In Re Straight Path Communications Inc. Consol. Stockholder Litigation
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Opinion
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: May 3, 2023 Date Decided: October 3, 2023
Ned Weinberger and Mark Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; OF COUNSEL: Jeroen van Kwawegen, Edward G. Timlin, and Eric J. Riedel, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York, Attorneys for Lead Plaintiff Ardell Howard.
Rudolf Koch, Kevin M. Gallagher, Daniel E. Kaprow, and John M. O’Toole, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Thomas Uebler, MCCOLLOM D’EMILIO SMITH UEBLER LLC, Wilmington, Delaware; OF COUNSEL: Jason Cyrulnik, Paul Fattaruso, and Matthew Henken, CYRULNIK FATTARUSO LLP, New York, New York, Attorneys for Defendants IDT Corporation, Howard Jonas, and The Patrick Henry Trust.
GLASSCOCK, Vice Chancellor A recurring theme of our corporate law involves stockholders with voting
control of an entity using that control to influence a transaction in which the
controller’s interests diverge from that of the minority stockholders. Our law has
developed mechanisms whereby such controllers may insulate themselves from the
conflicted transactions.1 Even where they do not, controller-driven transactions are
not prohibited, but the controller bears the burden to demonstrate that the transaction
was entirely fair to the minority. Under our controlling caselaw,2 this court must
undertake a unified fairness review, considering both price and process, to determine
whether a transaction featuring a conflicted controller was entirely fair. If not, the
controller has breached a fiduciary duty, for which damages, if any, may be awarded.
This post-trial opinion finds that the controller here, Howard Jonas, drove an
unfair transaction in breach of fiduciary duty, but that no damages flowed therefrom.
The litigation involves two Delaware public corporations, IDT Corporation
(“IDT”) and Straight Path Communications Inc. (“Straight Path” or “SPCI” or the
“Company”). IDT was founded by Defendant Howard Jonas,3 who continues to own
a controlling interest in IDT. IDT was founded in 1990 and became the Jonas family
1 In re MFW S'holders Litig., 67 A.3d 496 (Del. Ch. 2013), aff'd sub nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). 2 E.g., In re Tesla Motors, Inc. S’holder Litig., 298 A.3d 667 (Del. 2023). 3 I refer to members of the Jonas family throughout by first names to avoid confusion. No familiarity or disrespect is intended.
1 business. It became a public corporation in 1996. As of 2013, Howard was the
chairman of the IDT board of directors and had installed his son, Shmuel, as CEO.
If the controller scenario here was paradigmatic, the transaction at issue was
unique. Briefly, among IDT’s assets were choses in action relating to patent
infringement. IDT was reluctant to monetize these through litigation because of
concerns about potential counterclaims against it. Accordingly, in 2013, IDT spun
off Straight Path as a vehicle to pursue intellectual property litigation. Because stock
in Straight Path was distributed pro rata to IDT stockholders, Howard became the
majority stockholder in Straight Path as well as IDT. In the spin-off, Straight Path
received the intellectual property assets from IDT (the “IP Assets”). For various tax
reasons, IDT also transferred a portfolio of broadcast spectrum licenses (the
“Spectrum Licenses”) to Straight Path in the same transaction. These were mostly
moribund, but a few licenses were leased to third parties and did bring in some
income. Howard did not become a director of Straight Path. However, he installed
another son, Davidi, as Chairman and CEO of the new company. He also recruited
three outside directors to the board: K. Christopher Todd, William Weld, and Fred
Zeidman.
As part of the spin-off, IDT and Straight Path entered a separation and
distribution agreement. At issue here are indemnification rights under that
agreement. Much of this litigation concerned the extent of those rights; it is
2 sufficient here to note that in some circumstances IDT was bound to indemnify
Straight Path for certain losses.
As described above, the Spectrum Licenses were not considered by the parties
involved to be particularly valuable. Changes in Federal Communications
Commission (“FCC”) regulations and the growing need for cellular spectrum
changed that. After a bidding war that ran from 2017 to 2018, Verizon ultimately
bought Straight Path—absent the IP Assets, which were sold to Howard—for
approximately $3.1 billion. This amounted to roughly $184 per share, a huge
windfall for Straight Path stockholders.
Prior to the sale, Straight Path and its Spectrum Licenses had become the
subject of an FCC investigation, as had IDT itself. A requirement for holding such
licenses is that the holder demonstrate substantial service—that is, that the license
holder must be able to broadcast over the spectrum. When IDT renewed the licenses
with the FCC prior to the spin-off, IDT was required to demonstrate the viability of
each license. To do so, IDT permitted a technician to go from location to location,
temporarily installing broadcast equipment, establishing transmission, then
removing it for use in the next temporary installation. IDT then submitted these tests
as substantial service demonstrations to the FCC.
Post-spin-off, Straight Path continued to fail to establish or maintain broadcast
capabilities at most of the locations. In the investigation, the FCC maintained that
3 this procedure was not in compliance with its regulations. Ultimately, Straight Path
entered a settlement with the FCC, under which it paid an upfront fine of $15 million.
It also forfeited 196 Spectrum Licenses and was required to either give up all
remaining licenses, sell the remaining spectrum assets, or pay an additional fine of
$85 million. If Straight Path chose to sell the spectrum assets, it would pay a 20%-
of-sale-proceeds penalty to the FCC. Straight Path determined that its best course
of action was to sell the company. Once the IP Assets were sold separately, a sale
of Straight Path was effectively a sale of the Spectrum Licenses, the sole remaining
assets of the company.
The independent directors of Straight Path believed that the company could
seek indemnification from IDT for the penalties under the settlement with the FCC
(the “Indemnification Claim”). Because they believed that the Indemnification
Claim was unlikely to be valued by a purchaser, they explored ways to preserve the
claim as a stockholder asset, post-sale, including by creating a trust to hold the claim
on the stockholders’ behalf. Howard, however, got wind of this plan. He used his
position as controller to cause the independent directors to release the
Indemnification Claim, for $10 million and a contingent right to profits from the IP
Assets. If the company sale had closed at the high bid as of the date the parties
agreed to the release of the Indemnification Claim, the aggregate fine paid by
4 Straight Path would have amounted to $175 million (not counting the Spectrum
Licenses forfeited).
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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: May 3, 2023 Date Decided: October 3, 2023
Ned Weinberger and Mark Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; OF COUNSEL: Jeroen van Kwawegen, Edward G. Timlin, and Eric J. Riedel, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York, Attorneys for Lead Plaintiff Ardell Howard.
Rudolf Koch, Kevin M. Gallagher, Daniel E. Kaprow, and John M. O’Toole, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Thomas Uebler, MCCOLLOM D’EMILIO SMITH UEBLER LLC, Wilmington, Delaware; OF COUNSEL: Jason Cyrulnik, Paul Fattaruso, and Matthew Henken, CYRULNIK FATTARUSO LLP, New York, New York, Attorneys for Defendants IDT Corporation, Howard Jonas, and The Patrick Henry Trust.
GLASSCOCK, Vice Chancellor A recurring theme of our corporate law involves stockholders with voting
control of an entity using that control to influence a transaction in which the
controller’s interests diverge from that of the minority stockholders. Our law has
developed mechanisms whereby such controllers may insulate themselves from the
conflicted transactions.1 Even where they do not, controller-driven transactions are
not prohibited, but the controller bears the burden to demonstrate that the transaction
was entirely fair to the minority. Under our controlling caselaw,2 this court must
undertake a unified fairness review, considering both price and process, to determine
whether a transaction featuring a conflicted controller was entirely fair. If not, the
controller has breached a fiduciary duty, for which damages, if any, may be awarded.
This post-trial opinion finds that the controller here, Howard Jonas, drove an
unfair transaction in breach of fiduciary duty, but that no damages flowed therefrom.
The litigation involves two Delaware public corporations, IDT Corporation
(“IDT”) and Straight Path Communications Inc. (“Straight Path” or “SPCI” or the
“Company”). IDT was founded by Defendant Howard Jonas,3 who continues to own
a controlling interest in IDT. IDT was founded in 1990 and became the Jonas family
1 In re MFW S'holders Litig., 67 A.3d 496 (Del. Ch. 2013), aff'd sub nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). 2 E.g., In re Tesla Motors, Inc. S’holder Litig., 298 A.3d 667 (Del. 2023). 3 I refer to members of the Jonas family throughout by first names to avoid confusion. No familiarity or disrespect is intended.
1 business. It became a public corporation in 1996. As of 2013, Howard was the
chairman of the IDT board of directors and had installed his son, Shmuel, as CEO.
If the controller scenario here was paradigmatic, the transaction at issue was
unique. Briefly, among IDT’s assets were choses in action relating to patent
infringement. IDT was reluctant to monetize these through litigation because of
concerns about potential counterclaims against it. Accordingly, in 2013, IDT spun
off Straight Path as a vehicle to pursue intellectual property litigation. Because stock
in Straight Path was distributed pro rata to IDT stockholders, Howard became the
majority stockholder in Straight Path as well as IDT. In the spin-off, Straight Path
received the intellectual property assets from IDT (the “IP Assets”). For various tax
reasons, IDT also transferred a portfolio of broadcast spectrum licenses (the
“Spectrum Licenses”) to Straight Path in the same transaction. These were mostly
moribund, but a few licenses were leased to third parties and did bring in some
income. Howard did not become a director of Straight Path. However, he installed
another son, Davidi, as Chairman and CEO of the new company. He also recruited
three outside directors to the board: K. Christopher Todd, William Weld, and Fred
Zeidman.
As part of the spin-off, IDT and Straight Path entered a separation and
distribution agreement. At issue here are indemnification rights under that
agreement. Much of this litigation concerned the extent of those rights; it is
2 sufficient here to note that in some circumstances IDT was bound to indemnify
Straight Path for certain losses.
As described above, the Spectrum Licenses were not considered by the parties
involved to be particularly valuable. Changes in Federal Communications
Commission (“FCC”) regulations and the growing need for cellular spectrum
changed that. After a bidding war that ran from 2017 to 2018, Verizon ultimately
bought Straight Path—absent the IP Assets, which were sold to Howard—for
approximately $3.1 billion. This amounted to roughly $184 per share, a huge
windfall for Straight Path stockholders.
Prior to the sale, Straight Path and its Spectrum Licenses had become the
subject of an FCC investigation, as had IDT itself. A requirement for holding such
licenses is that the holder demonstrate substantial service—that is, that the license
holder must be able to broadcast over the spectrum. When IDT renewed the licenses
with the FCC prior to the spin-off, IDT was required to demonstrate the viability of
each license. To do so, IDT permitted a technician to go from location to location,
temporarily installing broadcast equipment, establishing transmission, then
removing it for use in the next temporary installation. IDT then submitted these tests
as substantial service demonstrations to the FCC.
Post-spin-off, Straight Path continued to fail to establish or maintain broadcast
capabilities at most of the locations. In the investigation, the FCC maintained that
3 this procedure was not in compliance with its regulations. Ultimately, Straight Path
entered a settlement with the FCC, under which it paid an upfront fine of $15 million.
It also forfeited 196 Spectrum Licenses and was required to either give up all
remaining licenses, sell the remaining spectrum assets, or pay an additional fine of
$85 million. If Straight Path chose to sell the spectrum assets, it would pay a 20%-
of-sale-proceeds penalty to the FCC. Straight Path determined that its best course
of action was to sell the company. Once the IP Assets were sold separately, a sale
of Straight Path was effectively a sale of the Spectrum Licenses, the sole remaining
assets of the company.
The independent directors of Straight Path believed that the company could
seek indemnification from IDT for the penalties under the settlement with the FCC
(the “Indemnification Claim”). Because they believed that the Indemnification
Claim was unlikely to be valued by a purchaser, they explored ways to preserve the
claim as a stockholder asset, post-sale, including by creating a trust to hold the claim
on the stockholders’ behalf. Howard, however, got wind of this plan. He used his
position as controller to cause the independent directors to release the
Indemnification Claim, for $10 million and a contingent right to profits from the IP
Assets. If the company sale had closed at the high bid as of the date the parties
agreed to the release of the Indemnification Claim, the aggregate fine paid by
4 Straight Path would have amounted to $175 million (not counting the Spectrum
Licenses forfeited).
This suit was brought on behalf of the class of minority stockholders of
Straight Path, alleging that IDT and Howard had unfairly diverted merger
consideration to themselves by stripping the right of stockholders to receive, through
indemnification, the value turned over to the FCC as penalties. After much
convoluted litigation, the matter was tried in the fall and winter of 2022. This is my
post-trial decision.
It is clear that Howard used his control to seize the corporate machinery,
causing the release of the Indemnification Claim in an unfair process. Howard, I
note, because of his interests in Straight Path, appears to have individual interests
aligned with the minority stockholders—maximizing the value of the
Indemnification Claim. Howard’s family interests, however, are aligned with IDT.
Complicated financial and familial issues occupied much of the litigation. In the
end, however, I find that Howard settled the Indemnification Claim in a manifestly
unfair manner, in breach of his duties as a fiduciary.
The remaining question is damages. The Indemnification Claim was, in many
ways, a flawed asset. It was contractually questionable, as will be explained below.
Its existence was also rightfully considered a potential impediment to getting the
best price for Straight Path in the auction. Considering all the evidence at trial, I
5 conclude that the price paid for the release of the Indemnification Claim was higher
than would have resulted, absent the controller’s intervention. Accordingly, I award
the class nominal damages from Howard. My reasoning follows a recitation of the
facts, below.
