In re Straight Path Communications Inc. Consolidated Stockholder Litigation ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE STRAIGHT PATH )
COMMUNICATIONS INC. ) C.A. No. 2017-0486-SG
CONSOLIDATED STOCKHOLDER )
LITIGATION )
MEMORANDUM OPINION
Date Submitted: March 2, 2018
Date Decided: June 25, 2018
Ned Weinberger and Thomas Curry, of LABATON SUCHAROW LLP,
Wilmington, Delaware; OF COUNSEL: Mark Lebovitch, Edward Timlin, John
Vielandi, and David MacIsaac, of BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP, New York, New York; Vincent R. Cappucci and Joshua K.
Porter, of ENTWISTLE & CAPPUCCI LLP, New York, New York, Attorneys for
Plaintiffs JDS1, LLC and The Arbitrage Fund.
Rudolf Koch, Kevin M. Gallagher, Sarah A. Clark, and Anthony M. Calvano, of
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL:
William Ohlemeyer, Edward Normand, and Jason Cyrulnik, of BOIES SCHILLER
FLEXNER LLP, Armonk, New York, Attorneys for Defendants IDT Corporation,
Howard Jonas, and The Patrick Henry Trust.
Kevin G. Abrams, Michael A. Barlow, and April M. Kirby, of ABRAMS &
BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Greg A. Danilow, Seth
Goodchild, and Thomas G. James, of WEIL, GOTSHAL & MANGES LLP, New
York, New York, Attorneys for Defendant Davidi Jonas and Nominal Defendant
Straight Path Communications Inc.
GLASSCOCK, Vice Chancellor
When the controller of a company improperly uses his control to enter a
transaction with the company at the expense of the minority, the resulting cause of
action for breach of fiduciary duty is an asset of the company, which stockholders
typically can pursue only derivatively. When the company is sold, the litigation
asset, like the other assets, passes to the purchaser. However, when a controller
improperly uses her control to extract a special benefit in the sale itself, at the
expense of the consideration received by stockholders in exchange for their interest
in the company, the injury, and the recovery, run directly to the former stockholders;
thus, they may sue directly.
This matter presents a twist on that rather simple dichotomy. Here, a holding
company was for sale. It was subject to a fine which would be levied by the federal
government upon sale of assets that made up the vast bulk of company value, as a
percentage of the sale price. It held as an asset an indemnification right for the
amount of that fine, against an entity affiliated with the controller. The outside
directors were concerned that the value of the indemnification right could not be
adequately monetized through the sale of the company. They were thus considering
putting the indemnification claim into a litigation trust, the benefit of which would
be received by stockholders—along with the consideration paid by the buyer—when
the claim ripened upon the sale of the company. The stockholders’ Complaint here
alleges that, when the controller caught wind of the proposed litigation trust, he used
1
his control to purchase the indemnification asset instead, for a price manifestly
unfair. After the sale, $614 million of the consideration was diverted to pay the fine,
but the company only received $10 million (plus a portion of the proceeds from
certain intellectual property-related assets) from the controller for release of the
claim. The stockholders have sued the controller, and others, directly for breach of
fiduciary duty.
The Defendants argue that this is a classic derivative claim; the controller
allegedly purchased an asset of the company at an unfair price, that cause of action
passed to the purchaser, and the claim of the former stockholders must be dismissed.
I agree with the Plaintiffs, however, that under this unique factual scenario, the claim
is direct. Here, the indemnification right did not fully ripen until the sale, and the
leverage used by the controller included a threat to nix the transaction unless
corporate assets were first transferred to his affiliates for a manifestly unfair price,
but for which the consideration received by the stockholders upon sale would have
included both the price paid by the purchaser and the beneficial ownership of the
litigation trust. I find the transfer of the indemnification claim to the controller here
to be sufficiently intertwined with the sale of the company and the assets received
by stockholders therefrom to state a claim that the sales transaction was unfair. That
claim is direct and may proceed.
My reasoning follows.
2
I. BACKGROUND1
A. Parties
Nominal Defendant Straight Path Communications Inc. is a Delaware
corporation headquartered in Glen Allen, Virginia.2 Straight Path owns two
subsidiaries: (i) Straight Path Spectrum, Inc., which holds fixed wireless spectrum
through its wholly owned subsidiary Straight Path Spectrum, LLC, and (ii) Straight
Path IP Group, which owns a majority stake in intellectual property related to
internet communications.3 When the Complaint in this action was filed, Straight
Path’s securities traded on the New York Stock Exchange under the ticker symbol
“STRP.”4
Defendant IDT Corporation is a telecommunications company. 5 IDT was
Straight Path’s parent until July 31, 2013, when Straight Path was spun off from
IDT.6 As part of the spinoff, Straight Path and IDT entered into a Separation and
Distribution Agreement under which IDT agreed to indemnify Straight Path for any
liabilities stemming from pre-spinoff conduct.7
1
The facts, drawn from the Complaint and other material I may consider on a motion to dismiss,
are presumed true for purposes of evaluating the Defendants’ Motions to Dismiss.
2
Compl. ¶ 16.
3
Id.
4
Id.
5
Id. ¶ 17.
6
Id.
7
Id.
3
Defendant Howard Jonas founded IDT in 1990 and has served as its Chairman
since then.8 He was IDT’s CEO from December 1991 to July 2001, and again from
October 2009 to December 2013.9 IDT’s CEO is now Shmuel Jonas, one of
Howard’s sons.10 Howard was the controlling stockholder of Straight Path and IDT,
owning over 70% of both companies’ voting stock.11 As of November 2016,
Howard held 17.6% of Straight Path’s equity,12 and as of October 2016, he held
11.3% of IDT’s equity.13 Howard’s stock in Straight Path was owned by Defendant
The Patrick Henry Trust, of which Howard was the beneficiary.14 Nevertheless,
Howard retained certain consent rights with respect to Straight Path.15 Specifically,
Howard’s consent was necessary to consummate significant transactions that
required approval by Straight Path’s stockholders, including a merger or a sale of all
assets.16
Defendant Davidi Jonas, another one of Howard’s sons, has served as Straight
Path’s CEO and President since April 2013.17 Davidi has also served as a Straight
8
Id. ¶ 18.
9
Id.
10
Id. ¶ 19.
11
Id. ¶ 18. To the extent I use first names here, it is to avoid confusion; no disrespect is meant.
12
Id. ¶ 38.
13
Clark Aff. Ex. D, at 14.
14
Compl. ¶ 21.
15
Id.
16
Id. ¶ 39.
17
Id. ¶ 20.
4
Path director since that time, and on August 1, 2013, he became the company’s
Chairman.18 Davidi and his siblings own over 10% of IDT’s equity.19
Plaintiff JDS1, LLC is an investment vehicle that held Straight Path common
stock at all relevant times.20 Plaintiff The Arbitrage Fund is a mutual fund that also
held Straight Path common stock at all relevant times.21
B. Factual Background
1. Straight Path’s Business and the Spinoff
Straight Path began as a subsidiary of IDT.22 Straight Path holds two sets of
assets: 39 GHz and 28 GHz wireless spectrum licenses (the “Spectrum Assets”), and
intellectual property related to communications over the internet (the “IP Assets”).23
The Spectrum Assets, which IDT controlled before the spinoff,24 are particularly
valuable. Straight Path owns 70% of the 39 GHz licenses in the United States, and
telecommunications companies view these licenses as essential to developing the
next generation of wireless networks.25 The IP Assets likewise hold significant
value. For example, Straight Path received $18.25 million in proceeds from July
18
Id.
19
Id.
20
Id. ¶ 14.
21
Id. ¶ 15.
22
Id. ¶¶ 28, 34.
23
Id. ¶¶ 16, 28, 31.
24
Id. ¶ 35.
25
Id. ¶¶ 29–30.
5
2013 to February 2015 as a result of its efforts to prosecute its patent rights.26
Moreover, the IP Assets have recently increased in value due to a string of favorable
administrative and court rulings.27
On July 31, 2013, IDT spun off Straight Path via a pro rata distribution of
Straight Path common stock to IDT stockholders.28 Following the spinoff, Straight
Path maintained a dual-class capital structure in which Howard Jonas, through The
Patrick Henry Trust, retained majority voting control while holding only 17.6% of
the company’s equity.29 IDT had (and continues to have) a similar capital structure,
in which Howard Jonas holds a majority of voting stock while owning only 11.3%
of the equity.30
As part of the spinoff, Straight Path and IDT negotiated a Separation and
Distribution Agreement.31 That Agreement obligates IDT to indemnify Straight Path
for any liabilities arising from or related to the period before the spinoff.32 Straight
26
Id. ¶ 31.
27
Id. ¶ 32.
28
Id. ¶ 36.
29
Id. ¶¶ 37–38.
30
Id. ¶¶ 18, 37; Clark Aff. Ex. D, at 14.
31
Compl. ¶ 36.
32
Id. Specifically, the Separation Agreement provides that “[o]n and after the Distribution Date,
IDT shall indemnify, defend and hold harmless SPCI and its subsidiaries and each of their
respective directors, officers, employees and agents (the ‘SPCI Indemnitees’) from and against any
and all Indemnifiable Losses incurred or suffered by any of the SPCI Indemnitees and arising out
of, or due to, (a) the failure of IDT or any member of the IDT Group to pay, perform or otherwise
discharge, any of the IDT Liabilities, and (b) any breach by IDT or any member of the IDT Group
of this Agreement.” Clark Aff. Ex. B, § 6.02. The Agreement defines “IDT Liabilities” to include,
among other things, “any Liabilities of SPCI or its subsidiaries arising, or related to the period,
prior to the Effective Time.” Id. at 5.
