In re Straight Path Communications Inc Consolidated Stockholder Litigation

COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: July 23, 2018
Date Decided: July 26, 2018
Ned Weinberger, Esquire Rudolf Koch, Esquire
Thomas Curry, Esquire Kevin M. Gallagher, Esquire
Labaton Sucharow LLP Sarah A. Clark, Esquire
300 Delaware Avenue, Suite 1340 Anthony M. Calvano, Esquire
Wilmington, Delaware 19801 Richards, Layton & Finger, P.A.
920 North King Street
Wilmington, Delaware 19801
Kevin G. Abrams, Esquire
Michael A. Barlow, Esquire
April M. Ferraro, Esquire
Abrams & Bayliss LLP
20 Montchanin Road, Suite 200
Wilmington, Delaware 19807
Re: In re Straight Path Communications Inc. Consolidated
Stockholder Litigation, Civil Action No. 2017-0486-SG
Dear Counsel:
I have reviewed the Defendants’1 request that I certify an interlocutory
appeal of my Memorandum Opinion of June 25, 2018 (the “Mem. Op.”), together
with the Plaintiffs’ opposition. An Order consistent with Supreme Court Rule 42
is attached, certifying the interlocutory appeal. This Letter Opinion supports that
Order.
1
I refer to IDT Corporation, Howard Jonas, and The Patrick Henry Trust as the “Defendants” in
this Letter Opinion.
The viability of this post-merger action depends on the nature of the
Plaintiffs’ claim. If that claim is derivative of a cause of action owned by Nominal
Defendant Straight Path Communications Inc., then that cause of action passed to
the buyer, Verizon, in the merger of Straight Path into Verizon, which closed on
February 28, 2018.2 Any standing these Plaintiffs had to prosecute that cause of
action went by the board at that time.3 On the other hand, if the Plaintiffs’ claim is
direct, the merger had no bearing on its viability or on the Plaintiffs’ standing.4
In the Mem. Op., I found that the actions complained of—involving a
conflicted transaction to settle claims and transfer assets to a controller—were
sufficiently intertwined with the merger that they represented a claim that some of
the fruits of the merger were diverted to the controller at the expense of the non-
controller stockholders, rendering that transaction unfair.5 Accordingly, I found
the Plaintiffs had pled a direct claim, and denied in relevant part the Motions to
Dismiss.6
2
In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *8 (Del. Ch.
June 25, 2018).
3
See Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984) (“A plaintiff who ceases to be a
shareholder, whether by reason of a merger or for any other reason, loses standing to continue a
derivative suit.”).
4
See Golaine v. Edwards, 1999 WL 1271882, at *4 (Del. Ch. Dec. 21, 1999) (“If the claims are
held to be individual, then the target company plaintiff may press on.”).
5
In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *9–20.
6
Id.2
Our Supreme Court has made it clear, via Rule 42, that interlocutory appeals
are disfavored as, generally, inefficient.7 The Supreme Court has directed the trial
courts to deny motions to certify interlocutory appeals unless a specific analysis of
enumerated factors demonstrates to the trial court that the proposed appeal is in
that small subset of cases where interlocutory review is appropriate in the interests
of justice and efficiency.8
The Defendants point out that, if my decision on the Motions to Dismiss
were reversed, the matter would be at an end.9 An interlocutory appeal, therefore,
might avoid the necessity for discovery and trial, the expense and effort of which
would be wasted if a reversal came only upon final review on appeal. In other
words, the Mem. Op. resolved a substantial issue of material importance to the
parties.10 True, but insufficient; the same is true with respect to any denial of a
case-dispositive motion. The Defendants also point out, however, that this matter
satisfies more than one of the criteria applicable under Rule 42(b)(iii), which
embody the analysis mandated to the trial court, as discussed above.
7
See Supr. Ct. R. 42(b)(ii) (“Interlocutory appeals should be exceptional, not routine, because
they disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce
party and judicial resources.”).