I. BACKGROUND4
A. Factual Background
1. The Parties and Relevant Non-Parties
Ardell Howard is the lead Plaintiff in this suit.5 Ms. Howard acquired three
shares of Straight Path Class B common stock in October 2016, which she
beneficially owned at the time of the merger with Verizon.6
Defendant IDT is a publicly traded Delaware corporation with its principal
place of business in Newark, New Jersey.7 IDT is the prior parent of non-party
Straight Path.
Defendant Howard Jonas is IDT’s founder and chairman.8
4 Facts drawn from the exhibits jointly submitted by the parties are referred to by the numbers provided on the parties’ joint exhibit list (cited as “JX__” unless otherwise defined). Trial testimony is cited as “TT (Name) __:__.” The parties’ Joint Pretrial Order, Dkt. No. 665, is cited as “PTO ¶ __.” 5 PTO ¶ 79. 6 Id. 7 Id. ¶ 83. 8 Id. ¶ 80.
6 Defendant The Patrick Henry Trust was a trust established on July 31, 2013,
to hold shares of Class A and Class B Straight Path stock for its sole beneficiary,
Howard Jonas.9
Straight Path was a public company spun off from IDT on July 31, 2013.10 In
the spin-off, it received all of IDT’s outstanding stock in Straight Path Spectrum,
Inc. (formerly known as IDT Spectrum) as well as SPIP (formerly known as ICTI).11
Straight Path was acquired by Verizon in a merger that closed on February 28,
2018.12
Shmuel Jonas is Howard’s son. He serves as IDT’s CEO.13
Davidi Jonas is another of Howard’s sons. He served as Straight Path’s CEO
and chairman of the board from the spin-off until the merger with Verizon.14
K. Christopher Todd was a director of Straight Path from the spin-off through
the merger.15 Todd is a former prosecutor in the Southern District of New York and
a named partner at the law firm Kellogg Hansen Todd Figel & Frederick.16
9 Id. ¶¶ 81–82. 10 Id. ¶ 91. 11 Id. ¶¶ 91, 93. 12 Id. ¶¶ 178, 180. 13 Id. ¶ 86. 14 Id. ¶ 92. 15 Id. ¶ 100. 16 TT (Todd) 1339:9–1340:7.
7 William Weld was a director of Straight Path from the spin-off through the
merger.17 Weld is a former governor of Massachusetts and previously served as both
a U.S. Attorney for the District of Massachusetts and the Head of the Criminal
Division of the U.S. Department of Justice.18
Fred Zeidman was a director of Straight Path from the spin-off through the
merger.19 Zeidman is a businessman with a background in restructuring who has
served as chairman and CEO of multiple companies.20
2. Founding of IDT/Jonas Family Control
Howard Jonas founded IDT in 1990.21 The company started out distributing
brochures to hotels, eventually expanding into telecommunications via the
international phone business.22 IDT went public in 1996.23 Howard has served as
the company’s chairman since its founding and was its CEO through 2013, when he
was replaced by his son, Shmuel.24 Howard continues to serve as an officer of IDT.25
As described below, IDT has grown into a large enterprise, but in many ways it
continues to be run like a family business.
17 PTO ¶ 101. 18 TT (Weld) 1893:19–1894:6. 19 PTO ¶ 102. 20 TT (Zeidman) 1593:13–1595:21. 21 PTO ¶ 80. 22 TT (Howard) 970:15–972:9. 23 Id. at 972:11–973:10. 24 PTO ¶ 80; TT (Shmuel) 606:2–18; JX120.0060. 25 JX237.0046.
8 Howard and his family play an outsized role in the management of IDT. In
addition to Howard’s and Shmuel’s roles at the company, Howard’s sister, Joyce
Mason, is IDT’s general counsel.26 Collectively, the Jonas family held 25.52% of
IDT’s outstanding shares and 74.98% of its voting power.27
a. Spectrum Licenses Background
IDT purchased the Spectrum Licenses for approximately $30 million during
the 2001 bankruptcy of Winstar Communications.28 The FCC requires that licenses
in the 28 and 29 GHz frequency bands, including the Spectrum Licenses, be renewed
every ten years.29 The Spectrum Licenses came to rest with IDT Spectrum, where
they were written down to zero on the company’s balance sheet.30
In mid-2009, Michael Rapaport, then President and CEO of IDT Spectrum,
an IDT subsidiary, recognized the Spectrum Licenses’ potential value.31 In 2010,
with the renewal period fast approaching, Rapaport negotiated an agreement with
the Jonases, who were initially skeptical of the future value of the Spectrum
Licenses, under which Rapaport and IDT would share both the costs and potential
profits of renewal.32 In addition to licensing fees, renewal required the licensee to
26 JX827.0020–21. 27 JX739.0060 (demonstrating 69% of IDT’s voting power was held by Howard alone). 28 TT (Shmuel) 563:3–21; TT (Howard) 978:23–980:23. 29 TT (McDowell) 3056:11–21; TT (Davidi) 29:11–16. 30 JX84.0002. 31 Id. 32 Id.
9 demonstrate that it had constructed equipment capable of providing users with
“substantial service.”33
From 2010 to 2012, IDT Spectrum, led by Rapaport, carried out an ambitious
scheme to provide service demonstrations on a shoestring budget.34 Rapaport began
by engaging FCC regulatory counsel, including his brother, Max. 35 He also hired a
wireless engineer, Douglas Lockie, to carry out the service demonstrations.36
Constructing a permanent installation at each location where the company needed to
demonstrate substantial service would have cost millions.37 Instead, Rapaport’s
strategy involved having Lockie obtain access to suitable rooftops, sometimes
through bribes, where he would set up a homemade radio transmitter he built for
$450.38 Lockie would only stay long enough to demonstrate signal viability,
typically an hour or less, before breaking down the transmitter and moving to the
next site.39
IDT consistently represented to the FCC, in both the renewal applications and
subsequent document submissions, that it had constructed equipment capable of
33 TT (McDowell) 3056:11–3057:8; JX749.0008 (citing 47 C.F.R. § 30.104 (2018)); JX187.0006. 34 TT (McDowell) 3058:5–22; TT (Davidi) 213:11–22, 254:10–13; JX215.0135–148; JX136.001; JX187.0013. 35 TT (Lamancusa) 466:14–467:20; TT (Shmuel) 565:21–566:7; TT (Ash) 811:20–812:7, TT 853:1-9. 36 TT (Davidi) 30:24–31:2. 37 JX136.0001. 38 Id.; JX187.0013. 39 JX187.0013.
10 transmitting at appropriate locations.40 For example, one such substantial service
submission claims that “IDT Spectrum has recently completed construction of a
point-to-multipoint hub facility[.]”41 The hub “deploys 1 foot antennas mounted on
an Az-El positioner” and is “located at 200 Harbor Drive, San Diego,” where it
“provides fixed wireless coverage” to more than a million individuals.42 Notably,
these representations contained no caveats for the present-tense language or
explanations of the ephemeral nature of Lockie’s “construction.”
The applications, subsequently granted, that IDT submitted to transfer the
licenses to Straight Path took similar liberties in claiming that transmitting
equipment had been “[c]onstructed” for each license.43 Howard, Joyce Mason, and
Michael Rapaport signed each of these applications, certifying their veracity.44
3. The Spin-Off of Straight Path
In March 2013, Howard led IDT’s board in a discussion of the spin-off of an
IP portfolio held by IDT subsidiary Innovative Communications Technologies, Inc.
(“ICTI”).45 The portfolio in question included patents widely used in internet and
video communications, which could be used to launch potentially lucrative patent
40 See, e.g., JX749:0015–16. 41 Id. (emphasis added). 42 Id. (emphasis added). 43 JX215.0037–74. 44 JX215.0037, -0087, -0104. 45 JX86.0006–07.
11 infringement litigation.46 However, this type of infringement litigation brought with
it significant risks that targets would respond by asserting their own counter
infringement claims against ICTI or IDT.47 A spin-off to IDT’s stockholders would
allow the new company to pursue the infringement claims while shielding IDT’s
assets from these countersuits.
The new company, Straight Path, would hold two primary assets: the IP
Assets, communications-related intellectual property, and the Spectrum Licenses,
wireless spectrum licenses regulated by the FCC.48 The Spectrum Licenses, along
with the limited business they generated,49 were added to the nascent company for
two main reasons: (i) due to a favorable piece of the tax code, adding the Spectrum
Licenses made the spin-off tax free; and (ii) losses from the spectrum business could
offset patent profits, again for tax purposes.50
In order to mitigate counter-assertion litigation risks associated with his dual
control of IDT and Straight Path, Howard created The Patrick Henry Trust (the
“Trust”) to hold his stake in Straight Path.51 As a blind trust, the trust agreement
46 Id. 47 See TT (Ash) 750:9–751:3; TT (Davidi) 11:3–18, 14:16–16:5 (discussing counterclaim risk if Howard maintained joint direct control of both Straight Path and IDT). 48 PTO ¶ 95. 49 TT (Davidi) 16:22–18:1, 21:14–23:6; TT (Shmuel) 559:22–560:21; TT (Ash) 748:11–24, 749:1–8; TT (Howard) 986:19–987:13. 50 TT (Davidi) 16:22–18:1; TT (Shmuel) 559:22–560:21; TT (Ash) 748:11–24, 749:1–8; TT (Howard) 986:19–987:13. 51 TT (Ash) 750:9–751:3; TT (Davidi) 11:3–18, 14:16–16:5; JX366.
12 delegated complete decision making authority to the trustee, including over how to
exercise the rights associated with Howard’s Straight Path shares.52 The trust
agreement also included a specific carveout from this delegation: Howard would
retain discretion over decisions relating to any merger or sale of the company.53
Pursuant to a tax separation agreement, transition services agreement, and
separation and distribution agreement (the “S&DA”),54 Straight Path spun-off from
IDT on July 31, 2013.55 Every IDT stockholder received one share of Straight Path
stock for every two shares of IDT that they owned.56
B. Period 2: Post-Spin-Off
Post-spin-off, Straight Path formed a board of directors composed of Davidi,
K. Christopher Todd, William Weld, and Fred Zeidman.57 In addition to his
directorial role, Davidi also served as the company’s CEO.58
1. FiberTower Alleges Misconduct
Shortly after the spin-off, a competing spectrum company, FiberTower
Corporation, first raised the question of the sufficiency of the methods IDT Spectrum
had employed in renewing the Spectrum Licenses.59 FiberTower argued that it
52 JX366.0002. 53 Id. at -0006. 54 See JX107 (the “S&DA”). 55 PTO ¶ 91. 56 Id. ¶ 94. 57 Id. ¶¶ 92, 100–02. 58 Id. ¶ 92. 59 See JX103.0011–15.
13 should not be required to meet its FCC-imposed buildout deadlines because the
companies that had completed buildout, most notably IDT Spectrum, had done so
through “save builds” that did not provide meaningful service. 60 As evidence,
FiberTower submitted a photograph taken on May 29, 2013, showing that the site of
a purported IDT installation in Washington, D.C., was in fact, empty.61 In February
2014, the FCC denied FiberTower’s request, stating that approval of IDT’s
substantial service demonstrations was a “final action.”62 However, the FCC left
open the question of whether IDT’s licenses were “subject to cancellation for
permanent discontinuance of operation[.]”63
Straight Path followed FiberTower’s allegations and, on the advice of counsel,
began taking remedial steps before the FCC issued its February decision.64 Thus,
when the FCC sent IDT65 a letter the following month inquiring about the status of
Straight Path’s operations in the Washington D.C. area,66 IDT and Straight Path were
able to respond promptly.67 Their response, issued by Joyce Mason in her capacity
as IDT Capital’s secretary,68 reported that the D.C. hub in question had “been
60 Id. 61 Id. at -0013–14. 62 JX113.0007. 63 Id. 64 JX918; JX919. 65 JX114. Because the licenses were still in the process of being transferred, the letter was sent to IDT Capital, Inc., rather than Straight Path. TT (Davidi) 34:4–35:5; TT (Weld) 1973:12–1974:11. 66 JX114. 67 TT (Weld) 1863:6–1864:20. 68 Mason is IDT’s general counsel, Howard’s sister, and Davidi’s aunt.
14 operational” between “March 28, 2011 and the present.”69 The FCC subsequently
expressed that it was satisfied with the response.70
2. The Spectrum Licenses Appreciate, A Whistleblower Emerges
By 2015, it was becoming increasingly clear that the Spectrum Licenses had
the potential to become a valuable component of a future 5G wireless network.71
Fed by speculation around this upside, Straight Path’s stock price more than doubled
between August 31 and October 23, 2015.72 On November 5, 2015, an anonymous
short seller published a report (the “Sinclair Upton Report” or the “Report”) alleging
that IDT Spectrum had “likely committed over 150+ counts of fraud against the US
government” because its transmission equipment was “never built on the sites as
specified in the filings.”73 Per the Sinclair Upton Report, Straight Path stock, which
had been trading at almost $50 per share in October,74 had a fair value of just a dollar
or two.75 On the day the Report was published, Straight Path’s stock price dropped
by over 50%.76
69 JX116.001. 70 TT (Weld) 1873:12–1874:10. 71 TT (Davidi) 39:15–41:4. 72 JX916.0011–12. 73 JX137.0001. 74 JX916.0011–12. 75 JX137.0001. 76 JX916.0012.