6
Path’s public filings acknowledge this obligation, stating that “[t]he Separation and
Distribution Agreement includes, among other things, that IDT is obligated to
reimburse [Straight Path] for the payment of any liabilities arising or related to the
period prior to the Spin-Off.”33 Notably, the indemnification right covers liabilities
stemming from pre-spinoff conduct related to the Spectrum Assets.34
2. The FCC Dings Straight Path for Pre-Spinoff Misconduct
Under Federal Communications Commission (“FCC”) regulations, holders of
39 GHz licenses are required to submit substantial service filings at the end of each
license’s term.35 In these filings, license holders must demonstrate that they have
taken steps to construct systems for making use of their spectrum.36 Failure to
submit substantial service filings may lead to termination of the licenses. 37 In
November 2015, Sinclair Upton Research issued a report alleging that IDT had
defrauded the FCC when it sought renewal of its 39 GHz licenses in 2011 and 2012.38
Specifically, Sinclair claimed that almost none of the 39 GHz systems IDT had
purportedly constructed were operational at the time of the report.39
33
Compl. ¶ 36 (second alteration in original).
34
Id.
35
Id. ¶ 41.
36
Id. ¶ 43.
37
Id. ¶ 41.
38
Id. ¶ 42.
39
Id. ¶ 45.
7
After the Sinclair report came out, Straight Path hired Morgan, Lewis &
Bockius LLP to conduct an internal investigation.40 Morgan Lewis confirmed
Sinclair’s finding that IDT had failed to comply with the FCC’s substantial service
requirements.41 The FCC also began its own investigation.42 On September 20,
2016, IDT received a letter of inquiry from the FCC requesting information relevant
to the investigation.43 About a month later, IDT filed a Form 10-K in which it
disclosed that due to the FCC’s investigation, IDT could face a claim from Straight
Path related to any fines or penalties the FCC imposed on Straight Path for violations
that took place when IDT controlled the Spectrum Assets.44
On January 11, 2017, Straight Path entered into a Consent Decree with the
FCC.45 The Consent Decree has three primary components. First, Straight Path
agreed to forfeit approximately 20% of its spectrum licenses.46 Second, Straight
Path was required to submit an application to sell its remaining spectrum licenses
within one year of the Consent Decree and to pay 20% of the sales proceeds to the
FCC.47 Third, Straight Path agreed to pay a $100 million fine, with the first $15
40
Id. ¶ 47.
41
Id.
42
Id. ¶ 49.
43
Id. ¶ 50.
44
Id.
45
Id. ¶ 52.
46
Id. ¶ 53.
47
Id. ¶ 54.
8
million due in installments over a nine-month period.48 If Straight Path sold its
remaining spectrum licenses to a third party within one year and gave 20% of the
proceeds to the FCC, it would not have to pay the balance of the fine.49 On the other
hand, if Straight Path failed to sell its spectrum, it would have to pay the $85 million
and take the risk that the FCC would later seek to cancel the licenses as well.50
Finally, if Straight Path neither sold the spectrum nor paid the $85 million, it would
be required to forfeit its licenses to the FCC.51 The upshot of the Consent Decree
and the Sinclair Upton report was that Straight Path had no practical choice but to
sell itself.52
Soon after the Consent Decree was entered, IDT acknowledged that it could
face liability on account of the penalties the FCC had just imposed on Straight Path.53
In a Form 10-Q for the period ending January 31, 2017, IDT stated that it “could be
the subject of a claim from Straight Path for indemnification related to its liability
related to the consent decree.”54 The basis for this disclosure was presumably that
the fraudulent renewals took place in 2011 and 2012, before Straight Path was spun
48
Id. ¶ 55.
49
Id.
50
Id.
51
Id.
52
Id. ¶¶ 54, 60, 63.
53
Id. ¶ 58.
54
Id.
9
off from IDT.55 To repeat, the Separation Agreement requires IDT to indemnify
Straight Path for any liabilities incurred pre-spinoff.56
3. Straight Path Sells Itself
Even before the Consent Decree (but after the Sinclair report), Straight Path
was considering a sale of either the whole company or the Spectrum Assets.57 In the
summer of 2016, Straight Path held discussions with four interested parties,
including AT&T.58 In September 2016, AT&T submitted a term sheet to acquire the
company for $400 million, and Davidi Jonas, Straight Path’s CEO, retained Evercore
as the company’s financial advisor.59 AT&T raised its offer in November 2016, but
the Straight Path board—which at the time consisted of Davidi Jonas, William F.
Weld, K. Chris Todd, and Fred S. Zeidman60—decided to defer the sales process
until the FCC’s investigation concluded.61 When the investigation wrapped up and
the Consent Decree was entered, Straight Path’s only real option was to sell itself.62
Indeed, the Straight Path board later advised Evercore that “it was in the best
55
Id. ¶ 57.
56
Id. ¶ 36.
57
Id. ¶ 60.
58
Id.
59
Id. ¶ 61.
60
Id. ¶¶ 20, 22–24.
61
Id. ¶ 62.
62
Id. ¶ 63.
10
interests of the holders of Straight Path common stock for Straight Path to pursue a
competitive process to sell Straight Path.”63
The sales process began in earnest in February 2017, when the Board told
Evercore to reach out to twenty potential bidders.64 In its first-round bid instruction
letter, Evercore informed potential bidders of the 20% penalty owed to the FCC
under the Consent Decree.65 Bidders were told to take the penalty into account in
formulating their bids.66 The result was that Straight Path’s stockholders were bound
to receive less in a sale than they would have if the FCC had not penalized the
company.67
On February 6, 2017, the Straight Path board formed a Special Committee
made up of all directors save Davidi Jonas.68 The Special Committee’s initial task
was to evaluate options for divesting the IP Assets, which both the board and Howard
Jonas thought bidders were not interested in.69 About a week after its formation,
however, the Special Committee began discussing Straight Path’s indemnification
claim against IDT.70 Specifically, the Special Committee considered “the feasibility
of asserting an indemnification claim on behalf of Straight Path against IDT in
63
Clark Aff. Ex. C, at 60.
64
Compl. ¶ 65.
65
Id. ¶ 66; Clark Aff. Ex. C, at 39.
66
Compl. ¶ 66.
67
Id.
68
Id. ¶ 69.
69
Id. ¶¶ 68–69.
70
Id. ¶ 71.
11
relation to the FCC consent decree and Straight Path’s related liabilities in
connection with the Straight Path board’s evaluation of Straight Path’s strategic
alternatives.”71 After a February 14 meeting, the Special Committee unanimously
decided to preserve and pursue the indemnification claim for the benefit of Straight
Path’s stockholders.72
On February 28, the Special Committee’s lawyers from Shearman & Sterling
LLP told Straight Path’s counsel at Weil, Gotshal & Manges LLP that the Special
Committee intended to preserve the indemnification claim. 73 Shearman told Weil
that the Special Committee was exploring several options, including selling only the
Spectrum Assets or assigning the indemnification claim to a litigation trust.74 Either
option would enable Straight Path to pursue the claim against IDT post-closing.75
The next month, on March 8, the Special Committee met, with Weil and
Straight Path’s General Counsel in attendance.76 The Special Committee “expressed
and discussed concerns that bidders for Straight Path would not have interest in
vigorously pursuing a potential indemnity claim against IDT and thus would not
ascribe appropriate value to such claim in their bids to acquire Straight Path.”77 The
71
Clark Aff. Ex. C, at 39–40.
72
Compl. ¶ 71.
73
Id. ¶ 72.
74
Id.
75
Id.
76
Id. ¶ 73.
77
Clark Aff. Ex. C, at 40.
12
Special Committee then considered the feasibility of separating the indemnification
claim from any sale of Straight Path or, alternatively, negotiating a settlement of the
claim.78 Around this time, the Special Committee instructed its counsel to start
planning for the establishment of a litigation trust that could pursue the
indemnification claim against IDT post-closing.79
The Special Committee met again on March 13; Evercore, Straight Path’s
General Gounsel, and Weil were in attendance.80 At this meeting, the Special
Committee unanimously determined that it was in the best interests of Straight Path
and its stockholders to exclude the indemnification claim from any sale of the
company; it also asked that potential bidders be told about this in the second-round
bid instruction letter.81 The letter was sent out the next day.82
Davidi Jonas did not attend these Special Committee meetings, but by
February 28, he had likely learned of the Committee’s interest in preserving the
indemnification claim.83 It is also reasonable to infer that, shortly after the March
13 meeting, Davidi learned of the Committee’s definitive plan to exclude the claim
from any sale.84 After all, that meeting (along with the February 28 meeting) was
78
Id.
79
Compl. ¶ 74.
80
Id. ¶ 75.
81
Id.
82
Id.
83
Id. ¶ 76.
84
Id. ¶ 77.
13
attended by Weil, which represents Davidi in this litigation.85 In any case, Davidi
almost certainly became aware of the Special Committee’s intentions by March 14,
when Evercore, at the board’s direction, sent out the second-round bid instruction
letter informing potential bidders of the carve-out.86
Davidi recognized that pursuing the indemnification claim against IDT could
harm him and his family.87 If Straight Path successfully enforced its indemnification
right, IDT—which has a market capitalization of less than $350 million—would
likely go bankrupt.88 Shmuel Jonas, Davidi’s brother, is IDT’s CEO, and Howard
Jonas is its Chairman and controlling stockholder.89 Moreover, Davidi and his
siblings own over 10% of IDT’s outstanding equity.90 Thus, the Plaintiffs infer that
Davidi, understanding the threat posed by the preservation of the indemnification
claim, tipped off his father about the Special Committee’s plan.91 That is a
reasonable inference. Howard Jonas was not a member of Straight Path’s board, and
there is no indication that he was granted access to confidential information about
the sales process.92 Yet, as detailed below, Howard intervened in the process on
March 14, almost immediately after his son likely learned of the Special
85
Id. ¶¶ 76–77.
86
Id. ¶ 77.
87
Id. ¶ 78.
88
Id. ¶¶ 8, 78.
89
Id. ¶ 78.
90
Id.
91
Id. ¶ 79.
92
Id.
