In re Straight Path Commc'ns Inc. Consol. S'holder Litigation
CA 2017-0486-SG
| Del. Ch. | Nov 20, 2017Background
- Straight Path Communications (Straight Path) held valuable wireless spectrum (Spectrum Assets) and IP Assets; it was spun off from IDT in 2013 and is the target of a proposed $3.1 billion sale to Verizon.
- A 2017 FCC Consent Decree required Straight Path to pay fines and relinquish ~20% of Spectrum Assets; Straight Path claims a right to indemnification from pre-spin IDT under the Separation and Distribution Agreement (the Indemnification Claim).
- Howard Jonas controls both IDT and Straight Path via supervoting stock; his son Davidi Jonas is Straight Path CEO and a director; the Patrick Henry Trust holds Howard’s Straight Path stock.
- Plaintiffs allege Howard used his controller power to condition his consent to the merger on (a) transferring the Indemnification Claim to IDT for $10 million plus other consideration and (b) transferring the IP Assets to IDT for $6 million, both at substantially below-fair value. IDT allegedly re-sold the IP assets to the Jonas family.
- Plaintiffs assert direct and derivative claims for breaches of fiduciary duty (Howard, Davidi) and aiding-and-abetting (IDT), and seek damages plus a constructive trust to recover the Indemnification Claim and auction the IP Assets. Plaintiffs do not seek to enjoin the merger and favor its completion.
- Defendants moved to dismiss; the Court did not resolve the motions on the merits and instead stayed the action as unripe because the merger has not closed and the alleged primary harm depends on consummation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Ripeness of direct claims arising from alleged controller extraction of value pre-merger | The transfers were extra consideration for the merger and the primary injury (e.g., FCC allocation of merger proceeds) will occur only if the merger closes, so direct claims should be adjudicated now | The claims are unripe because the merger has not closed; any ruling now could be advisory and inefficient | Court: Direct claims are unripe; stay entered until facts are developed or merger closes |
| Whether the alleged controller transfer is a corporate (derivative) or direct stockholder claim | Plaintiffs contend transfers functioned as individualized, extra consideration to controller, supporting direct claims | Defendants argue the injury belongs to the corporation and thus is derivative | Court did not resolve; declined to decide direct-vs-derivative question pending ripeness/mootness of merger closure |
| Demand futility for derivative claims (whether pre-suit demand excused) | Plaintiffs claim demand excused because a majority of directors indicated litigation should proceed (independent directors declined to authorize a motion to dismiss) | Defendants argue independent directors remain conflicted (were formerly defendants and could be sued again), so their stance cannot excuse demand | Court: Declined to decide demand-excusal issue now; deferred until derivative claims (if any) become ripe |
| Appropriateness of staying vs dismissing the case | Plaintiffs seek prompt adjudication; efficient resolution argued | Defendants seek dismissal of claims where appropriate | Court: Exercised discretion to stay the action (not dismiss) as best use of judicial resources pending merger outcome |
Key Cases Cited
- White v. Panic, 783 A.2d 543 (Del. 2001) (standard for drawing inferences from complaint allegations)
- In re Walt Disney Co. Derivative Litigation, 825 A.2d 275 (Del. Ch. 2003) (limit on opining about truth of allegations at pleading stage)
- XI Specialty Ins. Co. v. WMI Liquidating Trust, 93 A.3d 1208 (Del. 2014) (ripeness doctrine and conserving judicial resources)
- Stroud v. Milliken Enterprises, Inc., 552 A.2d 476 (Del. 1989) (ripeness and justiciability principles)
- Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012) (controller self-dealing typically gives rise to derivative claims and entire fairness review)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (demand futility standard for derivative suits)
- Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726 (Del. 1988) (when a corporation’s neutrality can affect demand-excusal analysis)