15 a. Fallout from the Report
At a Straight Path board meeting held the next day, Davidi noted that the
Report referred exclusively to pre-spin-off violations and that Straight Path had
relied on representations that all licensing requirements were met, which were
supported by IDT records of expenses for equipment purchases, FCC counsel, and
engineering services.77 Indeed, prior to the Sinclair Upton Report, neither Davidi
nor the rest of the Straight Path board was aware of the methods that IDT Spectrum
had employed in renewing the Spectrum Licenses.78 The board then resolved to
have management retain counsel to investigate the Report’s allegations,79 eventually
settling on Morgan Lewis & Bockius LLP (“Morgan Lewis”).80
A week later, a Straight Path stockholder filed a federal securities fraud class
action (the “Zacharia action”) in response to the drop in stock price, citing
inconsistencies between Straight Path’s securities filings and the allegations of the
Sinclair Upton Report.81 On December 1, 2015, Straight Path filed an 8-K in which
it publicly acknowledged the Report’s allegations, admitted that much of the
equipment from the substantial service demonstrations was “no longer present at the
77 JX141.0001. 78 TT (Weld) 1912:10–17; TT (Davidi) 218:10–21, 248:5–23, 316:23–317:18. 79 JX141.0002. 80 PTO ¶¶ 105, 124; TT (Davidi) 58:12–59:2. 81 See JX150. Straight Path settled the Zacharia action in January 2017 for approximately $9.5 million. TT (Breau) 2369:6–14.
16 original locations[,]” but nonetheless stuck to its position that renewal requirements
had been met.82
In January 2016, Straight Path retained Boies Schiller Flexner LLP (“Boies
Schiller”) as litigation counsel in the Zacharia matter.83 On February 26, Davidi
sent an email to his brother Shmuel (IDT’s CEO), Menachem Ash (IDT’s in-house
counsel), and Jason Cyrulnik (outside counsel to both IDT and Straight Path, then at
Boies Schiller).84 In the email, Davidi asked to set up a call with Ash and Shmuel,
noting that “[a]ccording to a clause in the [S&DA], IDT indemnifies [Straight Path]
for activities prior to separation.”85 He went on to state that “[g]iven the posture of
the claims against [Straight Path] to date[,] that clause may be implicated.”86 Though
Ash agreed to a call,87 none of the parties to the email could remember a call
happening or explain why it did not.88 There is no evidence that either Davidi or
David Breau (Straight Path’s general counsel, copied on the email) ever followed up
on the email.89
82 JX152.0002. 83 PTO ¶ 112. 84 JX161. 85 Id. 86 Id. 87 JX163.0001. 88 TT (Davidi) 275:10–276:15; TT (Ash) 918:10–919:7; TT (Schwell) 2861:20–2862:8; TT (Breau) 2418:6–14; TT (Shmuel) 698:7–11. 89 See TT (Davidi) 278:22–279:8; TT (Breau) 2419:1–17.
17 3. Morgan Lewis Memo, Straight Path White Paper
On July 21, 2016, Morgan Lewis delivered a memo (the “Memo”)
summarizing the findings of its internal investigation into the allegations of the
Sinclair Upton Report.90 The Memo concluded that no transmission equipment was
in place at any site visited, nor had such equipment ever been permanently
installed.91 However, the Memo further concluded that evidence of Doug Lockie’s
string of temporary installations contradicted claims in the Sinclair Upton Report
that the demonstrations were merely a “paper exercise,” with no construction ever
actually occurring.92 Finally, Morgan Lewis concluded that, prior to the Report,
Straight Path itself was unaware of the lack of permanent equipment.93 The next
day, Straight Path filed another 8-K in which it updated stockholders on these broad
conclusions.94
On August 1, Morgan Lewis partner Frank Lamancusa met with the FCC and
provided the Commission with a redacted copy of the Memo.95 The following day
Lamancusa followed up by email seeking to set up a discussion of “the particulars
of the [FCC’s] desired legal analysis[.]”96 This legal analysis eventually took the
90 JX178. 91 Id. at -0001. 92 Id. 93 Id. 94 JX182.0003. 95 JX185; JX187.0001, 05; PTO ¶128. 96 JX186.0001–02.
18 form of a white paper authored by Straight Path’s FCC counsel (the “White Paper”)
and submitted to the FCC on August 19, 2016.97 The White Paper advanced an
interlocking series of arguments against Straight Path’s liability: first, that the FCC’s
2011 and 2012 substantial service determinations were correct and are now final;
second, that the FCC’s Discontinuance Rule does not apply; third, that even if that
rule applied, it has not been violated; and finally, even if there has been a violation,
enforcement would undermine the public interest.98 These arguments would form
the basis for both Straight Path’s settlement negotiations with the FCC, as well as
some of the parties’ contentions here.99
4. The FCC Investigation
On September 20, 2016, the FCC launched parallel inquiries into Straight Path
and IDT’s handling of the Spectrum Licenses.100 The letter of inquiry sent to
Straight Path cited potential violations of FCC rules governing candor, substantial
service demonstrations, and permanent discontinuance of service.101 IDT and
Straight Path coordinated their response to the FCC inquiries through shared legal
97 JX192. 98 See id. at -0004–06. 99 TT (Davidi) 95:18–97:10 (arguing it was in IDT’s best interests to settle in order to avoid losing maximization of the Spectrum Licenses). 100 JX198; JX199. The FCC closed its inquiry into IDT with a “no further action” letter in August 2022. JX906. 101 JX199.0002–03.
19 counsel.102 On October 11, both companies sent the FCC their initial responses to
their respective letters of inquiry.103 Similar to its position in the White Paper,
Straight Path argued that it was not liable for violations that took place before it
controlled the licenses in question.104 Straight Path’s response also noted 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.”105 In its response, IDT admitted that any
construction or service demonstrations occurred under the auspices of IDT
Spectrum.106 On October 14, IDT acknowledged in its annual 10-K that, “should
the FCC impose liability on Straight Path, [IDT] could be the subject of a claim from
Straight Path related to that liability.”107
As early as June 2016, Straight Path had begun to receive unsolicited attention
from third-parties interested in purchasing the Spectrum Licenses.108 However, it
became clear that some of these offers were contingent on the resolution of, or were
otherwise negatively impacted by, the FCC investigation.109 This encouraged
Straight Path to take an active approach to resolving the FCC inquiry with the goal
102 JX683.0064, 78; JX678.0002, 04 (IDT Privilege Log); JX680 (Straight Path Privilege Log) Entry Nos. 3586–87, 3828, 3831, 3929, 4224, 4292, 4772, 4799, 4858. 103 JX214; JX216. 104 JX214.0015–16. 105 Id. at -0009. 106 JX216.0010–11. 107 JX237.0014. 108 JX577.0065; TT (Davidi) 110:12–111:13; TT (Todd) 1208:22–1209:2. 109 See, e.g., JX248.0002 (discussing communications from an interested party, in which the FCC inquiry weighed heavily).
20 of getting “a clean bill of health” for its licenses.110 On October 28, the board
retained Evercore Group LLC (“Evercore”) as financial advisers to aid in
“evaluation of unsolicited offers received by the Company.”111 The company
subsequently retained Weil, Gotshal & Manges LLP (“Weil”) as legal advisers on
the same matters.112
On November 2, Frank Lamancusa of Morgan Lewis reached out to the FCC
expressing a desire to discuss “next steps” or a “mutually agreed upon solution.”113
Following a meeting between Straight Path counsel and the FCC on November 10,114
Lamancusa reached back out to inquire when the Commission “would know a
timeline for the investigation.”115 The FCC responded on November 15 that, unless
Straight Path had “a specific proposal” on how to proceed, the FCC would “need
time to review the documents” Straight Path had produced before it could “respond
on what the next steps would be and the associated timing for their completion.”116
The next day, Lamancusa replied that Straight Path would gladly meet “to discuss
the scope and scale of a consent decree.”117
110 TT (Weld) 1716:16–1717:12, 1717:14–17; TT (Todd) 1212:5–1213:2; TT (Zeidman) 1512:21– 1513:17; TT (Breau) 2370:17–2371:14. 111 PTO ¶¶ 103, 138. 112 Id. ¶¶ 104, 139. 113 JX243. 114 See JX249.0002 (referencing a meeting “last Thursday” in an email dated November 14, 2016). 115 Id. at -0003. 116 Id. at -0002. 117 Id. at -0001.
21 On November 28, Lamancusa sent the FCC a document outlining the
proposed terms of a consent decree,118 sparking a round of rapid negotiations.119
Following a meeting on Wednesday, November 30, Straight Path provided a revised
proposed term sheet on December 2, ahead of a second meeting scheduled for
Wednesday, December 5.120 Roughly contemporaneous with these negotiations,
Davidi met with Howard and informed his father that the FCC had proposed a
settlement in which Straight Path would give up half of the proceeds it obtained from
selling the Spectrum Licenses.121 Howard told his son that “this is a first offer […]
you should keep negotiating […] because you can do much better.”122
Negotiations between Straight Path and the FCC continued throughout
December 2016.123 In the second half of the month, Howard began to take a more
active role in the deal, with a particular focus on the impact the impending change
in presidential administration might bring.124 In a December 18 email discussing
deal progress, one of Straight Path’s advisors at Evercore noted that Straight Path’s
general counsel, David Breau, had informed him that “Howard Jonas and/or IDT
118 JX256. 119 TT (Davidi) 116:23–117:20. 120 JX259.0001. 121 TT (Howard) 990:6–14 (discussing a conversation that occurred six weeks before the consent decree of January 11, 2017). 122 TT (Howard) 992:1–6. 123 JX263; JX265; JX266; JX268; JX276; JX277; JX279; JX280; JX281; JX282. 124 TT (Howard) 989:19–996:9.
22 would contribute a lot towards funding [any FCC penalty.]”125 Just four days later,
Breau and Straight Path’s outside counsel participated in a call with Howard and
Shmuel to discuss “the deal overall,”126 including the impact of the changing
administrations.127
In early January 2017, Howard and Davidi met to discuss the FCC’s most
recent offer.128 Unlike their previous meeting the month before, Howard did not
explicitly tell his son to renegotiate, instead indicating that he would reach out to his
political contacts to assess what a deal might look like under the new
administration.129 On January 8, Howard flew to the Dominican Republic to meet
with Straight Path director William Weld, whose tenure as governor of
Massachusetts had left him with contacts in Washington, D.C..130 The two discussed
the pros and cons of waiting for the new administration versus settling with the
current one.131 Weld believed that settling with the present administration was the
prudent choice.132 The conversation also touched on the topic of indemnity, but it
125 JX275. 126 JX282; JX572.0199–205; JX836.0001. 127 TT (Howard) 1117:13–1119:2. 128 Id. at 992:12–23 (discussing a conversation that took place about a month after the previous one). 129 Id. at 992:12–994:10. 130 Id. at 996:23–997:17; TT (Weld) 1940:5–12. 131 TT (Howard) 1000:2–1001:2; TT (Weld) 1940:5–9, 1941:12–22. 132 TT (Howard) 1001:3–1004:3, 1122:17–22; TT (Weld) 1943:12–1945:14.
23 was not a focus.133 Ultimately, Howard took the position that it would be more
favorable to wait for the new administration.134
On January 11, 2017, Straight Path officially entered a settlement with the
FCC in the form of a consent decree (the “Consent Decree”).135 In exchange for the
resolution of potential violations of FCC rules governing candor, substantial service,
and permanent discontinuance, Straight Path made an initial payment of $15 million
and gave up 196 of its Spectrum Licenses for termination.136 The Consent Decree
did not require Straight Path to admit to any violations.137 The FCC also agreed not
to pursue further investigation of Straight Path “in the absence of new material
evidence.”138 Because Straight Path was given leeway to choose which licenses
would be terminated, it strategically chose those with the least impact on the
portfolio’s ultimate sale value.139
The Consent Decree also required Straight Path to choose one of three
additional penalties: (1) an additional penalty of $85 million, due within 12 months;
(2) termination of the remaining Spectrum Licenses; or (3) forfeiture of 20% of the
proceeds from a sale of the remaining Spectrum Licenses.140
133 TT (Weld) 1947:13–24. 134 TT (Davidi) 307:4–308:6. 135 JX825; JX314.0002; JX322.0001. 136 PTO ¶ 135. 137 TT (Furchtgott-Roth) 347:20–24. 138 JX322.0006. 139 TT (Davidi) 129:3–131:13; TT (Zeidman) 1583:2–1585:6; TT (Weld) 1927:16–23. 140 JX322.0001.
24 5. The Indemnification Claim and the Sale
The Consent Decree cleared the way for Straight Path to sell the Spectrum
Licenses.141 However, the independent directors worried that an acquirer would not
be interested in pursuing the company’s Indemnification Claim against Howard and
IDT for pre-spin-off activities giving rise to the FCC investigation the
Indemnification Claim.142 Because the independent directors believed the
Indemnification Claim was valuable to Straight Path stockholders, they began to
explore opportunities to preserve the claim as Straight Path worked towards an
acquisition.143
a. Bidding Begins, The Special Committee is Formed
On January 31, 2017, the Straight Path board met with Evercore and Weil by
telephone.144 The board authorized Evercore to work with management to identify
potential bidders and begin outreach.145 Early the next month, Evercore contacted
20 potential bidders, 11 of which eventually executed confidentiality agreements
with Straight Path.146
On February 6, the board formed a special committee (the “Special
Committee”) consisting of the three independent directors: Todd, Weld, and
141 TT (Davidi) 131:22–132:13. 142 TT (Weld) 1952:17–1953:9; TT (Fortinsky) 2238:18–2239:8. 143 TT (Weld) 1767:8–10; TT (Todd) 1377:9–17; TT (Fortinsky) 2238:2–13. 144 PTO ¶ 140. 145 Id. 146 Id. ¶ 141.