14
Committee’s definitive plan to separate the indemnification claim from any sale of
the company.93
Howard Jonas did not want the indemnification claim to survive a sale and be
pursued against IDT.94 While he held a greater equity stake in Straight Path than in
IDT, successful pursuit of the claim could bankrupt IDT, in which Howard’s
children held a 10% equity interest.95 Moreover, the size of the indemnification
claim was increasing as the bidding for Straight Path heated up. By the time the
second-round bid instruction letter was sent out, Verizon had expressed a willingness
to acquire Straight Path for up to $750 million.96 Thus, at this point in the sales
process, the portion of the indemnification claim related to the 20% penalty alone
was worth over $100 million.97 Notably, the Special Committee and its lawyers at
Shearman appear to have read the Separation Agreement to mean that IDT would be
on the hook for the 20% penalty.98
93
Id.
94
Id. ¶ 81.
95
Id. ¶¶ 78, 82
96
Id. ¶ 81.
97
Id.
98
See Clark Aff. Ex. C, at 47 (“Also on April 8, 2017, at a telephonic meeting of the special
committee, at which representatives of Shearman participated, the special committee instructed
representatives of Shearman to seek additional settlement consideration from IDT in light of the
substantially increased bids for Straight Path received since the settlement in principle was reached
on March 29, 2017, and in light of the increased amount that Straight Path would accordingly have
to pay to the FCC under the terms of the FCC consent decree.”); id. (“On the same date, a
representative of Shearman informed a representative of Boies Schiller that, because the bids for
Straight Path had climbed to a substantially higher level, the value of the potential indemnification
claim had increased significantly, and the special committee was requesting that IDT increase the
settlement consideration in light of the significant change in circumstances.”).
15
As soon as he learned of the Special Committee’s plan, Howard Jonas took
action. On March 14 and 15, Howard personally contacted each member of the
Committee and threatened to blow up the sales process if the Committee stuck to its
plan of preserving the indemnification claim. 99 Howard’s threat was credible
because he was Straight Path’s controlling stockholder, making his consent
necessary to consummate any sale of the company.100 During these conversations
or on other occasions around this time, Howard, per the Complaint, also “personally
threatened” the Special Committee members in an effort to get them to waive the
indemnification claim for a nominal settlement amount.101
On March 15, an IDT representative told Straight Path that Howard Jonas was
interested in acquiring the IP Assets as part of a settlement of the indemnification
claim.102 Two days later, Weil met with Howard Jonas and his lawyers from Boies,
Schiller & Flexner LLP.103 Weil noted that bidders would probably ask that Howard
and The Patrick Henry Trust enter a voting agreement to support any potential
transaction.104 Howard then told Weil that, although he would not support a sale of
Straight Path as a whole, he would consent to selling only the Spectrum Assets.105
99
Compl. ¶ 83.
100
Id. ¶ 80.
101
Id. ¶ 83.
102
Id. ¶ 84; Clark Aff. Ex. C, at 41.
103
Clark Aff. Ex. C, at 41.
104
Id.
105
Id. at 42.
16
Later, on March 20, one of Howard’s lawyers at Boies told counsel for the Special
Committee that Howard would not support any transaction that would enable the
indemnification claim to be pursued against IDT post-closing.106
Howard Jonas met with the Special Committee on March 29 to discuss the
indemnification claim and the IP Assets.107 Weil, Shearman, Boies, and Straight
Path’s General Counsel were in attendance.108 Realizing that it was out of options,
the Special Committee capitulated to Howard Jonas’s demands.109 The parties
reached an agreement in principle to settle the indemnification claim and sell the IP
Assets to IDT.110 On April 2, Evercore sent out the third-round bid instruction letter,
which informed bidders of the agreement between Howard and the Special
Committee.111
Straight Path and IDT executed the initial term sheet on April 6. 112 The
Special Committee signed off on the deal “after taking into account both the potential
gain in the event that Straight Path were to pursue an indemnification claim against
IDT and the costs and risks to the merger transaction.”113 Per the term sheet, Straight
Path agreed to sell the IP Assets to IDT for $6 million, even though the Consent
106
Id.; Compl. ¶ 84.
107
Compl. ¶ 86.
108
Clark Aff. Ex. C, at 43–44.
109
Compl. ¶ 86.
110
Id.
111
Id.; Clark Aff. Ex. C., at 44.
112
Compl. ¶ 87; Clark Aff. Ex. C, at 44.
113
Clark Aff. Ex. C, at 44.
17
Decree places a $50 million value on Straight Path’s “Non-License Portfolio
Assets,” the vast majority of which are the IP Assets.114 Straight Path also agreed to
settle the indemnification claim against IDT for $10 million plus a right to receive
22% of the net proceeds from the IP Assets.115 Finally, IDT consented to release
any counterclaims it might have against Straight Path.116
The day after the initial term sheet was executed, one of Howard’s attorneys
from Boies asked the Special Committee’s counsel to make the agreement
binding.117 The Boies attorney expressed the view that “consummation of the
merger should not be contingent upon further documentation of the settlement
between IDT and Straight Path.”118 As the Plaintiffs point out, however, the bidding
war for Straight Path was continuing unabated at this time; indeed, the same day this
conversation took place, Verizon proposed to acquire the company for $1.262
billion.119 Again, as the bids for Straight Path increased, IDT’s potential liability to
Straight Path increased as well.
The Special Committee met by phone on April 8.120 Recognizing that the
value of the indemnification claim was increasing by the day, the Special Committee
114
Compl. ¶¶ 88, 90. IDT later resold the IP Assets to Howard Jonas for $6 million. Id. ¶ 88.
115
Id. ¶ 88; Clark Aff. Ex. C, Annex A, Ex. B, at 1–2.
116
Clark Aff. Ex. C, Annex A, Ex. B, at 1.
117
Clark Aff. Ex. C, at 46.
118
Id.
119
Id. at 45–46.
120
Id. at 47.
18
instructed its lawyers to seek additional settlement consideration from IDT.121 When
counsel for the Committee did as they were told and tried to get a better deal for
Straight Path, Howard Jonas’s lawyers at Boies “emphatically rejected the . . .
request.”122 Worse, the Boies attorneys threatened litigation against both Shearman
and the Special Committee members personally if the Committee sought to
renegotiate the term sheet.123 The Special Committee relented, reasoning that “it
was not worth taking any risk of holding up the prospective merger in light of the
vastly improved offers for Straight Path, which . . . would greatly benefit
stockholders.”124 Thus, on April 9, Straight Path and IDT signed a revised term sheet
that reflected IDT’s request to make the agreement binding.125
4. Verizon Agrees to Acquire Straight Path for $3.1 Billion
The same day Straight Path and IDT executed the revised term sheet, AT&T
informed Davidi that it was prepared to offer $1.6 billion to acquire Straight Path.126
The offer was contingent on Straight Path approving the transaction that evening.127
The board unanimously approved the deal, and Straight Path and AT&T executed
the merger agreement, which allowed Straight Path to consider superior third-party
121
Id.; Compl. ¶ 93.
122
Clark Aff. Ex. C, at 47.
123
Compl. ¶ 93.
124
Clark Aff. Ex. C, at 47.
125
Id.
126
Id. at 48.
127
Id.
19
offers.128 Four days later, Verizon sent a letter to Evercore indicating that it was
considering a topping bid.129 A bidding war between AT&T and Verizon ensued.130
Verizon ultimately prevailed, and on May 11, 2017, it entered into the operative
merger agreement with Straight Path.131 Verizon agreed to acquire Straight Path at
a total enterprise value of $3.1 billion, or $184 in Verizon stock.132 The merger
consideration represents a 486% premium to the closing price of Straight Path’s
common stock on January 11, 2017, the day before the company announced the FCC
settlement and the strategic alternatives process.133 As part of the deal, Howard
Jonas agreed to vote his stock in favor of the merger.134 Straight Path’s stockholders
approved the transaction on August 2, 2017.135
5. The Merger Closes, and Straight Path and Verizon Pay the FCC
over $600 Million
On February 28, 2018, the Verizon merger closed, and the FCC received $614
million in accordance with the Consent Decree entered in January 2017.136 The
128
Id. at 49; Compl. ¶ 97.
129
Clark Aff. Ex. C, at 49.
130
Id. at 49–53.
131
Id. at 53; Compl. ¶ 98.
132
Compl. ¶ 98.
133
Clark Aff. Ex. C, at 54.
134
Compl. ¶ 98.
135
Id. ¶ 98 n.9.
136
A.K. Marsh. 2, 2018 Letter.
20
payment represents the largest civil penalty ever paid to the United States Treasury
to resolve an FCC investigation.137
C. This Litigation
This action began on July 5, 2017. Plaintiff JDS1 immediately moved for an
expedited trial, and I denied the request on July 24. That same day, I consolidated
the JDS1 action with a related case that had been filed on July 11 by Plaintiff The
Arbitrage Fund. JDS1’s initial complaint named Straight Path’s outside directors as
defendants. At the hearing on the motion to expedite, however, JDS1’s counsel
stated that the outside directors would be dismissed from the action without
prejudice.138 At the same hearing, counsel for the outside directors indicated that a
majority of the Straight Path board would not authorize the company to move to
dismiss under Court of Chancery Rule 23.1.139 The outside directors saw “it as their
duty to the company and the public stockholders, in the context of this controller
transaction, not to stand in the way of the Court’s consideration of any claim that
could ultimately benefit the company and all stockholders.”140
The Plaintiffs amended their Complaint on August 29, 2017. The Complaint
is styled as a class action directly challenging the Verizon merger, though the
137
A.K. Marsh. 26, 2018 Letter Ex. 2.
138
July 24, 2017 Oral Arg. Tr. 11:21–24.
139
Id. at 15:18–16:4.
140
Id. at 15:24–16:4.
21
Plaintiffs alternatively bring it as a derivative action.141 The Complaint contains four
counts. Count I alleges that Howard Jonas, as Straight Path’s controlling
stockholder, breached the fiduciary duties he owed to Straight Path and its
stockholders.142 Specifically, the Complaint charges Howard with using his position
as a controlling stockholder to extract unique benefits from the sales process, to the
detriment of the company’s minority stockholders.143 Those benefits included the
settlement of the indemnification claim for well below its fair value and the
acquisition of the IP Assets, previously valued at around $50 million, for only $6
million. Count II alleges that Davidi Jonas breached his fiduciary duties to Straight
Path and its stockholders by putting his (and his family’s) interests above those of
the company and its stockholders.144 Count III alleges that IDT aided and abetted
Howard and Davidi Jonas’s breaches of fiduciary duty. 145 Finally, Count IV is
brought derivatively, and it seeks a declaratory judgment and a constructive trust,
though these requests are moot now that the merger has closed.146
141
Compl. ¶¶ 102, 113.
