of perennial interest (at least to me) that we have frequently discussed. The second is the Brophy claim.

In this post, I discuss the Chancery Court decision’s analysis of the controlling shareholder issue. To be sure, the plaintiff did not appeal that aspect of the Chancery Court’s decision. It’s nevertheless worth discussing because the question of who is a controlling shareholder is one that we’ve frequently discussed here.