25 Zeidman.147 The initial purpose of the Special Committee was to explore the
possibility of monetizing Straight Path’s IP Assets, which the board believed should
be sold separately in order to maximize stockholder value.148 The Special
Committee was necessary because IDT was a potential buyer for the IP Assets,
creating a conflict for Davidi.149
Though it was not initially in the explicit scope of the Special Committee’s
responsibilities,150 evaluation of Straight Path’s options regarding the
Indemnification Claim quickly became the independent directors’ main focus.151
The independent directors had begun interviewing potential legal advisors as early
as December 2016,152 eventually settling on Shearman & Sterling LLP
(“Shearman”).153 Shearman understood from the outset that its role involved
advising on the Indemnification Claim.154
The Special Committee met for the first time on February 14, 2017.155 At that
meeting, Shearman attorneys discussed preservation of the Indemnification Claim
with the Special Committee.156 The Special Committee then unanimously expressed
147 Id. ¶ 152. 148 JX358.0002; TT (Weld) 1726:14–1727:1. 149 JX349.0001; TT (Davidi) 143:22–144:21. 150 See JX349. 151 TT (Fortinsky) 2224:7–14, 2228:18–23; TT (Weld) 1939:9–22. 152 TT (Fortinsky) 2219:16–2220:7. 153 PTO ¶ 109. 154 TT (Fortinsky) 2056:11–13. 155 PTO ¶ 153. 156 JX357.0001.
26 interest in preserving and pursuing the Indemnification Claim.157 This decision was
motivated by the Special Committee’s desire to ensure that Straight Path
stockholders receive fair value for the Indemnification Claim, which might be
undervalued by an acquirer.158 On February 24, the Special Committee formalized
its relationship with Shearman in an engagement letter.159 On February 28,
Shearman informed Weil that the Special Committee intended to preserve the
Indemnification Claim, potentially by assigning the claim to a litigation trust.160
The S&DA contains a provision precluding the assignment of rights or
delegation of duties under that agreement without the prior written consent of the
other party.161 Apparently, the Special Committee did not contemplate that IDT
would give its consent; accordingly, in March the Special Committee asked its
advisors at Shearman and Morris, Nichols, Arsht & Tunnell LLP (“MNAT”) to
develop potential litigation trust structures that could preserve the Indemnification
Claim without assignment.162
157 Id. 158 TT (Weld) 1949:23–1950:2; TT (Fortinsky) 2238:14–17. 159 PTO ¶ 154. 160 JX577.0068. 161 JX107.0030. 162 TT (Weld) 1978:18–1979:7; see PTO ¶ 108.
27 b. The Special Committee Decides to Preserve the Indemnification Claim
On March 2, Evercore received preliminary bids ranging from $435 million
to $602 million from AT&T, Verizon, Sprint, and T-Mobile.163 The following week
on March 8, the Special Committee held a meeting attended by Breau as well as
attorneys from Shearman and Weil.164 Representatives from Weil expressed that
both they and Evercore were concerned about the risk that separating the
Indemnification Claim would negatively impact the sale process.165 The Special
Committee unanimously agreed that settlement of the Indemnification Claim would
benefit the Straight Path stockholders, but that it was worth considering additional
options.166 One option discussed was the creation of a trust to preserve the
Indemnification Claim.167 In the interests of exploring a settlement, Weld agreed to
reach out to Howard for a discussion.168
Following this meeting, Breau, Straight Path’s general counsel, informed
Shmuel, IDT’s CEO, about the Special Committee’s plan to preserve or pursue the
Indemnification Claim.169 Shmuel passed this information on to Howard.170 Shortly
163 PTO ¶ 143. 164 JX390.0001; JX389.0001. 165 TT (Fortinsky) 2085:24–2087:3, 2089:13–2090:10. 166 Id.; TT (Weld) 1960:14–1962:4; TT (Fortinsky) 2244:6–17. 167 JX390.0001. 168 JX389.0002. 169 TT (Shmuel) 595:4–596:1, 690:2–18. 170 Id. at 690:19–21.
28 thereafter,171 Howard received the call from Weld to discuss the potential settlement
of the Indemnification Claim.172 Howard asked that the Special Committee put their
rationale for pursuing the claim into writing and he would raise it with Shmuel, who
was skeptical of the claim’s value.173
On March 10, the Special Committee resolved that an upcoming process letter
being sent to bidders would disclose that the Indemnification Claim would be
excluded from the transaction.174 Three days later, Evercore reported to Straight
Path that Verizon had expressed a willingness to preempt the auction process on an
accelerated basis, unilaterally raising its bid to $750 million.175 That day, the Special
Committee met again and heard a presentation from Weil advocating against
including a statement about the Indemnification Claim in the process letter.176
Nonetheless, at the end of the meeting the Special Committee remained in favor of
including the statement.177
171 See TT (Howard) 1016:6–24 (testifying that he first heard about the Indemnification Claim from Shmuel). 172 Id. at 1018:11–1020:5. 173 Id. 174 JX392.0001. 175 PTO ¶ 144. 176 JX405.0001; JX720.0141:15–142:20; TT (Weld) 1754:6–13, 1890:13–1891:6. 177 JX405.0001.
29 c. Howard Reacts
Howard was quickly informed of the Special Committee’s intentions,178
which upset him.179 Breau tried to set up a discussion between Howard and the
Special Committee members180 but had been informed by Shearman that it was
inappropriate for the independent directors to speak to Howard without counsel.181
This angered Howard further and, over the next two days, he made multiple
unsuccessful attempts to contact each of Special Committee members.182 On March
14, Straight Path’s full board instructed Evercore to send out the process letter for
the second-round bid,183 including a statement expressing the company’s intent to
exclude the Indemnification Claim from the sale.184
From the evening of March 14 through the morning of March 15, Howard
called Weld around a dozen times.185 Though Weld initially resisted, he eventually
answered because he knew Howard was distraught.186 During that call, Howard
expressed anger with the Special Committee’s decision to pursue the
Indemnification Claim, potentially impacting the auction process, which he thought
178 TT (Howard) 1023:18–1024:7. 179 Id. at 1141:23–1142:18. 180 TT (Fortinsky) 2256:22–2257:16. 181 Id. at 2264:20–2265:10. 182 TT (Howard) 1026:4–1027:17. 183 JX588.0061. 184 JX410.0004; TT (Weld) 1963:18–1964:22; PTO ¶¶ 145, 161–62. 185 TT (Weld) 1965:11–1966:12. 186 Id. at 1966:2–1967:3.
30 was in Straight Path’s best interests.187 When Howard’s efforts to pressure Weld to
drop the Indemnification Claim proved unsuccessful, Howard raised the possibility
that he was “going to put it all on Mintz [Levin,]”188 the law firm where Weld was a
partner and which had served as FCC counsel to both IDT and Straight Path.189 Weld
took this as a serious threat that Howard wanted the Indemnification Claim settled,
“or else.”190
Following Howard’s call with Weld, Shearman instructed the Special
Committee members not to communicate directly with Howard.191 Accordingly,
Howard’s subsequent attempts to reach Zeidman and Todd were unsuccessful.192
Howard thought that it was “insane” for Shearman “not to let the controlling
shareholder speak to his own directors” “in the middle of what could be a billion
dollar deal[.]”193
On March 15, Jason Cyrulnik of Boies Schiller contacted Breau seeking a
conflict waiver that would allow his firm to represent IDT with regard to the
Indemnification Claim, despite its substantial previous representation of Straight
Path.194 Breau provided a waiver on March 17, requesting that Boies Schiller engage
187 Id. at 1967:7–18, 2053:16–18. 188 Id. at 1967:19–1968:1; TT (Howard) 1144:9–1145:23. 189 TT (Weld) 1838:20–23; PTO ¶ 106. 190 TT (Weld) 1968:7–1969:4, 1968:18–24, 1969:1–4. 191 Id. at 1958:8–21. 192 TT (Howard) 1030:4–1031:7. 193 Id. at 1146:10–23. 194 PTO ¶ 163.
31 directly with the Special Committee’s attorneys at Shearman.195 On March 19 or 20,
Cyrulnik had a call with Fortinsky of Shearman in which he communicated that
Howard was not prepared to support a transaction that preserved the Indemnification
Claim.196 The Special Committee understood this to mean that Howard’s support
for a the sale of Straight Path would be conditional on the resolution of the Indemnity
Claim.197 Due to Howard’s voting control of Straight Path, his support was
necessary to a sale of the company.198
On March 19, Shearman reached out to Weil and Breau to propose a March
23 meeting between Howard and the Special Committee.199 That meeting was
eventually scheduled for March 29.200 Though Shearman had floated the idea of a
neutral mediator to Howard, suggesting former Chancellor Chandler or former Vice
Chancellor Lamb as options,201 Cyrulnik rejected the proposal on behalf of Howard
and IDT.202
On March 28, the Special Committee met to discuss the upcoming meeting.203
The independent directors noted that the litigation trust term sheet and description
195 Id. ¶ 164. 196 JX588.0062; TT (Fortinsky) 2245:21–2246:6; see TT (Fortinsky) 2272:5–15 (discussing which day the call occurred on). 197 TT (Fortinsky) 2274:9–16, 2346:6–14. 198 Id. at 2273:16–2274:8. 199 JX421.0001–02. 200 PTO ¶ 167. 201 TT (Fortinsky) 2279:16–2280:21, 2283:4–2284:12. 202 JX449.0002. 203 JX453.0001.
32 of the Indemnification Claim had not been circulated to the bidders, which the
Special Committee had requested, resolving that these documents should be added
to the deal’s data room no later than March 31.204
The auction process continued as negotiations around the Indemnification
Claim ramped up. Following the March 14 process letter, which contained a
statement that the Indemnification Claim would be excluded from any contemplated
transaction, bidders had questions about the nature of the Indemnification Claim.205
AT&T expressed a preference for the claim to be resolved prior to closing.206
However, no bidder ever withdrew, lowered its bid, or expressed concern about the
Indemnification Claim’s impact on the validity of the Spectrum Licenses.207 Indeed,
from March 21 to 23, the four largest bidders all raised their bids, each indicating a
willingness to pay $750 million or more.208
d. The Lead-Up to the March 29 Meeting
Going into the March 29 meeting, the Special Committee faced a number of
competing considerations. Though they were convinced of the Indemnification
204 Id. 205 TT (Evercore) 3010:16–3013:18; TT (Breau) 2376:21–2377:4; JX688; TT (Verizon Designations) 94:17–95:18 (“We wanted to understand what it was.”). 206 JX454.0006. 207 TT (Davidi) 312:7–11; TT (Evercore) 3013:23–3015:6; TT (Fortinsky) 2253:1–2254:15; JX720.0166 (Weil Designations) 166:3–25; TT (Breau) 2470:15–2471:13; see also JX688.0177 (Verizon Designations) 177:08–14; TT (Evercore) 3015:2–9; JX720.0166 (Weil Designations) 166:7–12; TT (Breau) 2473:5–2474:9; see also JX688.0173 (Verizon Designations) 173:10–22. 208 PTO ¶¶ 146–49; TT (Evercore) 3015:16–3017:20.
33 Claim’s value,209 the Special Committee members were aware that resolution of the
claim may well lead to a smoother process in the ongoing sale of the company.210 In
addition, Howard had injected a further element of time pressure by threatening to
withhold his support for any sale unless the Indemnification Claim was resolved by
the end of March.211 Accordingly, the Special Committee felt that the weight of
these asymmetrical negotiating positions put pressure on them to resolve the claim
at the March 29 meeting.212
Howard had also been preparing for the meeting. Following lobbying from
Davidi, in which he “begged” his brother to settle the claim,213 Shmuel and Howard
resolved that IDT would settle the Indemnification Claim for $10 million and “not a
penny more[.]”214 Howard would make this up to Shmuel by purchasing an
equivalent sum in IDT stock,215 in light of Shmuel’s emphatic position that Straight
Path was owed nothing.216 Howard communicated this $10 million cap to Weld
ahead of the meeting.217
209 TT (Howard) 2238:21–2239:8, 2240:2–10. 210 TT (Zeidman) 1564:1–5; TT (Todd) 1412:6–14; TT (Weld) 1804:6–13. 211 TT (Fortinsky) 2276:6–2277:11. 212 TT (Weld) 1993:10–1994:4; see also TT (Weld) 1994:17–1995:11; TT (Todd) 1388:6–21; TT (Fortinsky) 2242:3–18. 213 TT (Davidi) 153:11–154:16; TT (Shmuel) 597:11–598:23. 214 TT (Shmuel) 725:16–726:1; TT (Howard) 1085:1–20. 215 TT (Shmuel) 598:24–602:11, 725:7–726:1; TT (Howard) 1157:12–1158:18. 216 At trial, Shmuel compared the Special Committee’s position to ingrates disparaging the gift of a “golden chicken.” TT (Shmuel) 581:21–583:7. 217 TT (Weld) 1985:21–1987:14.