142
Id. ¶¶ 120–24. Count I is brought against both Howard Jonas and The Patrick Henry Trust. Id.
at 43.
143
Id. ¶ 122.
144
Id. ¶¶ 125–29.
145
Id. ¶¶ 130–33.
146
Id. ¶¶ 134–39.
22
The Defendants moved to dismiss the Complaint on September 13, 2017.
Howard Jonas147 argues that the Plaintiffs’ claims are derivative rather than direct,
and that the derivative claims fail as a matter of law. He also argues that, regardless
of whether the claims are direct or derivative, the Complaint fails to plead any breach
of fiduciary duty.148 Davidi Jonas separately argues that the Complaint fails to state
a claim against him. According to Davidi, any breach of fiduciary duty claim against
him fails because, even if he had not tipped off his father as to the Special
Committee’s plan to preserve the indemnification claim, Howard would have
learned of the plan anyway. I heard oral argument on these Motions on November
3, 2017. On November 20, 2017, I issued a Letter Opinion holding that the matter
was not ripe for decision, because if the merger failed to close, any ruling on whether
the Plaintiffs pled a direct claim would amount to an advisory opinion.149 I also
noted that if the merged closed, any direct claims would be ripe, while any derivative
claims would fall away.150
As noted above, the merger closed on February 28, 2018. The Plaintiffs so
informed me on March 2, 2018, upon which I deemed the matter fully submitted.
147
For simplicity, I sometimes refer to Howard Jonas, IDT, and The Patrick Henry Trust
collectively as “Howard Jonas.”
148
Howard Jonas additionally argues that because the Plaintiffs have failed to plead an underlying
breach of fiduciary duty, the aiding and abetting claim against IDT must be dismissed as well.
149
In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2017 WL 5565264, at *3 (Del. Ch.
Nov. 20, 2017).
150
Id. at *4. In addition, I declined to decide whether the Plaintiffs adequately alleged demand
futility. Id.
23
II. ANALYSIS
The Defendants have moved to dismiss the Complaint under Court of
Chancery Rule 12(b)(6).151 When reviewing such a motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.152
I need not, however, “accept conclusory allegations unsupported by specific facts or
. . . draw unreasonable inferences in favor of the non-moving party.”153
A. Direct or Derivative?
Howard Jonas argues that the Plaintiffs’ claims are derivative rather than
direct. According to him, the allegations in the Complaint boil down to the assertion
that IDT did not pay Straight Path enough for the settlement of the indemnification
claim and the IP Assets. Thus, it was Straight Path that suffered the injury, and any
harm befalling the stockholders was merely an indirect result of the underlying
depletion of corporate assets. If Howard Jonas is correct that the Plaintiffs’ claims
are derivative, the Complaint must be dismissed. That is because the Verizon merger
151
Howard Jonas has also moved to dismiss under Rule 23.1, but because I find that the Plaintiffs’
claims are direct (and because the merger has closed), I need not address Howard’s demand futility
arguments.
152
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
153
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
24
has closed, and it is black-letter law that a plaintiff loses standing to sue derivatively
when she ceases to be a stockholder following a merger.154 In my view, the
Plaintiffs’ claims are properly characterized as direct. Thus, the Plaintiffs did not
lose standing when the Verizon merger closed.
“To determine whether a claim is derivative or direct, this Court must consider
‘(1) who suffered the alleged harm (the corporation or the suing stockholders,
individually); and (2) who would receive the benefit of any recovery or other remedy
(the corporation or the stockholders, individually)?’”155 “The stockholder must
demonstrate that the duty breached was owed to the stockholder and that he or she
can prevail without showing an injury to the corporation.”156 Tooley requires this
Court to look beyond the labels used to describe the claim, evaluating instead the
nature of the wrong alleged.157 “Where all of a corporation’s stockholders are
harmed and would recover pro rata in proportion with their ownership of the
154
Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984). There are two exceptions to this rule:
“(i) if the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive
shareholders of the standing to bring a derivative action; or (ii) if the merger is in reality merely a
reorganization which does not affect plaintiff's ownership in the business enterprise.” Kramer v.
W. Pac. Indus., Inc., 546 A.2d 348, 354 (Del. 1988). Because the Plaintiffs’ claims are direct
rather than derivative, I need not decide whether these two exceptions apply here.
155
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 655 (Del. Ch. 2013) (quoting Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004)).
156
Tooley, 845 A.2d at 1039.
157
E.g., In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 817 (Del. Ch. 2005), aff’d,
906 A.2d 766 (Del. 2006).
25
corporation’s stock solely because they are stockholders, then the claim is derivative
in nature.”158
Application of these principles assumes heightened significance in the post-
merger context.159 As noted above, under Lewis v. Anderson, a stockholder loses
standing to pursue derivative claims when a merger extinguishes her status as a
stockholder.160 Thus, “[i]n the context of a merger transaction, the derivative-
individual distinction is essentially outcome-determinative of any breach of
fiduciary duty claims that can be asserted in connection with the merger by the target
company stockholders.”161 If the claims are deemed derivative, the lawsuit ends.162
If they are found to be direct, however, the plaintiff may continue to pursue them.163
The caselaw that has developed to address the question of standing in the post-
merger context is often hard to reconcile.164 Nevertheless, the decisions provide
some helpful guidance.
158
Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).
159
Golaine v. Edwards, 1999 WL 1271882, at *4 (Del. Ch. Dec. 21, 1999); see also Feldman, 951
A.2d at 731 (“It is now well established that a plaintiff may avoid dismissal of his derivative claims
following a merger in only two circumstances: where the claims asserted are direct, rather than
derivative, or whether one of the exceptions recognized in Lewis v. Anderson applies.”).
160
477 A.2d at 1049.
161
Golaine, 1999 WL 1271882, at *4.
162
Id.
163
Id.
164
See, e.g., In re Gaylord Container Corp. S’holders Litig., 747 A.2d 71, 75 (Del. 1999) (“The
application of th[e direct/derivative test]-especially with respect to complaints challenging board
actions taken for defensive reasons or in the context of change of control transactions-has yielded
less than predictable results. Some of these results seem to flow from whether the plaintiff cited
the correct magic words, rather than from any real distinction between the relief sought or [sic] the
injury suffered.”).
26
The basic rule is simple enough: “A stockholder who directly attacks the
fairness or validity of a merger alleges an injury to the stockholders, not the
corporation, and may pursue such a claim even after the merger at issue has been
consummated.”165 Put differently, to state a direct claim under Parnes, “a
stockholder must challenge the validity of the merger itself, usually by charging the
directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair
price.”166 The difficulty lies in distinguishing between challenges to the merger itself
and challenges to mere “wrongs associated with the merger.”167 The former state
direct claims; the latter, if sufficiently remote from the merger itself, give rise to
derivative claims, which target stockholders typically cannot pursue post-merger.168
A review of the caselaw helps illustrate these principles. Parnes involved
allegations that the CEO of Bally Entertainment Corporation “informed all potential
acquirors that his consent would be required for any business combination with Bally
and that, to obtain his consent, the acquiror would be required to pay [him]
substantial sums of money and transfer to him valuable Bally assets.”169 The CEO
had no legal authority to make these demands, and several potential acquirors
165
Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999).
166
Id.
167
Id.
168
See Dieterich v. Harrer, 857 A.2d 1017, 1027 (Del. Ch. 2004) (noting that Parnes does not
mean “all shareholder claims for breach of fiduciary duty are direct if they involve a merger”).
169
Parnes, 722 A.2d at 1245.
27
declined to bid because they did not want to participate in illegal transactions.170
Nevertheless, Hilton Hotels Corporation agreed to the CEO’s demands.171 The
Supreme Court held that these allegations stated a direct claim because they “directly
challenge[d] the fairness of the process and the price in the Bally/Hilton merger.”172
The Parnes Court contrasted the facts before it with those in Kramer v.
Western Pacific Industries, Inc., which the Supreme Court had decided over a
decade earlier.173 In Kramer, two of the target corporation’s directors allegedly
breached their fiduciary duties by “diverting to themselves eleven million dollars of
the [merger] proceeds through their receipt of stock options and golden parachutes
and [by] incurring eighteen million dollars of excessive or unnecessary fees and
expenses in connection with the [merger].”174 The plaintiff in Kramer did not claim
that these transactions made the merger price unfair or tainted the sales process.175
Thus, even though the plaintiff alleged that the challenged transactions reduced the
consideration paid to the target stockholders, the Supreme Court held that the
complaint stated a derivative claim for “mismanagement resulting in waste of
corporate assets.”176
170
Id. at 1245–46.
171
Id. at 1246.
172
Id. at 1245.
173
Id.
174
Kramer, 546 A.2d at 350.
175
Id. at 354.
176
Id. at 353 & n.7.
28
Parnes distinguished Kramer as follows: “Although the complaint [in
Kramer] did allege that wrongful transactions associated with the merger . . . reduced
the amount paid to [the target’s] stockholders, it did not allege that the merger price
was unfair or that the merger was obtained through unfair dealing.”177 As former
Chancellor Chandler pointed out, the distinction drawn by Parnes is less than clear:
The rationale given by the Supreme Court in Parnes for distinguishing
Kramer is somewhat indeterminate. Although the complaint in Kramer
may not have alleged that the merger price was unfair, it did allege that
shareholders received less of the merger proceeds because of a series
of wrongful transactions leading up to the merger. It elevates form over
substance to allow a complaint to go forward simply by adding a
sentence to the complaint that alleges that the wrongful transactions at
issue resulted in an unfair merger price. Such a standard would
seemingly allow a plaintiff’s designation to trump the body of the
complaint.178
In other words, the Chancellor appears to have recognized that the distinction
articulated in Parnes embodies the type of formulaic pleading requirement that
Delaware law has generally rejected. Nevertheless, Tooley itself stated that both
Parnes and Kramer had been correctly decided.179
In Golaine v. Edwards, Chief Justice Strine, writing as a Vice Chancellor,
attempted a synthesis of Parnes and Kramer.180 The Court concluded that “the real
177
Parnes, 722 A.2d at 1245.