8
Supr. Ct. R. 42(b)(i), (iii).
9
See Golaine, 1999 WL 1271882, at *4 (“In 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. If the
claims are held to be individual, then the target company plaintiff may press on. If the claims are
found derivative, she may not.”).
10
See Supr. Ct. R. 42(b)(i) (“No interlocutory appeal will be certified by the trial court or
accepted by this Court unless the order of the trial court decides a substantial issue of material
importance that merits appellate review before a final judgment.”).
3
The question presented in the Mem. Op. involves whether a challenge to a
sale of corporate assets to a controller for an unfair price, upon which the controller
conditions consent to a merger, states a direct claim under Parnes v. Bally
Entertainment Corp.11 and its progeny. Under Parnes, “[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.”12 Unlike in Parnes itself,13 however, here
there was no challenge to the merger price as such; the challenged sale upon which
the merger was conditioned removed corporate assets that would otherwise have
been withheld from the merger sale and transferred to a trust for the benefit of the
stockholders.14 As a result, the total consideration received by the stockholders
post-merger was decreased by the challenged sale, but the merger price itself was
not affected, and was not challenged by the Plaintiffs.
This precise question has not been directly addressed by prior case law. In
that sense, the issue satisfies Rule 42(b)(iii)(A), which asks whether the decision
11
722 A.2d 1243 (Del. 1999).
12
Id. at 1245.
13
See id. at 1246 (noting that interested acquirors might have paid a higher price for Bally “but
were discouraged from bidding because they were unwilling to participate in illegal
transactions”).
14
See In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *13
n.187 (“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.”).
4
“involves a question of law resolved for the first time in this State.” As stated
above, review may terminate the litigation, satisfying Rule 42(b)(iii)(G). Finally, I
note that the resolution of the matter will be instructive on the application of
Parnes in light of the Supreme Court precedent in Kramer, which teaches that
transactions prior to a merger that are challenged, essentially, as waste, belong
solely to the company, and do not state direct claims.15 Guidance on this issue, in
my mind, would serve considerations of justice, satisfying Rule 42(b)(iii)(H).16
In light of this analysis, and despite the costs of interlocutory appeal to
litigants and to the courts, I find that review by the Supreme Court of this issue on
an interlocutory basis is in the interest of justice, and that the benefits will likely
outweigh the costs.17
15
See Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988) (“The complaint states
simply a series of claims of waste of assets (through the payment of unnecessary options,
bonuses, fees and expenses) that, by virtue of the timing of payout, are said to result in an illegal
diversion of funds from the shareholders in breach of a contract right and the cause of special
injury to them. We do not find such allegations to be sufficient to state a claim of special or
direct injury to the common shareholders rather than a derivative claim for waste.” (footnote
omitted)).
16
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.”).
17
See Supr. Ct. R. 42(b)(iii) (“After considering these factors and its own assessment of the most
efficient and just schedule to resolve the case, the trial court should identify whether and why the
likely benefits of interlocutory review outweigh the probable costs, such that interlocutory
review is in the interests of justice.”).
5
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
6
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 )
ORDER GRANTING LEAVE TO APPEAL FROM INTERLOCUTORY
ORDER
This day of July 26, 2018, Defendants IDT Corporation, Howard Jonas, and
The Patrick Henry Trust having made application under Rule 42 of the Supreme
Court for an order certifying an appeal from the interlocutory order of this Court,
dated July 3, 2018; and the Court having found that such order determines a
substantial issue of material importance that merits appellate review before a final
judgment and that the following criteria of Supreme Court Rule 42(b)(iii) apply:
Rule 42(b)(iii)(A), Rule 42(b)(iii)(G), Rule 42(b)(iii)(H);
IT IS ORDERED that the Court’s order of July 3, 2018, is hereby certified
to the Supreme Court of the State of Delaware for disposition in accordance with
Rule 42 of that Court.
/s/ Sam Glasscock III
Vice Chancellor
7