34 Howard took additional steps to ensure that he could exercise his control of
Straight Path with regard to both a settlement and sale.218 Acting on Howard’s
behalf, Cyrulnik obtained a dissolution agreement of The Patrick Henry Trust on
March 28.219 This agreement, already signed by the trustor, would enable Howard,
upon signing, to immediately regain control of his voting control of Straight Path.220
e. The Meeting
On March 29, 2017, Howard, IDT representatives, the Special Committee,
and their respective counsel met at Weil’s offices in New York.221 Shmuel kicked
off the initial large group session with a declaration that “‘I have a figure for how
much I’d be willing to pay for the indemnification claim, and that’s zero.’”222
Howard followed on, angrily describing the Special Committee as “bullshit
directors” who had failed at their job to “look out for Davidi.”223 Cyrulnik then took
to the floor to argue that the Indemnification Claim was not valuable for a variety of
218 See TT (Howard) 1158:19–1159:16. 219 JX451.0001; TT (Howard) 1158:19–1159:16. 220 JX451.0004. 221 PTO ¶ 167. 222 TT (Weld) 1990:6–1991:13, 1799:20–1800:3 (emphasis added). 223 TT (Fortinsky) 2302:4–7; see also TT (Todd) 1313:1–13, 1392:14–1393:23; TT (Zeidman) 1649:23–1650:8.
35 reasons.224 Shearman responded with a presentation that valued the Indemnification
Claim in the range of $60 million.225
The discussion then moved to a breakout session consisting of Howard,
Cyrulnik, Weld, Todd, Zeidman (by telephone), and Creighton Condon of
Shearman.226 In the hallway between the two sessions, Howard flashed The Patrick
Henry Trust’s dissolution agreement to Weld, saying “Bill, look at this … [i]t’s
already been dissolved.”227 When Weld described the exchange to the other
independent directors, prior to entering the small group meeting,228 they realized that
the dissolution of the Trust meant that Howard had the power to remove them as
directors.229
This realization added to the intense pressure on the Special Committee to
come to an agreement.230 Seeking to secure something for the Straight Path
stockholders,231 the Special Committee capitulated to Howard’s $10 million figure
224 See, e.g., TT (Todd) 1266:7–1267:23; TT (Fortinsky) 2304:6–2305:2 (describing the arguments raised). 225 While only Howard recalls a specific number, recollections generally agree upon this range. See TT (Fortinsky) 2149:7–14 (recalling a figure in the range of $50–70 million); TT (Ash) 831:8–832:7 (recalling $60 or $70 million); TT (Howard) 1078:16–22 (recalling $60 million); TT (Todd) 1307:11–1308:7, 1403:5–12 (recalling a number “probably considerably below” $100 million). 226 PTO ¶ 168. 227 TT (Weld) 2000:15–2001:1. 228 Id. at 2002:3–5. 229 Id. at 2001:2–18. 230 Id. at 2007:6–9 (describing how the Special Committee felt it had no “realistic choice other than to take the deal Howard presented”); TT (Todd) 1313:14–1314:3. 231 See TT (Weld) 1835:16–1836:2, 2004:7–15; see also TT (Todd) 1312:2–24, 1313:1–13, 1387:23–1389:5, 1389:18–1390:12.
36 during the breakout session.232 The parties also agreed that IDT would purchase the
IP Assets for $6 million, with Straight Path receiving a 22% contingent payment
right (the “CPR”) in net profits from those assets.233 IDT’s valuation of the IP Assets
was pegged to the highest bid that Straight Path had received for those assets.234
f. The Aftermath
On April 2, Evercore notified bidders that Straight Path and IDT had reached
an agreement in principle regarding the Indemnification Claim.235 On April 3, 2017,
Straight Path’s full board executed a unanimous written consent ratifying the Special
Committee’s power and authority to pursue and preserve the Indemnification Claim
on behalf of Straight Path.236 That document aimed to make this approval
retroactive.237
On April 6, Straight Path agreed to an initial term sheet memorializing the
settlement with Howard and IDT.238 That day, Evercore received revised bids from
AT&T and Verizon of $951.2 million and $1.028 billion, respectively.239 The
232 PTO ¶ 169. 233 Id.; JX517.0006. Despite the Special Committee’s disinterest in non-cash consideration, Howard would not budge from $10 million, leading to the CPR as a “deal-closer.” TT (Fortinsky) 2322:20–22, 2323:8–11. 234 TT (Weld) 1806:11–22; TT (Todd) 1257:20–1258:5. 235 JX472.0003. 236 JX476.0001–02. 237 Id. at -0002. 238 JX492. 239 PTO ¶ 173.
37 following day, as bids continued to increase,240 IDT requested that the term sheet be
made binding in case a more detailed settlement was never reached.241 The Special
Committee sought additional consideration based on their belief that the increasing
bids for Straight Path were driving up the value of the Indemnification Claim. 242
Cyrulnik’s response, which threatened the Committee members and their counsel
with malpractice and director liability,243 led the Special Committee to give in once
more.244 Straight Path publicly announced the terms of the settlement in an 8-K filed
April 9.245
g. The Acquisition
Straight Path announced a final deal with AT&T on April 10 at a price of $1.6
billion.246 However, ten days later, Verizon made an unsolicited offer of $1.8 billion,
leading to a bidding war between the telecom giants.247 Verizon eventually prevailed
with a bid of $3.1 billion.248 The sale premium of over 400% represented an
extraordinary windfall for Straight Path stockholders.249
240 Id. ¶ 174. 241 JX588.0066; TT (Fortinsky) 2327:19–2328:11. 242 JX509; PTO ¶ 176. 243 JX509. 244 JX517; PTO ¶ 177. 245 JX535. 246 See JX531.0001–02. 247 JX577.0077–80. 248 Id.; JX560. 249 JX564.0003.
38 On May 11, 2017, Straight Path and Verizon executed a merger agreement.250
That agreement required Straight Path to use reasonable best efforts to consummate
the settlement term sheet it had entered with IDT.251 That was achieved through a
long-form settlement agreement entered on October 24, 2017.252
C. Procedural History
The original complaint in this matter was filed on July 5, 2017.253 On July 24,
2017, I denied expedition and consolidated related matters into this action.254 On
July 26, Plaintiffs dismissed the Special Committee members without prejudice.255
Plaintiffs filed an amended complaint on August 29, bringing four causes of action
against Howard, Davidi, IDT, and the Trust.256 A confidential mediation took place
on June 14, 2018.257 The Defendants moved to dismiss and, following briefing, I
heard argument on those motions on November 3, 2017.258 In my November 20,
250 JX566. 251 Id. at -0049. 252 JX625. 253 Verified Class Action and Deriv. Compl. for Breach of Fiduciary Duties, Dkt. No. 1. 254 See July 24, 2017 Telephonic Oral Arg. Pls.’ Mot. for Expedited Proceedings and Rulings of the Ct., 14:13–22 (granting consolidation), 37:9–11 (denying expedition), Dkt. No. 44. 255 Granted (Stipulation and [Proposed] Order of Dismissal of Certain Defs. Without Prejudice), Dkt. No. 37. 256 See Verified Consolidated Am. Class Action and Deriv. Compl., Dkt. No. 62. (“Compl.”) 257 Transmittal Decl. of Daniel E. Kaprow, Esq., pursuant to 10 Del. C. § 3927 in Supp. of IDT Defs.’ Opp’n to Pls.’ Mot. for Class Certification, Ex. 8, Dkt. No. 434. 258 Judicial Action Form. Oral Arg. Held 11-3-17 on Defs.’ Mot. to Dismiss, Dkt. No. 98.
39 2017 Letter Opinion, I held that the matter was not ripe pending the merger
closing.259 On March 2, 2018, Plaintiffs informed me that the merger had closed.260
On June 25, 2018, Straight Path I dismissed as moot an alternative cause of
action for declaratory judgment and imposition of a constructive trust but allowed
the three fiduciary duty claims to proceed.261 This decision was affirmed on
February 22, 2019, by the Delaware Supreme Court following an interlocutory
appeal by the Defendants.262
Plaintiff Ardell Howard moved to intervene on October 14, 2020.263
Following briefing and oral argument I granted that motion.264
The IDT Defendants (comprised of Howard, IDT, and The Patrick Henry
Trust) and Davidi filed separate motions for summary judgment on July 6, 2021.265
Briefing for those motions was completed in late August.266 Briefing on class
certification was completed in October 2021.267 I heard combined oral argument on
259 In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2017 WL 5565264, at *3 (Del. Ch. Nov. 20, 2017). 260 Letter to Vice Chancellor Sam Glasscock III from Ned Weinberger, Esq., Dkt. No. 105. 261 See In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *13–20 (Del. Ch. June 25, 2018), aff’d sub nom. IDT Corp. v. JDS1, LLC, 206 A.3d 260 (Del. 2019) (“Straight Path I”). 262 See IDT Corp. v. JDS1, LLC, 206 A.3d 260 (Del. 2019). 263 See Mot. to Intervene or for Permissive Joinder with Certificate of Service, Dkt. No. 339. 264 Tr. of 7.20.21 Ct.’s Ruling on Mot. to Intervene and Scheduling Conference 4:2–6:16, Dkt. No. 498. 265 See Def. Davidi Jonas’s Mot. for Summ. J., Dkt. No. 439; IDT Defs.’ Mot. for Summ J., Dkt. No. 440. 266 See Reply Br. in Supp. of Def. Davidi Jonas’s Mot. for Summ. J., Dkt. No. 508; see also Reply Br. in Further Supp. of IDT Defs.’ Mot. for Summ. J., Dkt. No. 509. 267 See Pls.’ Sur-Sur-Reply Br. in Further Supp. of Mot. for Class Certification, Dkt. No. 525.
40 both class certification and summary judgment on November 9, 2021.268 My
decisions in Straight Path II269 and III270 denied the summary judgment motions in
full and approved class certification, respectively. On August 12, 2022, Plaintiff
reached a settlement with Davidi,271 which I subsequently approved.272 Trial was
split into two five-day segments beginning on August 29 and December 5, 2022.273
Post-trial briefing was completed on April 28, 2023274 and, following oral argument
on May 3, 2023, I took the matter under advisement.275
II. ANALYSIS
Following motion practice and settlement, two causes of action remain before
me: a claim for breach of the duty of loyalty against Howard and The Patrick Henry
Trust as Straight Path’s controlling stockholders (Count I);276 and a claim for aiding
and abetting that breach of duty pled against IDT (Count III).277
268 See Tr. of 11.9.21 Oral Arg. re Mot. for Class Certification, Class Representatives, and Mots. for Summ. J., Dkt. No. 531. 269 In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2022 WL 484420 (Del. Ch. Feb. 17, 2022) (“Straight Path II”). 270 In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2022 WL 2236192 (Del. Ch. June 14, 2022) (“Straight Path III”). 271 See Stipulation and Agreement of Settlement, Compromise, and Release with Def. Davidi Jonas, Dkt. No. 648. 272 See Tr. of 12-22-2022 Partial Settlement Hrg. and Rulings of the Ct., Dkt. No. 751. 273 See 8-29-2022 Trial Tr., Dkt. No. 702; Trial dated 12.5.22, 12.6.22, 12.8.22, 12.9.22, 12.12.12, Dkt. No. 735. 274 See IDT Defs.’ Corrected Answering Post-Tr. Br., Dkt. No. 773. 275 Post Trial Oral Arg., Dkt. No. 776. 276 Compl. ¶¶ 120–24; PTO ¶ 3. 277 Compl. ¶¶ 130–33; PTO ¶ 3.
41 The central theory of Plaintiff’s case is that the FCC investigation of Straight
Path is attributable to pre-spin-off violations of FCC rules by IDT, making the
penalties paid under the Consent Decree indemnifiable under the terms of the
S&DA. Per Plaintiff, Howard recognized this as a threat to his family’s substantial
interest in IDT and used his control of Straight Path to wrest the Indemnification
Claim away at an unfair price. While much of Plaintiff’s theory is vindicated on the
post-trial record, recovery is ultimately undermined by the Indemnification Claim’s
lack of viability.
A. Defendants’ Attack on Direct Standing Fails
Defendants begin by challenging Plaintiff’s standing to assert direct claims.278
The wrongful selling of a corporate asset too cheaply is a classic claim
belonging to the company; if it is to be asserted by a stockholder, it must be
derivatively. And such a litigation asset would typically belong to a buyer after a
corporate sale. I will not repeat here my pleadings-stage analysis that this case
represented a material diversion of sales proceeds, and thus that Plaintiff’s claims
278 Defendants challenge the direct nature of Plaintiff’s claims around both the IP Assets and the Indemnification Claim. IDT Defs.’ Opening Post-Trial Br. 142–43, Dkt. No. 759 (“DF PTOB”). While Plaintiff’s answering brief provides a compelling defense of the Indemnification Claim, it is silent as to the IP Assets. See Pl.’s Post-Trial Answering Br. 10–22, Dkt. No. 768 (“PL PTAB”). Accordingly, I find that Plaintiff has waived argument as to the IP Assets. Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”) (citation omitted). My remaining analysis therefore focuses exclusively on the Indemnification Claim.