178
Agostino v. Hicks, 845 A.2d 1110, 1119 (Del. Ch. 2004); see also In re Gaylord Container
Corp. S’holders Litig., 747 A.2d at 75–76 (noting that the difference in outcomes between Parnes
and Kramer “seem[s] to flow from whether the plaintiff cited the correct magic words, rather than
from any real distinction between the relief sought or the injury suffered”).
179
Tooley, 845 A.2d at 1038–39.
180
Golaine, 1999 WL 1271882, at *5–7.
29
question underlying the teaching of Parnes [is] whether the complaint states a claim
that the side transactions caused legally compensable harm to the target’s
stockholders by improperly diverting consideration from them to their
fiduciaries.”181 Viewed in this way, “the derivative-individual distinction as
articulated in Parnes is revealed as primarily a way of judging whether a plaintiff
has stated a claim on the merits.”182 According to the Golaine Court, the Parnes
inquiry should focus “on whether compensable injury to the target stockholders is
alleged rather than on whether the target stockholder’s complaint has articulated
only a waste or mismanagement claim for which there is likely no proper plaintiff
on earth.”183 Thus, to state a direct claim under Parnes and Kramer, “the target
stockholder plaintiff must, at the very least, allege facts showing that the side
payment improperly diverted proceeds that would have, if the defendant directors
had acted properly, ended up in the consideration paid to the target stockholders.”184
In my view, Parnes and its progeny compel the conclusion that the Complaint
here states direct claims challenging the fairness of the Verizon merger. The January
2017 Consent Decree required Straight Path to forfeit 20% of its spectrum licenses,
181
Id. at *7.
182
Id.
183
Id.
184
Id. at *9; see also Houseman v. Sagerman, 2014 WL 1600724, at *13 (Del. Ch. Apr. 16, 2014)
(holding that, to state a direct claim under Parnes, “the plaintiff must plead facts supporting an
inference that the side payment represented an improper diversion and that, absent the impropriety,
the consideration would have gone to the stockholders”).
30
sell its remaining licenses within one year, and relinquish 20% of the sales proceeds
to the FCC. Because wireless spectrum made up the vast majority of Straight Path’s
assets, the Consent Decree essentially forced the company to sell itself. Fortunately,
Straight Path had a way to seek compensation for the penalties the FCC imposed on
it. As part of the spinoff from IDT, Straight Path received a right to indemnification
from its former parent for liabilities incurred pre-spinoff. The misconduct giving
rise to the Consent Decree occurred in 2011 and 2012, and the spinoff took place in
July 2013. Thus, the indemnification claim could enable Straight Path to recover,
among other things, the 20% penalty it would pay to the FCC in the event of a sale.
The problem was that potential acquirers would probably have little interest in
purchasing, in addition to wireless spectrum, a lawsuit against IDT, a company
controlled by Howard Jonas.185 Accordingly, any sale of Straight Path that did not
preserve the indemnification claim could have the effect of depriving stockholders
of one-fifth of the merger consideration.
The Special Committee recognized this. It therefore set about preserving the
indemnification claim so that, once the merger closed, Straight Path could recover
the portion of the sales proceeds that would be remitted to the FCC. The Special
185
See, e.g., Carsanaro, 65 A.3d at 664 (“[I]t can be inferred reasonably at the pleadings stage that
the buyer is paying to acquire the target company’s business and not for the right to sue the target
company’s fiduciaries. Acquirers buy businesses, not claims. Merger-related financial analyses
focus on the business, not on fiduciary duty litigation.”).
31
Committee instructed its counsel to draft the paperwork necessary to create a
litigation trust. The trust would pursue the indemnification claim against IDT post-
merger. It would exist for the benefit of the Straight Path stockholders, and not
Straight Path itself; upon sale of the company, then, stockholders would receive two
forms of consideration—a beneficial interest in the trust and a proportionate share
of consideration paid by the buyer.
These developments spelled trouble for Howard Jonas and his family.
Howard controlled a majority of the voting stock of Straight Path and IDT. And
while he held a larger equity stake in Straight Path than in IDT (17.6% versus
11.3%), his children separately held 10% of IDT’s outstanding equity. Moreover,
given IDT’s market capitalization, successful pursuit of the indemnification claim
could bankrupt the company Howard had founded approximately thirty years before.
Indeed, if IDT went bankrupt, the bankruptcy trustee might consider pursuing breach
of fiduciary claims against Howard, who had served as the company’s CEO at the
time of the spectrum-related misconduct. Howard would thus have reason to fear the
prospect that an entity he could not control would collect on the massive debt IDT
owed to Straight Path. Accordingly, once he learned of the Special Committee’s
plan, Howard used his leverage as Straight Path’s controlling stockholder to force
the company to settle IDT’s debt at an amount manifestly below fair value. Howard
accomplished this by threatening to block any sale that would allow the
32
indemnification claim to be pursued against IDT post-closing. Howard’s threats put
the Special Committee in a bind: it could capitulate to Howard’s demands and
deprive stockholders of the value represented by the indemnification claim, or it
could stick to its plan and risk blowing up a sales process that was likely to generate
a large premium for the stockholders.186
The Special Committee ultimately gave in to Howard’s demands, and the
indemnification claim was settled for $10 million plus a right to receive 22% of the
net proceeds from the IP Assets. As part of the settlement, Straight Path also agreed
to sell the IP Assets to IDT for $6 million, even though the Consent Decree places a
$50 million value on Straight Path’s “Non-License Portfolio Assets,” almost all of
which are the IP Assets. The settlement agreement was made binding on April 9,
the same day AT&T offered to acquire Straight Path for $1.6 billion. And Straight
Path was ultimately sold to Verizon for $3.1 billion. Because the indemnification
claim gave Straight Path the right to recover 20% of the sales price, the settlement
186
Howard Jonas argues that the Special Committee was not actually in a bind because he
expressed support for “a sale of only Straight Path’s wireless spectrum assets—which were the
only assets that had to be sold pursuant to the FCC consent decree.” Clark Aff. Ex. C, at 42. Of
course, selling only the spectrum would leave Howard in control of Straight Path. Given the
extraordinary steps he took to eliminate the indemnification claim, it is reasonable to infer that he
would likewise do whatever he could to prevent the claim from being asserted against IDT after
an asset sale. Moreover, Straight Path’s board advised Evercore that “it was in the best interests
of the holders of Straight Path common stock for Straight Path to pursue a competitive process to
sell Straight Path.” Clark Aff. Ex. C, at 60. That supports a pleading-stage inference that a sale
of Straight Path, rather than an asset sale, was the optimal transaction structure for the company’s
stockholders.
33
agreement effectively deprived the company’s stockholders of a claim potentially
worth over half a billion dollars as part of the sale of the company. What Straight
Path and its stockholders received in return was a small fraction of that potential
recovery.
These allegations support a reasonable inference that Howard Jonas, through
IDT, improperly diverted merger consideration that otherwise would have gone to
the stockholders. In the transaction structure proposed by the Special Committee,
the stockholders would receive the $3.1 billion minus the 20% penalty paid to the
FCC. But the indemnification claim would survive the sale, so the litigation trust
would be able to recover the 20% penalty from IDT. Thus, if the Special Committee
had established the litigation trust, the stockholders would have effectively received
a much higher total price in the Verizon sale.
That is not what happened, of course. Instead, Howard Jonas insisted that the
indemnification claim be settled for a relatively small amount of consideration.
Howard extracted significant, non-ratable benefits from this settlement: forgiveness
of IDT’s enormous debt, and the assurance that IDT would not face bankruptcy as a
result of its obligations to Straight Path. Yet the settlement directly harmed Straight
Path’s other stockholders, who ended up receiving hundreds of millions of dollars
34
less in merger consideration than they would have but for Howard’s disloyalty. 187
For these reasons, the Complaint supports a reasonable inference that Howard Jonas
“improperly diverted proceeds that would have, if [he] had acted properly, ended up
in the consideration paid to the target stockholders.”188 The Complaint also
establishes “a causal link between the breach complained of and the ultimate
unfairness of the merger.”189 Accordingly, the Plaintiffs have stated direct claims
under Parnes and its progeny.190
Howard Jonas tries to avoid this outcome by arguing that this case is really
about Straight Path wasting valuable assets, and that the sales process was merely
the backdrop for acts of corporate mismanagement. Specifically, Howard suggests
that the settlement agreement—in which Straight Path gave up assets for less than
they were worth—could have occurred in a non-merger context. To the extent that
is correct, it does not make the Plaintiffs’ claims, under the facts pled, derivative.
187
Contrary to Howard Jonas’s suggestion, the Plaintiffs’ claims are not derivative simply because
the Complaint fails to allege that any potential acquirer would have paid more than Verizon’s bid
of $184 per share. The Plaintiffs do not argue that the consideration received by the stockholders
was unfair because other bidders could have topped Verizon’s offer. Instead, the Plaintiffs allege
that Howard Jonas took a massive amount of merger consideration off the table by coercing the
Special Committee into settling the indemnification claim (and selling IDT the IP Assets) for less
than fair value.
188
Golaine, 1999 WL 1271882, at *9.
189
In re NYMEX S’holder Litig., 2009 WL 3206051, at *10 (Del. Ch. Sept. 30, 2009).
190
While the Complaint does not explicitly allege that Howard Jonas conditioned his support for
the merger on receipt of the IP Assets, IDT’s acquisition of those Assets was part of the same
settlement agreement that released the indemnification claim. Thus, at the pleading stage, it is
reasonable to infer that IDT’s acquisition of the IP Assets at an allegedly unfair price was part of
the improper diversion of merger proceeds on which the Plaintiffs’ direct claims are premised.
35
Howard Jonas explicitly conditioned his support for a sale of the company on the
elimination of the indemnification claim. Indeed, he threatened to blow up any sale
unless the Special Committee dropped its plan to preserve the claim. Howard thus
manipulated the sales process to secure significant benefits for IDT and himself at
the expense of Straight Path’s other stockholders. This is not a situation in which,
before merger talks began, a company’s fiduciaries made poor business decisions
that ultimately led to a reduction in the merger consideration paid to the
stockholders.191 Rather, the side benefits Howard Jonas extracted from the sales
process were directly related to the Verizon merger.192 Contrary to Howard’s
suggestion, the Complaint does not present only “textbook derivative claims,”193 and
the Plaintiffs’ standing was not extinguished by the merger.
191
Cf. In re Syncor Int’l Corp. S’holders Litig., 857 A.2d 994, 998 (Del. Ch. 2004) (“The
conclusion that the claims asserted here are derivative, not direct, is not altered by the fact that,
when Fu’s misconduct was ultimately disclosed, an effect of that disclosure was to cause a
reduction in the exchange ratio in the Cardinal/Syncor merger agreement. This is merely a
coincidental, indirect consequence of Fu’s acts that resulted from the awkward timing of the
disclosure. . . . The change in the terms of the then-pending merger agreement simply reflected a
change in the market value of Syncor resulting from the public disclosure of Fu’s alleged
misconduct and Cardinal’s ability to bargain for a better deal.”).
192
This case is therefore distinguishable from Kramer, in which the Supreme Court noted that the
plaintiff’s claims were “largely unrelated” to the merger. 546 A.2d at 352.
193
IDT Defs.’ Opening Br. 25; cf. Gentile v. Rossette, 2005 WL 2810683, at *6 (Del. Ch. Oct. 20,
2005) (“[H]ere the challenged side benefits were (as Plaintiffs allege) entirely related to the
merger-consummation of the merger was actually conditioned upon Rossette’s receipt of some
‘inducement.’”), rev’d on other grounds, 906 A.2d 91 (Del. 2006).
36
B. Does the Complaint Plead Viable Claims for Breach of Fiduciary Duty?
Having held that the Plaintiffs have standing to sue under Parnes, I next
consider whether the Complaint states viable claims for breach of fiduciary duty.194
Howard and Davidi Jonas argue that the Complaint fails to state claims against them.
Howard’s primary contention is that he was simply exercising his right as Straight
Path’s controlling stockholder to vote “no” on the transaction structure proposed by
the Special Committee. According to Howard, that is not enough to state a claim for
breach of fiduciary duty. Howard also argues that the Plaintiffs have failed to allege
that the Verizon merger was unfair to Straight Path’s stockholders. Davidi
separately argues that his alleged misconduct—tipping off his father about the
Special Committee’s plan—cannot sustain a breach of fiduciary duty claim because,
even if he had not leaked the plan, his father would have inevitably learned the
information necessary to commit a breach. I analyze the allegations relevant to
Howard and Davidi separately. In my view, the Complaint adequately pleads claims
for breach of fiduciary duty against both of them.
1. Howard Jonas
“A controlling stockholder owes fiduciary duties to the corporation and its
minority stockholders, and it is prohibited from exercising corporate power . . . so
194
See In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 477 (Del. Ch. 2013) (“If standing exists
[under Parnes], then the plaintiff must still plead a viable claim.”).
37
as to advantage [itself] while disadvantaging the corporation.”195 While a
controlling stockholder is entitled to act in its own self-interest, that right “must yield
. . . when a corporate decision implicates a controller’s duty of loyalty.”196 For
example, a controlling stockholder may “control and vote [its] shares in [its] own
interest,” but it must do so in accordance with “any fiduciary duty owed to other
stockholders.”197 Delaware law imposes fiduciary duties on controllers because they
are able to “exert[] [their] will over the enterprise in the manner of the board
itself.”198 “The purpose of controlling stockholder liability is to make sure that
controlling stockholders do not use their control to reap improper gains [at the
expense of the minority] through unfair self dealing or other disloyal acts.”199
Not all transactions involving controlled companies are subject to heightened
judicial scrutiny.200 Delaware’s default standard of review for corporate decisions
is the business judgment rule, “which directs the court to presume the board of
directors ‘acted on an informed basis, in good faith and in the honest belief that the
195
Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *22 (Del. Ch. Mar. 26, 2018) (second
alteration in original) (citation, internal quotation marks, and emphasis omitted).
196
Id.
197
Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 845 (Del. 1987).
198
Abraham v. Emerson Radio Corp., 901 A.2d 751, 759 (Del. Ch. 2006).
199
Shandler v. DLJ Merchant Banking, Inc., 2010 WL 2929654, at *16 (Del. Ch. July 26, 2010).
200
See, e.g., IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *6 (Del. Ch. Dec. 11,
2017) (“[C]ontrolling stockholders are not automatically subject to entire fairness review when a
controlled corporation effectuates a transaction.”).
38
action was taken in the best interests of the company.’”201 To rebut the business
judgment rule in the context of a controlled corporation, the plaintiff must
adequately allege that the controller engaged in a conflicted transaction.202
“Conflicted transactions include those in which the controller stands on both sides
of the deal (for example, when a parent acquires its subsidiary), as well as those in
which the controller stands on only one side of the deal but ‘competes with the
common stockholders for consideration.’”203 “In either circumstance, entire fairness
review will apply ab initio.”204
This Court has identified three examples of conflicted transactions in which a
controller competes with minority stockholders for consideration:
(1) where the controller receives greater monetary consideration for its
shares than the minority stockholders; (2) where the controller takes a
different form of consideration than the minority stockholders; and (3)
where the controller gets a unique benefit by extracting something
uniquely valuable to the controller, even if the controller nominally
receives the same consideration as all other stockholders.205
Transactions in these three categories “face entire fairness scrutiny to assuage the
risk that a controller who stands to earn ‘different consideration or some unique
201
Larkin v. Shah, 2016 WL 4485447, at *8 (Del. Ch. Aug. 25, 2016) (quoting Aronson v. Lewis,
473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244
(Del. 2000)).
202
Crane, 2017 WL 7053964, at *6.
203
Larkin, 2016 WL 4485447, at *8 (footnote omitted) (quoting In re Crimson Exploration Inc.
S’holder Litig., 2014 WL 5449419, at *12 (Del. Ch. Oct. 24, 2014)).
204
Id.
205
Crane, 2017 WL 7053964, at *6 (citations, internal quotation marks, and footnotes omitted).
39
benefit’ will flex his control to secure that self-interested deal to the detriment of
minority stockholders.”206
Here, entire fairness applies because Howard Jonas used his power as a
controlling stockholder to extract unique, non-ratable benefits from the sales
process. By threatening to withhold support for any sale that would allow the
indemnification claim to be pursued against IDT, Howard got the Special Committee
to agree to forgive a potentially half-billion-dollar debt IDT owed to Straight Path.
In exchange, Straight Path received $10 million and a portion of the proceeds from
the IP Assets.207 While Howard’s equity stake in Straight Path was larger than that
in IDT, his children held 10% of IDT’s equity, and one of his sons was IDT’s CEO.
Moreover, IDT—which Howard founded and continues to control—likely faced
bankruptcy if Straight Path successfully enforced its indemnification right. Howard
was IDT’s CEO at the time of the misconduct that gave rise to the Consent Decree,
so it is reasonable to infer that, if IDT went bankrupt, the bankruptcy trustee would
consider pursuing claims against Howard for breach of fiduciary duty. The
Complaint plausibly alleges that these benefits were material to Howard. And, as
discussed above, they came at the expense of Straight Path’s minority stockholders,
who received materially less merger consideration as a result of Howard’s disloyalty.
206
Larkin, 2016 WL 4485447, at *9.
207
Howard Jonas also received the non-ratable benefit of the IP Assets, which IDT purchased from
Straight Path for $6 million and then immediately resold to Howard for the same amount.
40
Howard Jonas responds by invoking principles of stockholder democracy. He
says that he was simply exercising his right as a stockholder to “just say no” to a
transaction he disapproved of. Not so. It is true that “a stockholder is under no duty
to sell its holdings in a corporation, even if it is a majority shareholder, merely
because the sale would profit the minority.”208 And a controlling stockholder need
not “engage in self-sacrifice for the benefit of minority shareholders.”209 But that
“does not mean that the controller or its affiliates are immune from claims for the
improper exercise of fiduciary power.”210 “If the controller attempts to squeeze out
the minority, cause the controlled entity to engage in interested transactions, or other
such conduct, the duty of loyalty operates to police the controller’s conduct.”211
In re Delphi Financial Group Shareholder Litigation212 illustrates that a
controller’s right to refuse to support a transaction does not imply a right to exploit
minority stockholders. In Delphi, the target corporation maintained a dual-class
capital structure in which Class A shares were held mostly by the public and Class
208
Bershad, 535 A.2d at 845; see also Frank v. Elgamal, 2014 WL 957550, at *21 (Del. Ch. Mar.
10, 2014) (“Because a controlling stockholder has no duty to sell its stock, it has the obvious ability
to reject any transaction it does not like.”).
209
In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1040 (Del. Ch. 2012).
210
Buttonwood Tree Value Partners, LP v. Sullivan, 2015 WL 6437218, at *1 (Del. Oct. 22, 2015).
211
Id.; see also Mendel v. Carroll, 651 A.2d 297, 306 (Del. Ch. 1994) (“To acknowledge that the
Carroll Family has no obligation to support a transaction in which they would in effect sell their
stock is not, of course, to suggest that they can use their control over the corporation to effectuate
a self-interested merger at an unfair price.”).