42 were direct under Parnes; those interested should consult Straight Path I.279 On
Defendants’ interlocutory appeal, the Supreme Court affirmed this holding.280 That
finding is now the law of the case.281 However, this doctrine “is neither inflexible
nor an absolute bar to reconsideration of a prior decision that is ‘clearly wrong,
produces an injustice, or should be revisited because of changed circumstances.’”282
Defendants’ principal argument is that trial showed that the S&DA’s anti-
assignment provision made the proposed litigation trust structure a legal
impossibility.283 Because, per Defendants, the trust structure was not viable, the
Indemnification Claim could not have been withheld in the merger, and could not
represent a viable diversion of merger proceeds. No party has asserted that the
indemnification asset could have been monetized in the sale of the Company. It
follows that the claim’s sale to Howard did not impact the total merger consideration,
undermining the basis for Plaintiff’s direct standing under Parnes.284
279 Straight Path I, 2018 WL 3120804, at *13; see Parnes v. Bally Ent. Corp., 722 A.2d 1243 (Del. 1999). 280 See IDT Corp., 206 A.3d 260. 281 See Carlyle Inv. Mgmt. L.L.C. v. Moonmouth Co. S.A., 2015 WL 5278913, at *7 (Del. Ch. Sept. 10, 2015) (describing law of the case doctrine in the context of a proceeding before one court, rather than on remand). 282 Id. (quoting Advanced Litig., LLC v. Herzka, 2006 WL 2338044, at *5 (Del. Ch. Aug. 10, 2006)). 283 See DF PTOB 142–43. Defendants also argue that the trust structure was a practical impossibility. DF PTOB 143–44; IDT Defs.’ Corrected Answering Post-Trial Br. at 10–22, Dkt. No. 773 (“DF PTAB”). However, law of the case doctrine applies to legal, rather than factual issues. Advanced Litig., LLC, 2006 WL 2338044, at *5. Accordingly, I will address these factual arguments in my entire fairness analysis, to which they are pertinent. 284 See In re Straight Path Commc'ns Inc. Consol. S’holder Litig., 2018 WL 3599809, at *2 (Del. Ch. July 26, 2018).
43 Because the anti-assignment provision does not preclude the litigation trust
structure, Defendants’ argument fails as a matter of law. Section 11.05(b) of the
S&DA states that neither Straight Path nor IDT “may assign its rights or delegate
any of its duties under this Agreement without the prior written consent of the other
Party.”285 Defendants’ argument that this language is dispositive boldly cites no
legal authority.286 In doing so, it ignores that Delaware courts, following the
Restatement (Second) of Contracts, “generally construe such [anti-assignment]
provisions narrowly” by “distinguish[ing] between the power to assign and the right
to assign.”287 In order to prohibit a party’s power to assign, a provision must
expressly state that subsequent assignments will be void or invalid.288 Because the
anti-assignment provision in the S&DA contains no such statement,289 it does not
preclude the litigation trust structure as a matter of law.290 The matter of IDT’s
probable refusal to consent to any assignment, and whether that would have
prevented recovery against IDT, does figure in the analysis of fair price, infra.
285 JX107.0030. 286 See DF PTOB 142–43. 287 Se. Chester Cnty. Refuse Auth. v. BFI Waste Servs. of Pa., LLC, 2017 WL 2799160, at *5 (Del. 2017) (emphasis in original). 288 Id. (holding that absent such a provision, parties retain the power to assign, though assignments may result in a breach of contract action by their counterparty). 289 JX107.0030. 290 See Pl.’s Post-Trial Answering Br. at 13–15, Dkt. No. 769 (“PL PTAB”) (arguing that the contemplated structure involved a contractual arrangement with the acquirer, rather than an assignment of rights or duties).
44 B. Entire Fairness Review Applies
Defendants effectively concede that Howard was Straight Path’s controlling
stockholder and, putting aside their argument on standing, that entire fairness review
applies.291 Given that Howard controlled more than 70% of Straight Path’s voting
power as of the March 29 meeting,292 and given his involvement in the process, I
find that he was a controller owing fiduciary duties to the company’s minority
stockholders.293 Plaintiff alleges that Howard breached his duty of loyalty to the
minority stockholders by coercing the Special Committee into an unfair settlement
of the Indemnification Claim, resulting in a non-ratable benefit to Howard.294
Though Howard’s personal stake in Straight Path was smaller than in IDT, the Jonas
family collectively owned a larger stake in IDT, as of March 29, 2017.295 I find that
IDT’s status as Howard’s flagship company,296 his family’s larger ownership stake,
and ongoing interest in IDT post-merger are sufficient to establish a non-ratable
benefit.297
291 See DF PTOB 144–73; DF PTAB 22–119 (failing to contest the issue of control or the application of entire fairness). 292 JX739.0064. 293 See Williamson v. Cox Commc'ns, Inc., 2006 WL 1586375, at *4 (Del. Ch. June 5, 2006) (citing Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994)) (holding that an individual or entity holding 50% or more of a corporation’s voting power is a controller); Ivanhoe P’rs v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987) (holding that controllers owe fiduciary duties). Given Defendants’ waiver of the control argument, I need not assess whether the existence of the Patrick Henry Trust impacts this analysis. 294 PL PTOB 69. 295 JX739.0060–67. 296 TT (Howard) 970:13–972:9; see also TT (Weld) 1740:10–11; TT (Todd) 1272:19–1273:11. 297 TT (Atkins) 2644:21–2648:6; JX0739.0035–48.
45 Accordingly, entire fairness review applies,298 with the burden on Defendants
to demonstrate both fair process and fair price.299
1. Fair Process
Fair process “embraces 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.” 300 This Court is
frequently asked to make findings of controller overreach based on only
circumstantial evidence, cryptic communications, or inference.301 This is not one of
those cases. Here, Howard, directly and through Cyrulnik, made every effort to
bully the Special Committee towards his desired outcome.
Howard did not want the Indemnification Claim preserved.302 In order to push
his agenda, he bombarded the Special Committee members with phone calls.303 He
described as “insane” Shearman’s reasonable precaution of walling off “the
controlling shareholder” from communicating with “his own directors” about a
pending self-interested transaction.304 He threatened to “put it all on Mintz
298 See Straight Path I, 2018 WL 3120804, at *15. 299 In re Tesla Motors, Inc. S’holder Litig., 298 A.3d at 700. 300 Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). 301 See, e.g., In re Oracle Corp. Deriv. Litig., 2023 WL 3408772 (Del. Ch. May 12, 2023). 302 See, e.g., JX588.0062 (describing, in a signed SEC disclosure, how Cyrulnik told Fortinsky that Howard was not prepared to support a potential transaction in which the Indemnification Claim was preserved); TT (Fortinsky) 2272:5–15 (confirming the conversation); see also TT (Howard) 1177:20–1178:20. 303 TT (Howard) 1026:4–1027:17; TT (Weld) 1965:11–1966:12. 304 TT (Howard) 1146:4–23.
46 [Levin]”—the law firm where Weld was a partner—when Weld didn’t cave in to his
demands.305 He verbally abused the Special Committee during negotiations, calling
them “bullshit directors.”306 He made sure that the Special Committee knew, as they
went into final negotiations, that he had dissolved his blind trust and retaken direct
voting control of Straight Path.307 Finally, he made the Special Committee believe
that he would torpedo the lucrative sale of the Company, if the Special Committee
did not quickly settle the Indemnification Claim.308 This campaign of abuse and
coercion led the Special Committee to reasonably conclude that it had to settle the
Indemnification Claim on Howard’s terms or risk an even less favorable outcome
for the Company.309
In response to this overwhelming evidence of unfair process, Defendants
attempt to turn the tables by putting the blame on the Special Committee.
Defendants’ argument, as I understand it, is essentially that the Special Committee
went rogue and sought to preserve the Indemnification Claim despite blinding
evidence that it was not in the company’s best interests.310 Per Defendants, Howard
305 TT (Weld) 1967:11–1969:11. 306 Id. at 1991:18–21; TT (Fortinsky) 2301:23–2302:7. 307 TT (Weld) 2000:15–2001:1. 308 JX588.0062 (describing Cyrulnik’s conversation with Fortinsky); TT (Fortinsky) 2245:21– 2246:6; TT (Fortinsky) 2274:9–12; see also TT (Fortinsky) 2271:17–2272:2; TT (Weld) 1985:21– 1987:14. 309 TT (Weld) 1818:16–23, 1994:17–1995:11, 2007:6–9; TT (Todd) 1386:21–1387:11, 1390:2– 1392:3, 1437:2–24; TT (Zeidman) 1671:23–1672:12. 310 DF PTOB 169–73; DF PTAB 45–70.
47 was in fact defending minority stockholder interests by steamrolling the Special
Committee.311 I find that this fulsome312 defense of Howard’s clear interference with
the Special Committee is facially inconsistent with both Delaware law and the
factual record.
This Court presumes directors’ fidelity to their fiduciary duties.313 Defendants
seek, explicitly or not, to justify the forceable substitution of Howard’s business
judgment for the Special Committee’s own. The burden is therefore on Defendants
to establish facts rebutting this presumption of fidelity and justifying Howard’s
intervention.314 I find that they fall far short. The record is replete with evidence
that the Special Committee labored zealously to maximize stockholder value based
on the members’ good faith belief that the Indemnification Claim would be
undervalued in a merger, as well as their understanding of Howard’s
intransigence.315
311 See, e.g., DF PTOB 170 (arguing that Howard acted to benefit Straight Path, never threatened anyone, and sought no non-ratable benefit). 312 Fulsome, in the traditional sense. See Jeter v. RevolutionWear, Inc., 2016 WL 3947951, at *9 n.90 (Del. Ch. July 19, 2016); see also Cyrulnik’s impassioned closing defense of Howard at post- trial oral argument. Post Trial Oral Arg. Tr. 158:2–62:3, Dkt. No. 780. 313 See Orman v. Cullman, 794 A.2d 5, 19–20 (Del. Ch. 2002); see also Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1049–50 (Del. 2004) (applying this principle in the context of demand futility). 314 Orman, 794 A.2d at 19–20. 315 See, e.g., TT (Todd) 1380:19–1381:16 (stating that eliminating the Indemnification Claim would be beneficial for the sales process); TT (Weld) 1952:2–1953:13 (expressing that potential buyers would not have interest in the Indemnification Claim); TT (Fortinsky) 2238:18–2239:8 (asserting that the Special Committee stated “buyers would not pay anything for the Indemnification Claim”); TT (Weld) 1835:16–1836:2, 1836:12–21, 1994:17–21, 2004:7–15
48 Defendants’ principal argument to the contrary is that Howard’s actions were
taken in good faith and were consistent with advice from Straight Path’s deal
advisors at Weil and Evercore.316 As a threshold matter, it is irrelevant whether
Howard had a subjective good faith belief that coercing the Special Committee into
a settlement was in Straight Path’s best interest.317 Instead, Defendants’ only
relevant contention is that the advice of Weil and Evercore rebuts the presumption
that the Special Committee was carrying out its duties in good faith, necessitating
Howard’s intervention.318 However, this argument is not borne out by the evidence.
(revealing the committee needed to settle the Indemnification Claim or the transaction would not go forward and that stockholders would receive little for the claim if Howard removed independent directors from the board); TT (Todd) 1312:2–24, 1313:1–13, 1387:23–1389:5, 1389:18–1390:12 (stating that the financial interests of all stockholders were going to be negatively impacted); TT (Fortinsky) 2298:17–2299:13 (expressing that he did not believe Howard would allow the Indemnification Claim to survive a Straight Path transaction); TT (Weld) 2008:19–2009:12 (asserting that the Indemnification Claim was sacrificed to allow the transaction to go forward); see also TT (Weld) 2007:10–12, 1962:5–12 (stating the Indemnification Claim was settled for a low amount). 316 DF PTOB 169–71. I have found, supra, that Howard had a large and compelling familial interest in IDT, I need not address further Defendants’ arguments that Howard’s financial interests aligned with those of the minority. See DF PTOB 172–73. I also defer until the next section consideration of Defendants’ fair price arguments, which they attempt to inject into the fair process analysis. See DF PTAB 26–40. 317 See In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 489 (Del. Ch. 2013) (holding that fiduciaries are liable for unfair self-dealing, regardless of whether they acted in subjective good faith). Indeed, the idea that “fair process” can be fulfilled by a controller’s “good faith” steamrolling of a functioning special committee is non-intuitive and deviant from our doctrine. Perhaps this is why Defendants cite no relevant precedent in arguing fair process. See DF PTOB 169–73 (citing only two cases, both inapposite); DF PTAB 40–68 (citing only a single case, also inapposite, in almost 30 pages of argument). 318 Defendants attempt to cast doubt on the Special Committee’s understanding of its duties through artfully selected and ordered selections of trial testimony. DF PTAB 35–37. I find, however, that this evidence does little to rebut the presumption of the Special Committee’s adherence to its fiduciary duties. As such, I decline to address these arguments further.
49 Neither Straight Path’s deal advisors nor the bidders ever intimated that preservation
of the Indemnification Claim would “imperil[] the auction[.]”319 Weil and
Evercore’s belief that resolving the Indemnification Claim would make for a
smoother auction process is insufficient to impugn the Special Committee or justify
Howard’s interference.
Accordingly, I find that Defendants failed to demonstrate fair process.