212
2012 WL 729232 (Del. Ch. Mar. 6, 2012).
41
B shares were held entirely by the controlling stockholder.213 The controller held
49.9% of the target’s voting power on account of his Class B shares, but his stock
ownership accounted for only 12.9% of the outstanding equity.214 The target’s
charter required that holders of Class A and Class B shares receive equal
consideration in the event of a merger.215 Nevertheless, the controlling stockholder
conditioned his support for the merger on receiving a control premium, which in turn
required a charter amendment removing the equal-consideration requirement.216
The controller argued that because he was “generally unconstrained by fiduciary
duties when deciding whether to sell his stock, he [was] permitted to condition his
approval of a sale on both a restoration of his right to receive a control premium and
on actually receiving such a premium.”217 This Court rejected that argument, finding
it reasonably likely that the plaintiffs would be able to show at trial that “in
negotiating for disparate consideration and only agreeing to support the merger if he
received it, [the controller] violated duties to the stockholders.”218
Here, Howard Jonas did not simply refuse to support a sale of Straight Path.
He did not “just say no,” as was his right as a stockholder.219 Instead, he conditioned
213
Id. at *3.
214
Id.
215
Id.
216
Id. at *7, *9.
217
Id. at *16.
218
Id. at *17.
219
See, e.g., Peter Schoenfeld Asset Mgmt. LLC v. Shaw, 2003 WL 21649926, at *2 (Del. Ch. July
10, 2003) (“A majority shareholder has discretion as to when to sell his stock and to whom, a
42
his support for the merger on receiving unique, non-ratable benefits at the expense
of the company’s minority stockholders. Worse, he made personal threats against
the members of the Special Committee to secure their consent, and he threatened to
undercut the sales process if he did not get his way.220 These allegations are
sufficient to subject the Verizon merger to entire fairness review.221 Indeed, entire
fairness review is particularly appropriate here, where “a controller who [stood] to
discretion that comes from the majority shareholder’s rights qua shareholder.” (citation and
internal quotation marks omitted)), aff’d, 840 A.2d 642 (Del. 2003).
220
According to Howard Jonas, the Plaintiffs fail to allege that he engaged in any wrongdoing in
connection with the sales process. Specifically, Howard claims that “[t]he Complaint contains no
basis for leaping to the conclusion that Jonas pressured Straight Path to settle th[e]
[indemnification] claim (or sell the IP Assets) at any particular price, let alone an unfair one.” IDT
Defs.’ Opening Br. 40. For reasons that should be clear by now, Howard is wrong. To take just
one example, the Complaint specifically alleges that Howard “personally threatened the Special
Committee members in order to coerce them into agreeing to eliminate the Indemnification Claim
for nominal consideration.” Compl. ¶ 83 (emphasis added).
221
Howard Jonas argues that the business judgment rule applies because the settlement agreement
was approved “by an independent board in the exercise of its judgment.” IDT Defs.’ Opening Br.
52. That is incorrect. The business judgment rule will apply to a conflicted transaction involving
a controlling stockholder where the “controller agrees up front, before any negotiations begin, that
the controller will not proceed with the proposed transaction without both (i) the affirmative
recommendation of a sufficiently authorized board committee composed of independent and
disinterested directors and (ii) the affirmative vote of a majority of the shares owned by
stockholders who are not affiliated with the controller.” In re EZCORP Inc. Consulting Agreement
Derivative Litig., 2016 WL 301245, at *11 (Del. Ch. Jan. 25, 2016), reconsideration granted in
part, 2016 WL 727771 (Del. Ch. Feb. 23, 2016); see also In re Martha Stewart Living Omnimedia,
Inc. S’holder Litig., 2017 WL 3568089, at *2 (Del. Ch. Aug. 18, 2017) (concluding that this
framework applies “to conflicted one-side controller transactions”). “Threats, coercion, or fraud
on the part of the controlling stockholder, however, may nullify either procedural protection.” In
re Delphi Fin. Grp. S’holder Litig., 2012 WL 729232, at *12 n.57 (citation and internal quotation
marks omitted). Here, Howard Jonas repeatedly threatened the members of the Special
Committee, thereby nullifying the burden-shifting effect that would otherwise follow from the
Committee’s approval. See In re EZCORP Inc. Consulting Agreement Derivative Litig., 2016 WL
301245, at *11 (“If a controller agrees to use only one of the protections, . . . then the most that the
controller can achieve is a shift in the burden of proof such that the plaintiff challenging the
transaction must prove unfairness.”).
43
earn ‘different consideration or some unique benefit’ . . . flex[ed] his control to
secure [a] self-interested deal to the detriment of minority stockholders.”222
Thorpe v. CERBCO, Inc.,223 relied on by Howard Jonas, does not support a
different result. CERBCO involved controlling stockholders who usurped a
corporate opportunity by attempting to sell one of CERBCO’s subsidiaries without
bringing that opportunity to CERBCO itself.224 The Delaware Supreme Court
agreed with the trial court that the controllers had breached the duty of loyalty.225
The Supreme Court then turned to the issue of damages, distinguishing between
damages caused by the breach and damages resulting from the controllers’ “lawful
exercise of statutory rights” in vetoing a potential transaction.226 Because any
damages stemming from “the nonconsummation of the transaction” resulted from
the controllers’ lawful exercise of their statutory rights, transactional damages could
not be awarded.227 But the Supreme Court held that other damages could be awarded
for the controllers’ disloyalty, including “any expenses . . . that the corporation
incurred to accommodate the [controllers’] pursuit of their own interests prior to the
deal being abandoned.”228 CERBCO thus has no bearing on the question before me,
222
Larkin, 2016 WL 4485447, at *9.
223
676 A.2d 436 (Del. 1996).
224
Id. at 438–39.
225
Id. at 442.
226
Id. at 444.
227
Id.
228
Id. at 445.
44
which is whether the Complaint pleads viable claims.229 Issues involving the
calculation of damages must await a developed factual record.230
2. Davidi Jonas
According to the Complaint, Davidi Jonas tipped off his father as to the
Special Committee’s plan to put the indemnification claim in a litigation trust.
Davidi had reason to be concerned about the Special Committee’s plan to preserve
the claim. At the time of the sales process, he was a Straight Path director and the
company’s CEO, but he and his siblings held a 10% equity stake in IDT. Thus, it is
reasonable to infer that Davidi was looking out for his own (and his family’s)
interests when he leaked the Special Committee’s plan to his father. Nevertheless,
Davidi argues that the Complaint fails to allege that he breached the duty of loyalty.
He claims that his disloyal conduct cannot support a breach of fiduciary duty claim,
because even if he had been a faithful fiduciary, his father would have inevitably
learned everything necessary to extract non-ratable benefits at the minority
stockholders’ expense. This argument fails.
229
Equally inapposite is In re Countrywide Corp. Shareholders Litigation, 2009 WL 846019 (Del.
Ch. Mar. 31, 2009). True, in that case, former Vice Chancellor Noble held that a failure to preserve
a derivative claim via a litigation trust was “a novel theory . . . unlikely to find success.” Id. at *9.
But the target board’s actions in Countrywide were protected by the business judgment rule. Id.
Here, by contrast, the Verizon merger is subject to entire fairness review as a result of Howard
Jonas’s extraction of unique benefits from the sales process.
230
See, e.g., Chaffin v. GNI Grp., Inc., 1999 WL 721569, at *7 (Del. Ch. Sept. 3, 1999) (“On a
motion to dismiss all that need be decided is whether a claim is stated upon which any relief could
be granted. If that question is answered in the affirmative, the nature of that relief is not relevant
and need not be addressed.”).
45
As a Straight Path officer and director, Davidi owed fiduciary duties of care
and loyalty to the company and its stockholders.231 To establish a breach of fiduciary
duty, a plaintiff must prove two elements: (i) the defendant owed a fiduciary duty,
and (ii) the defendant breached the duty owed.232
“At the core of the fiduciary duty is the notion of loyalty—the equitable
requirement that, with respect to the property subject to the duty, a fiduciary always
must act in a good faith effort to advance the interests of his beneficiary.” 233
Accordingly, “the duty of loyalty mandates that the best interest of the corporation
and its shareholders takes precedence over any interest possessed by a director,
officer or controlling shareholder and not shared by the stockholders generally.”234
“Corporate fiduciaries ‘are not permitted to use their position of trust and confidence
to further their private interests.’”235 The duty of loyalty additionally requires a
corporate fiduciary to act in good faith.236 “A failure to act in good faith may be
231
See, e.g., QC Commc’ns Inc. v. Quartarone, 2014 WL 3974525, at *11 (Del. Ch. Aug. 15,
2014) (“Officers and directors of Delaware corporations owe fiduciary duties of care and loyalty
to those corporations for which they serve.”).
232
E.g., Beach to Bay Real Estate Ctr. LLC v. Beach to Bay Realtors Inc., 2017 WL 2928033, at
*5 (Del. Ch. July 10, 2017).
233
Dweck v. Nasser, 2012 WL 161590, at *12 (Del. Ch. Jan. 18, 2012) (quoting U.S. W., Inc. v.
Time Warner Inc., 1996 WL 307445, at *21 (Del. Ch. June 6, 1996)).
234
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
235
Frederick Hsu Living Trust v. ODN Holding Corp., 2017 WL 1437308, at *16 (Del. Ch. Apr.
14, 2017) (quoting Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939)).
236
Id.
46
shown, for instance, where the fiduciary intentionally acts with a purpose other than
that of advancing the best interests of the corporation.”237
The Complaint supports a reasonable inference that Davidi Jonas acted
disloyally to Straight Path and its stockholders. Because he and his siblings held a
significant equity stake in IDT, Davidi had a strong interest in seeing the
indemnification claim eliminated. After all, successful pursuit of that claim could
bankrupt IDT. Yet Straight Path and its stockholders would benefit from enforcing
the claim. Thus, by tipping off his father about the Special Committee’s plan to
preserve and pursue the claim post-merger, Davidi put his personal interests above
those of Straight Path and its stockholders. Indeed, it is reasonable to infer that
Davidi made the tip precisely because he wanted his father to use his control over
Straight Path to thwart the Special Committee’s plan. Simply put, a loyal fiduciary
would not have done what Davidi is alleged to have done. That is enough to state a
claim for breach of the duty of loyalty.238
Davidi argues that he should be dismissed from this case because his father
would have learned of the Special Committee’s plan regardless of the tip. Davidi
points out that, as Straight Path’s controlling stockholder, Howard Jonas had to sign
off on any merger. Presumably, Howard would not agree to vote his stock in favor
237
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006).
238
For the same reasons, the Complaint supports a reasonable inference that Davidi “intentionally
act[ed] with a purpose other than that of advancing the best interests of the corporation.” Id.
47
of a merger unless he understood its terms. A key component of the transaction
structure proposed by the Special Committee was that the indemnification claim
would be carved out from the sale and preserved in a litigation trust. Thus, before
he agreed to support a merger, Howard would very likely learn of the Special
Committee’s plan. Once that happened, Howard would be in just as good a position
to breach his fiduciary duties as he was when Davidi tipped him off.
Davidi misconstrues the pleading burden for claims of breach of fiduciary
duty. A plaintiff’s obligation at the pleading stage is simply to allege “(1) that a
fiduciary duty exists and (2) that the fiduciary breached that duty.”239 Notably,
resulting damages are absent from this list of elements. For the reasons explained
above, the Plaintiffs have adequately alleged that Davidi breached the fiduciary
duties he owed to Straight Path and its stockholders. Nothing more is required at
this stage of the litigation. Davidi has not cited a single case supporting the
proposition that, in addition to these two elements, the plaintiff must also allege the
precise impact of a fiduciary’s disloyal conduct. In any event, that is a fact-intensive
question that cannot be answered on a Rule 12(b)(6) motion. Davidi’s Motion to
Dismiss is denied.
239
York Linings v. Roach, 1999 WL 608850, at *2 (Del. Ch. July 28, 1999).
48
3. Entire Fairness
Having determined that the Verizon merger is subject to entire fairness
review, I now turn to Howard Jonas’s argument that the Plaintiffs have failed to
allege facts suggesting the transaction was unfair. I have already explained why the
Complaint adequately alleges the sales process was tainted by Howard’s improper
efforts to pressure the Special Committee into doing a deal that favored him at the
minority stockholders’ expense. Thus, I need not further address whether the
Plaintiffs have adequately alleged unfair dealing. But Howard also argues the
Plaintiffs have failed to plead that the consideration Straight Path’s stockholders
received in the merger was unfair. This argument lacks merit.
“Under the entire fairness standard, the Court will inquire ‘into two
interrelated concepts: fair dealing and fair price.’”240 Fair dealing encompasses
“questions of when the transaction was timed, how it was initiated, structured,
negotiated, disclosed to the directors, and how the approvals of the directors and the
stockholders were obtained.”241 “The fair price aspect of the test ensures that the
transaction was substantively fair by examining ‘the economic and financial
considerations.’”242 “Entire fairness is this Court’s most rigorous standard of
240
Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 WL 770251, at *9 (Del. Ch. Feb. 29, 2016)
(quoting In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *9).
241
Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983).
242
Will. v. Ji, 2017 WL 2799156, at *5 (Del. Ch. June 28, 2017) (quoting Weinberger, 457
A.2d at 711).
49
review; the initial burden of proof is on the [defendant] to establish, to the Court’s
satisfaction, that the transaction was a product of fair dealing and at a fair price.”243
If entire fairness applies at the pleading stage, dismissal is inappropriate
“unless the [defendant] is able to show, conclusively, that the challenged transaction
was entirely fair based solely on the allegations of the complaint and the documents
integral to it.”244 Still, a plaintiff “must allege some facts that tend to show that the
transaction was not fair.”245 The Plaintiffs here have met their pleading burden.
According to the Complaint, in exchange for $10 million and a portion of the
proceeds from the IP Assets, Straight Path waived an indemnification claim
potentially worth hundreds of millions of dollars.246 As part of the same transaction,
Straight Path sold IDT the IP Assets for $6 million, even though the Consent Decree
itself suggests the Assets were worth approximately $50 million. These allegations
are sufficient at the pleading stage to show that the reduction in merger consideration
243
Hamilton Partners, L.P. v. Highland Capital Mgmt., L.P., 2014 WL 1813340, at *12 (Del. Ch.
May 7, 2014).
244
Id.; see also In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1180–81
(Del. 2015) (“When [entire fairness] is invoked at the pleading stage, the plaintiffs will be able to
survive a motion to dismiss by interested parties regardless of the presence of an exculpatory
charter provision because their conflicts of interest support a pleading-stage inference of
disloyalty.”); Orman v. Cullman, 794 A.2d 5, 21 n.36 (Del. Ch. 2002) (“A determination of
whether the defendant has met [its] burden [in an entire fairness case] will normally be impossible
by examining only the documents the Court is free to consider on a motion to dismiss—the
complaint and any documents it incorporates by reference.”).
245
Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995), aff’d,
672 A.2d 35 (Del. 1996).
246
Notably, the indemnification claim may also have allowed Straight Path to recover from IDT
for the loss of the forfeited licenses, the $15 million fine, and any expenses related to both the
internal and FCC investigations.
50
caused by the settlement was unfair to Straight Path’s stockholders. The Plaintiffs
have thus adequately alleged unfair price.
Howard Jonas responds by asserting that the indemnification claim was
probably worthless.247 For example, Howard argues that the Plaintiffs have not
alleged Straight Path gave IDT timely written notice of the FCC investigation,
purportedly a condition precedent to the indemnification obligation. Howard also
suggests that the indemnification claim was not triggered because IDT itself did not
consent to the Consent Decree. And Howard claims that, even if Straight Path had
the contractual right to pursue the indemnification claim against IDT, Straight Path
would be barred as a matter of law from recovering from IDT any penalty paid to
the FCC.
In my view, a motion to dismiss is not the appropriate vehicle for considering
these arguments. The arguments boil down to the assertion that Straight Path had
no chance of recovering anything from IDT via the indemnification claim, and thus
that settlement of the claim—for any amount—was entirely fair. But the Complaint
makes clear that the Special Committee and its legal advisors saw things differently.
247
See IDT Defs.’ Opening Br. 49 (“At bottom, Plaintiffs’ pleading failures confirm that the
keystone to their position—that the Indemnity Claim was somehow worth $150 million—is flat
wrong. That claim was likely worth nothing . . . .” (emphasis added)). Oddly, in his reply brief,
Howard Jonas appears to deny having taken the position that the indemnification claim had no
value. See IDT Defs.’ Reply Br. 31 (“Indeed, as explained above, Defendants’ position is not that
the Indemnification Claim had no value – it is that Plaintiffs have failed to adequately allege that
the value at which it was settled (tens of millions of dollars) was unfair.”).
51
They thought that Straight Path’s chances of recovering the 20% penalty from IDT
justified creation of the litigation trust. It is possible that the Special Committee and
its lawyers at Shearman—a prominent law firm—misunderstood the Separation
Agreement. But it is equally reasonable to infer that they did not, and at the pleading
stage, the plaintiff gets the benefit of all reasonable inferences.248 Moreover, it is
hard to square the notion that the indemnification claim was worthless with Howard
Jonas’s alleged conduct in connection with settlement of the claim. According to
the Complaint, this conduct included making personal threats to the members of the
Special Committee—one of whom (William F. Weld) is the former Governor of
Massachusetts.249
Finally, Howard Jonas argues that the Consent Decree’s $50 million valuation
of Straight Path’s “Non-License Portfolio Assets” does not suggest the IP Assets
were worth that amount. But the Complaint explicitly alleges that the vast majority
of Straight Path’s non-spectrum assets consisted of the IP Assets. And, according
to the Plaintiffs, the $50 million figure in the Consent Decree came from Straight
Path itself.250 Thus, the Complaint supports a reasonable inference that the IP Assets
were worth around $50 million, and that $6 million was therefore an unfair price.
248
See, e.g., Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (“[T]he plaintiff is entitled
to all reasonable inferences that logically flow from the face of the complaint.”).
249
In addition, IDT itself recognized in public filings that it could face liability for the penalties
the FCC imposed on Straight Path.
250
Compl. ¶ 54 n.3.
52
Further, while Howard claims that IDT simply matched the highest bid Straight Path
had received for the IP Assets, that purported fact is not alleged or incorporated by
reference in the Complaint, and so cannot be considered on a motion to dismiss.251
Accordingly, the Complaint adequately alleges that the sale of the IP Assets at well
below fair value helped render the merger consideration unfair.
In sum, the Plaintiffs have alleged enough facts to suggest that the Verizon
merger, conditioned as it was on the transfer of assets to Howard Jonas’s benefit,
was unfair to Straight Path’s stockholders. Of course, Howard Jonas is free to make
the fact-intensive arguments advanced in his motion papers at a later stage of this
litigation.
C. Aiding and Abetting
The Complaint charges IDT with aiding and abetting Howard and Davidi
Jonas’s breaches of fiduciary duty. The sole argument for dismissal of this claim is
that the Complaint fails to plead any underlying breach of fiduciary duty. Because
the Complaint adequately alleges Howard and Davidi committed breaches of
fiduciary duty, the aiding and abetting claim survives.
251
See, e.g., In re Gardner Denver, Inc., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014) (“[T]he
universe of facts [on a Rule 12(b)(6) motion] is typically limited to the allegations of the complaint
and any documents attached to it.”).
53
D. Declaratory Judgment and Constructive Trust
Count IV of the Complaint seeks “an expedited declaratory judgment prior to
the closing of the Verizon Transaction that Davidi Jonas and Howard Jonas breached
their fiduciary duties by entering into” the settlement agreement.252 Count IV also
seeks the imposition of a constructive trust to allow the Plaintiffs “to pursue the
Indemnification Claim on behalf of the stockholders and [have] the Court appoint a
trustee to hold a free and fair auction for the IP Assets with the proceeds going to
the stockholders.”253 These requests are premised on my finding that the Plaintiffs’
claims are derivative, and they seek pre-closing relief. Because the Verizon merger
has closed, and I have held that the Plaintiffs’ claims are direct rather than derivative,
Count IV is moot and must be dismissed.
III. CONCLUSION
For the foregoing reasons, the Defendants’ Motions to Dismiss are granted in
part and denied in part. The parties should submit an appropriate form of order.
252
Compl. ¶ 135.
253
Id. ¶ 139.
54