2. Fair Price and the Value of the Indemnification Claim Based on the Trial Record
In assessing fair price, the Court must determine whether Defendants have
proved that the price paid for the Indemnification Claim “falls within a range of
fairness.”320 Contrary to Defendants’ contentions, the price in question is the
consideration Howard paid in exchange for settlement of the Indemnification Claim,
not the $3.1 billion Verizon paid for Straight Path.321 Plaintiff accurately
summarizes the analysis as follows: “[t]o determine ‘fair price,’ the Court must
decide whether Defendants proved that the Indemni[fication] Claim was worthless
or of so little value that $10 million fails within a range of fairness for this massive
319 DF PTOB 169; see TT (Evercore) 3013:23–3015:9; TT (Breau) 2469:11–2474:9; JX720.0166 (Weil Designations) 166:3–25; JX688.0187 (Verizon Designations) 187:22–188:07, 194:06– 195:06; 215:09–23. 320 In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *33 (Del. Ch. Aug. 27, 2015). 321 DF PTOB 145.
50 shortfall.”322 The following section, accordingly, addresses a counterfactual: if IDT
had not obtained a release of the Claim, what would its value be to the Plaintiff class?
Because I find that Straight Path’s failure to fulfill the notice and consent
requirements of Section 6.07 of the S&DA is dispositive in determining that the
Indemnification Claim was economically worthless, I need not rule on many of the
parties’ other threshold arguments.323 In order to give the reader context, I briefly
outline these arguments before analyzing the issue of notice and consent in detail. I
then address Plaintiff’s arguments around contribution, which she contends provides
an equitable path towards recovery not subject to the notice and consent
requirements of S&DA Section 6.07. Because Plaintiff’s arguments are not
supported by equity, they do not sway my finding that the $10 million paid by
Defendants was fair. My reasoning follows.
a. SPCI Liability, Pre- or Post-Spin-Off, Indemnifiable Loss, Limitation on Liability
Defendants field a host of arguments that the price paid was more than fair
because the Indemnification Claim was not viable. For the purposes of the fair price
analysis, I either find or assume that Plaintiff prevails on each of the arguments
discussed in this subsection.
322 PL PTAB 61. 323 Accordingly, because I find that the $10 million paid was economically fair, I need not assess the value of the CPR that stockholders obtained in the settlement with Howard and IDT.
51 i. Indemnifiable Loss
Section 6.02 of the S&DA governs IDT indemnification of Straight Path (or
“SPCI”) and is the basis for the Indemnification Claim. That section reads:
On 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.324
Defendants argue that, because Straight Path received the Spectrum Licenses for free
in the spin-off, there can be no Indemnifiable Loss,325 which is defined as “any and
all damage, loss, liability, and expense. . . in connection with any and all”326 actual
or threatened claims, proceedings, or investigations before any court or government
agency.327 Defendants cite no authority, legal or otherwise, nor do they attempt to
reconcile their position’s clear conflict with the language of the S&DA.
Accordingly, I find that the Consent Decree gave rise to an Indemnifiable Loss under
the S&DA.
ii. Limitation of Liability
324 JX107.0019. 325 DF PTOB 155–56. 326 JX107.0006. 327 Id. (defining “Action”).
52 Section 11.12 of the S&DA contains a provision limiting indemnitors’
liability for “any special, indirect, incidental, punitive, consequential, exemplary,
statutorily enhanced or similar damages in excess of compensatory damages[.]”328
Defendants contend that the damages here are consequential and that there can be
no compensatory damages, given that Straight Path received the Spectrum Licenses
for free.329 In doing so, Defendants ignore the subsequent parenthetical noting that
“any such liability with respect to a Third Party Claim shall be considered direct
damages.”330 As Plaintiff notes, “[a] plain reading of [Section] 11.12 and the
S&DA’s definitions confirm that liability resulting from a Consent Decree is the
result of a ‘Third Party Claim[.]’”331 Accordingly, Defendants’ limitation of liability
argument fails.
iii. SPCI Liabilities
The parties next dispute whether Plaintiff’s claimed losses are “SPCI
Liabilities” as defined in the S&DA.332 This is relevant because SPCI Liabilities are
specifically carved out from IDT’s indemnification obligations in Section 6.02.333
The definition of “SPCI Liabilities” is complex, involving seven subparts and
328 JX107.0032. 329 DF PTOB 156–58. 330 JX107.0032. 331 PL PTAB 98. 332 PL PTOB 105–10; PL PTAB 69–80; DF PTOB 150–55; DF PTAB 88–97. 333 JX107.0005 (carving “SPCI Liabilities” out from “IDT Liabilities”), -0030 (linking one category of indemnity to IDT Liabilities).
53 ambiguity resulting from an obvious drafting error.334 Of these seven subparts, only
numbers (ii), (iv), and (vii) are the subject of the parties’ post-trial arguments.
Subpart (ii) attempts to use time-based limitations to determine whether a
given liability is an SPCI Liability.335 While the first half of the provision336
allocates liabilities arising after the spin-off to Straight Path, the second half appears
to also allocate pre-spin-off liabilities to Straight Path, but the language is
ambiguous due to a missing parenthesis and the use of what appears to have been
intended as a defined term, “Effective Date,” that appears nowhere else in the
S&DA.337 I assume for the purpose of this fair price analysis that Plaintiff’s
preferred reading of subpart (ii), allocating to Straight Path only those liabilities
arising from post-spin-off conduct,338 is correct.
I found on summary judgment review that the language of subpart (iv) (which
excludes from indemnification liabilities arising from “a sale”) was unambiguous
334 Id. at -0009–10. 335 Straight Path II, 2022 WL 484420, at *9–11. 336 “[A]ny and all Liabilities of IDT, SPCI, or any of their respective Affiliates, primarily relating to, arising out of or resulting from the operation or conduct of the SPCI Business or any other business, or the ownership or use of the Assets of SPCI, as conducted at any time on or after the Effective Time.” JX107.0009. 337 Id. 338 PL PTOB 105–10 (emphasis added).
54 but inapplicable to Plaintiff’s claims.339 I reject as inadequate Defendants’ attempts
here to overcome the law of the case.340
Finally, Defendants argue that subpart (vii), which governs liabilities relating
to post-spin legal actions, controls Plaintiff’s claims.341 Subpart (vii) includes a
time-based limitation similar to subpart (ii) and applies to liabilities relating to the
operation of the SPCI Business and any SPCI Action.342 The S&DA defines “any
SPCI Action” as “any current or future Action relating primarily to the SPCI
Business in which one or more members of the IDT Group is a defendant or the party
against whom a claim or investigation is directed. . . .”343 Defendants contend subpart
(vii) applies to Plaintiff’s claims since Plaintiff asserts the FCC Straight Path Inquiry
was directed against IDT’s conduct.344 Based on this interpretation, Defendants
argue subpart (vii) designates the FCC Straight Path Inquiry as an “SPCI Action,”
and, as a consequence, allocates liability to Straight Path.345 I assume for the
purposes of this analysis that Plaintiff’s position—that subpart (vii) is inapplicable
339 See Straight Path II, 2022 WL 484420 at *10. 340 See, e.g., DF PTAB 99–101 (seemingly arguing that trial introduced new evidence inconsistent with my prior decision, but failing to explain how this overcomes the law of the case doctrine); see also Section III.A (discussing law of the case doctrine). 341 DF PTOB 153–55. 342 “[A]ny and all Liabilities relating to, resulting from, or arising out of any Action that is primarily related to the operation of the SPCI Business following the Effective Time, including any SPCI Action.” JX107.0010. 343 Id. at -0008. 344 DF PTOB 153. 345 Id.
55 because it allocates liability to Straight Path for IDT’s post-spin-off conduct and not
pre-spin-off violations—is correct.346
iv. Pre- or Post-Spin-Off
Defendants next argue that, even under Plaintiff’s reading of the S&DA, the
penalties Straight Path paid under the Consent Decree are not indemnifiable because
they are attributable to post-spin-off conduct,347 putting them on the wrong side of
subpart (ii)’s time-based liability allocations. As the facts recited above indicate,
most—but not all—of the actions cited by the FCC in its investigation involve pre-
spin activity. I once again assume without finding that Plaintiff’s position—that the
FCC investigation and subsequent Consent Decree arose from IDT’s pre-spin-off
violations—is correct.
b. Notice & Consent
I turn, then, to whether Straight Path created a viable indemnification
obligation on the part of IDT, under the terms of the S&DA. Defendants contend
that the Indemnification Claim was worthless because it was barred by Section 6.07
of the S&DA, governing notice and defense of third-party claims.348 At summary
judgment, I warned that Plaintiff’s theory of implied consent “may prove difficult to
vindicate on the facts alleged.”349 On a post-trial record, I find that Defendants
346 PL PTAB 82–83 (emphasis added). 347 Id. at 158–65. 348 PTOB 145–49; JX107.00021–22. 349 Straight Path II, 2022 WL 484420, at *11.
56 proved that the notice and consent requirements of Section 6.07 were not met and
that Plaintiff’s theories were not tenable.
i. Requirements under Section 6.07
Section 6.07 provides:
Promptly following the earlier of (a) receipt of notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (b) receipt of information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "Third Party Claim"), the Indemnified Party shall give the Indemnifying Party written notice thereof. The failure of the Indemnified Party to give notice as provided in this Section 6.07 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is materially prejudiced by such failure to give notice. Within thirty (30) days after receipt of such notice, the Indemnifying Party shall, by giving written notice thereof to the Indemnified Party, (a) acknowledge, as between the parties hereto, liability for, and at its option elect to assume the defense of such Third Party Claim at its sole cost and expense or (b) object to the claim of indemnification set forth in the notice delivered by the Indemnified Party pursuant to the first sentence of this Section 6.07 setting forth the grounds therefor; provided that if the Indemnifying Party does not within the same thirty (30) day period give the Indemnified Party written notice acknowledging liability or objecting to such claim and setting forth the grounds therefor, the Indemnifying Party shall be deemed to have acknowledged, as between the parties hereto, its liability to the Indemnified Party for such Third Party Claim. . . . If the Indemnifying Party assumes the defense of a Third Party Claim, the Indemnifying Party may settle or compromise the claim without the prior written consent of the Indemnified Party if such settlement or compromise is solely for monetary damages for which the Indemnifying Party shall be responsible for; in all other events, the Indemnifying Party may not agree to any settlement or compromise without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld or delayed. If the
57 Indemnifying Party does not assume the defense of a Third Party Claim for which it has acknowledged liability for indemnification under Article VI, the Indemnified Party may require the Indemnifying Party to reimburse it on a current basis for its reasonable expenses of investigation, reasonable attorney's fees and reasonable out-of-pocket expenses incurred in defending against such Third Party Claim, and the Indemnifying Party shall be bound by the result obtained with respect thereto by the Indemnified Party; provided that the Indemnifying Party shall not be liable for any settlement effected without its consent, which consent shall not be unreasonably withheld or delayed.350
The Section requires the “Indemnified Party” (here, Straight Path) to promptly
notify the Indemnifying Party, IDT, in writing, upon receiving notice that a third
party (a) has commenced an Action against or involving Straight Path or (b) has
alleged the existence of such a claim.351 Both (a) and (b) only apply to claims for
“which indemnification may be sought” under the S&DA.352 Failure to adhere to
this notice requirement “shall not relieve [IDT] of its obligations under [the
S&DA],” except to the extent such a failure materially prejudices IDT (the “Material
Prejudice Carveout”).353
Section 6.07 further requires IDT, within 30 days of receiving “such notice,”
to notify Straight Path in writing that IDT either (x) acknowledges its liability to
Straight Path354 or (y) objects to Straight Path’s indemnification claim.355 If IDT
350 JX107.00021–22. 351 Id. at -0021. 352 Id. 353 Id. 354 This option, which only acknowledges liability “as between the parties,” also gives IDT the option to assume the defense of the claim at its own expense. Id. 355 IDT is also required to provide the grounds for rejection. Id.
58 does not provide this written notice within the 30-day period specified, it is deemed
to have acknowledged its liability to Straight Path for the claim.356
Section 6.07 also provides that IDT, if it assumes the defense of the underlying
claim by the third party, can settle that claim without consulting Straight Path where
the settlement involves only money damages to be paid by IDT.357 Otherwise, IDT
may not settle a claim without Straight Path’s prior written consent, which “shall not
be unreasonably withheld or delayed.”358 Similarly, for claims where IDT has
acknowledged liability but not assumed the defense, IDT “shall be bound by the
result” obtained by Straight Path but will not be liable for settlements entered
without its consent, which “shall not be unreasonably withheld or delayed.”359
Here, Plaintiff seeks to recover for fines and license terminations under the
Consent Decree Straight Path entered—settled—with the FCC.360 It is largely
undisputed that Straight Path did not follow the process described in Section 6.07
prior to entering the Consent Decree.361 The operative question is therefore whether
356 Id. 357 Id. 358 Id. at -0021–22. 359 Id. at -0022. 360 See PL PTOB 98–99. 361 Plaintiff argues that Davidi provided written notice on behalf of Straight Path in a February 2016 email. PL PTOB 112. However, this email predates the FCC investigation that resulted in the Consent Decree. See JX199.0002 (FCC letter of inquiry dated September 20, 2016). I therefore find that it could not have fulfilled the requirements of Section 6.07 with regard to that settlement.
59 Plaintiff’s alternative theories of notice and consent are permissible under the
S&DA.
ii. Notice Requirement
Reading Section 6.07 as a whole, the notice requirement serves two functions:
to let IDT know that (1) a claim potentially giving rise to an indemnification
obligation exists and (2) Straight Path intends to seek indemnification for that claim.
An indemnitor can suffer material prejudice if it is held liable for a claim where it
had notice of (1) but not (2). This is because the indemnitor’s interest in defending
against a given claim corresponds directly to the probability that it will be liable for
payment. That probability is based on both the merits of the underlying claim and
the likelihood that the indemnitee will seek indemnification. Thus (2) serves the
important function of eliminating uncertainty around whether the indemnitee will
seek indemnification, aligning the interests between indemnitee and indemnitor.
Plaintiff contends that Straight Path provided IDT with the contractually
required notice of the FCC’s impending inquiry and Straight Path’s intention to seek
indemnification from IDT in the event Straight Path was made to pay fines as a result
of the FCC inquiry.362 On February 26, 2016, Davidi sent an email to Schmuel,
IDT’s in-house counsel, and Cyrulnik, which stated, in relevant part, “According to
a clause in the separation agreement (6.07 I believe) between [Straight Path] and
362 PL PTOB 112–13.
60 IDT, IDT indemnifies [Straight Path] for activities prior to separation. Given the
posture of the claims against [Straight Path] to date that clause may be
implicated.”363 While Davidi requested a call in this email to discuss the issue
further, no testifying witness recalled whether the requested call occurred.364 It is
unclear from the text of the email whether Davidi’s email was referencing
indemnification from IDT for the ongoing Zacharia lawsuit Straight Path was a party
to365 or Straight Path’s potential liability for the not-yet-opened FCC Straight Path
Inquiry.366 I note that the latter was not a “claim[]. . . to date.”367
Though Plaintiff points to IDT’s October 2016 SEC filing that acknowledges
“should the FCC impose liability on Straight Path, we could be the subject of a claim
from Straight Path related to that liability”368 as confirmation that IDT was properly
put on notice by Straight Path, Plaintiff has been unable to adduce anything
attributable to Straight Path which clearly puts IDT on notice that Straight Path
would be seeking indemnification from IDT for any liabilities Straight Path incurred
from the FCC Straight Path Inquiry.369 At best, the language in IDT’s October 2016
SEC filing is evidence that IDT knew of the FCC Straight Path Inquiry and was
363 JX0161.0001. 364 TT (Davidi) 275:10–76:15; TT (Ash) 918:10–19:7; TT (Schwell) 2861:20–62:8; TT (Breau) 2418:6–14; TT (Schmuel) 2419:1–17. 365 TT (Davidi) 55:1–5, 56:1–57:20, 269:23–271:9. 366 See JX199 (September 2016 FCC Letter of Intent). 367 Id. 368 JX0237.0014, -0021, -0043 (emphasis added). 369 See PL PTOB; PL PTAB.
61 anticipating Straight Path might provide IDT with notice for indemnification in the
future.
The presence of function (2)—that Straight Path may seek indemnification—
in Section 6.07’s notice requirements is apparent in the option for the IDT to assume
the defense of the claim and the requirement that the Straight Path obtain the IDT’s
consent before settling. These provisions would not make sense if notice included
notice of a claim but not intent to demand indemnification, because IDT’s decisions
around the appropriateness of defense or settlement hinge on Straight Path’s intent
to seek indemnification. I find that Plaintiff’s evidence fails demonstrate that IDT
was aware Straight Path intended to seek indemnification for FCC-imposed liability.
Plaintiff argues next that the Material Prejudice Carveout excuses the lack of
written notice. Per Plaintiff, the fact that IDT already had constructive and actual
notice that Straight Path was planning to settle with the FCC, potentially opening the
door to an indemnification claim, “preclude[s] a finding of material prejudice.”370 I
find that this interpretation is inconsistent with the text of Section 6.07, as well as
the facts of record.
It is indisputable that Howard, a conflicted fiduciary, was aware of and
cooperated in Straight Path’s response to and eventual settlement of the FCC
370 PL PTAB 85.
62 investigation.371 However, there is no evidence that, prior to that settlement, Straight
Path provided appropriate notice to IDT that it was asserting its right to
indemnification for the resulting liability. Deeming IDT to have notice of this
Indemnification Claim would result in material prejudice to IDT because it did not
have an opportunity to defend against the investigation or negotiate the settlement
with the full knowledge of its liability.
At the time Straight Path agreed to this settlement with the FCC, 372 Straight
Path was already preparing for a potential sale of its licenses after having been
approached by potential buyers.373 It strains credulity that IDT, being on notice of
its need to potentially indemnify Straight Path, would have negotiated a settlement
opting to remit to the FCC 20% of the proceeds from the sale of Straight Path’s
license portfolio without requiring any cap on the amount remittable to the FCC.
Ultimately, Straight Path’s liability to the FCC ballooned to a point that the face
value of the Indemnification Claim exceeded not only IDT’s ability to pay, but also
IDT’s liquidation value.374
Accordingly, I find that Defendants have shown that Straight Path failed to
comply with the written notice requirement of Section 6.07, materially prejudicing
371 See, e.g., TT (Weld) 1947:11–23; JX0357.0001; TT (Fortinsky) 2234:5–35:22; TT (Davidi) 307:4–9:9; TT (Howard) 1001:3–1004:3, 1122:17–22. 372 JX825. 373 JX577.0065; TT (Weld) 1716:12–15. 374 TT (Atkins) 2680:13–20.
63 IDT. Therefore, IDT cannot be deemed to have been on contractual notice of
Straight Path’s intention to seek indemnification for the FCC Straight Path Inquiry.
iii. Consent
My finding that Straight Path failed to fulfill Section 6.07’s notice
requirement effectively moots the need to evaluate the parties’ consent arguments.
This is because the consent requirement is predicated on IDT’s acknowledgement of
liability, which itself requires notice.375 However, for the sake of completeness, I
briefly address the consent arguments here, which would independently negate the
Indemnification Claim.
Plaintiff’s principal argument on consent is that IDT impliedly consented to
indemnification.376 Per Plaintiff, because “[t]he S&DA does not proscribe any
formal requirements for the indemnifying party’s consent to a settlement,” Howard’s
knowledge of and lack of objection to Straight Path’s settlement with the FCC is
375 JX107.0021–22. 376 PL PTOB 114–17. Plaintiff also contends that IDT “relinquished any consent right” by denying that it had any indemnity obligations relating to the Consent Decree. Id. at 113–14. This argument is based on a strained reading of Section 6.07, which deems the indemnitor to acknowledge liability if it doesn’t respond to the indemnitee’s notice within 30 days. JX107.0021. Plaintiff takes this to mean that, by not responding, the indemnitor waives its consent right. PL PTAB 86–87. However, Section 6.07 deems the unresponsive indemnitor to have “acknowledged. . . liability[,]” which is precisely the phrase used when describing the scenario in which the consent right arises. JX107.0021–22. Thus, it is clear that the parties intended that an unresponsive indemnitor could be deemed to have acknowledged liability but retain its consent right when it came to subsequent settlements. In any event, I have found contractual notice lacking here, and only “such notice” triggers IDT’s obligation to “acknowledge” the obligation to indemnify.
64 sufficient to constitute consent.377 In further support of this argument, Plaintiff
points to Straight Path and IDT’s allegedly overlapping legal teams that coordinated
the response to the FCC.378 At most, this evidence indicates that IDT had knowledge
of Straight Path’s response to the FCC inquiry; it does not indicate that IDT was
aware that Straight Path would seek indemnification or that IDT was consenting to
indemnifying Straight Path. This argument fails for the same reasons as the
Plaintiff’s contentions around notice.
Alternatively, Plaintiff argues that IDT waived its right to consent to any
settlement Straight Path reached in resolving the FCC Straight Path Inquiry.379 In
asserting this argument, Plaintiff is trying to have her cake and eat it too. Plaintiff
has asked that this Court eliminate the requirement in Section 6.07 that Straight
Path’s notice be in writing because the notice was implied, while also asking that
this Court to find that IDT waived its consent right for not strictly adhering to the
S&DA’s requirement that IDT respond in writing within 30 days of receiving
377 PL PTOB 114–16. Plaintiff asserts that Howard’s alleged willingness to help Straight Path finance any penalty assessed by the FCC as further evidence of IDT consenting to indemnify Straight Path. PL PTAB 84, 92. While Howard is IDT’s controlling stockholder, Howard lacks the authority to unilaterally consent to indemnifying Straight Path. TT (Ash) 825:24–826:22 (explaining that indemnifying Straight Path qualified as a related-party transaction and would therefore require independent board approval by IDT). 378 See PL PTOB 115–16 (pointing out that (i) Cyrulnik reviewed the draft Consent Decree while simultaneously representing both Straight Path and IDT and (ii) Cyrulnik and Schwell attended the Straight Path board members where the negotiations with the FCC were discussed and the Consent Decree was ultimately approved, as evidence that IDT had impliedly consented); PL PTAB 90. 379 Id. at 113–14; PL PTAB 86–89.
65 notice.380 Under Plaintiff’s reading of the S&DA, if IDT did not acknowledge
liability, IDT would waive its right to consent, but Straight Path could still seek
indemnification from IDT for any settlement, even a settlement reached without
IDT’s receipt of written notice.381 Plaintiff further argues that IDT’s alleged failure
to acknowledge liability meant “that IDT disclaimed indemnity and thereby
relinquished any consent right.”382
Despite Plaintiff’s best efforts to force IDT into strict compliance with the
S&DA’s requirements while simultaneously holding Straight Path to a lesser
standard, I find Plaintiff’s interpretation of the S&DA untenable. It is only Straight
Path’s written notice that can trigger IDT’s concomitant responding obligation, but
IDT never received a writing that met S&DA’s requirements. Here, there could be
no waiver of IDT’s consent right and, as discussed supra in Section II.B.2.b.ii., the
argument that IDT would sit on its consent rights while Straight Path settled the FCC
Straight Path Inquiry for an unknown amount that was inherently connected with the
sale of Straight Path’s licenses, which quickly skyrocketed to a record sale premium,
is unfounded.
My decision not to defer to Plaintiff’s interpretation of Section 6.07 is further
supported by the record, which I find is replete with evidence that Straight Path was
380 JX0107.0021–22. 381 PL PTOB 113. 382 Id. at 114.
66 impatient to resolve the FCC inquiry by entering the Consent Decree, at the expense
of running afoul of Section 6.07 in the S&DA. For instance, Weld, Straight Path’s
director, agreed it was “preferable to get a clean bill of health from the FCC for its
licenses before it was going to entertain serious discussions with anyone about
buying the company.”383 Additionally, Todd, another Straight Path director,
expressed “the idea was, we needed to get this resolved as quickly as we could,
because any buyer is going to be hesitant to buy something that’s flawed.”384
Zeidman, yet another Straight Path director, declared “. . . if they had revoked all our
licenses, there would have been nothing to transfer to an AT&T or anybody else.
So[,] I think it was sort of mandatory that we resolve the issue.” 385 Finally, Breau,
Straight Path’s General Counsel, stated Straight Path was “very focused on resolving
the FCC’s inquiry.”386
Further, I find that the record also demonstrates that Straight Path deliberately
avoided the formalities of Section 6.07, by failing to provide IDT with adequate
notice as required by the S&DA. For example, Davidi, Straight Path’s CEO and a
director, asserted that Straight Path considered involving IDT in the FCC
negotiations, but Straight Path eventually determined “it would be likely fatal to our
383 TT (Weld) 1716:16–1717:12. 384 TT (Todd) 1212:5–1213:2. 385 TT (Zeidman) 1513:3–6. 386 TT (Breau) 2370:19–21.
67 objective of achieving resolution with the FCC to invite IDT to participate; and so[,]
we did not.”387 Zeidman also expressed that Straight Path did not seek IDT’s consent
for the FCC settlement because Straight Path “felt that it was an independent
decision by Straight Path, and we had no reason to get consent of anyone – of anyone
other than the board, if you will, of Straight Path.”388 Further, Frank Lamancusa,
Straight Path’s outside counsel, stated he did not “have any recollection that. . . [IDT
was]. . . aware of the settlement discussion.”389
In short, Straight Path failed to provide IDT with written notice pursuant to
the S&DA. While IDT was well aware of the FCC’s inquiry into Straight Path, it
was unaware that Straight Path intended to seek indemnification. IDT was not on
notice and, therefore, was not given the opportunity to exercise its contractual right
to take over the defense of the inquiry nor allowed to meaningfully participate in the
negotiations with the FCC. Even after Straight Path negotiated a settlement with the
FCC, I find, Straight Path failed to provide IDT the option of approving the terms of
the settlement because it was not in Straight Path’s interest to do so. Straight Path
much preferred to allow the “golden chicken” (to use Shmuel’s memorable phrase)
that was the sales auction to keep laying, instead of allowing IDT the ability to
assume the defense of claim or change the terms of the settlement, interfering with
387 TT (Davidi) 120:12–22. 388 TT (Zeidman) 1525:24-1527:6. 389 TT (Lamancua) 478:10–14.
68 the ovulatory process. Allowing IDT to have a say in the FCC Straight Path Inquiry
risked delaying or harming the highly lucrative sales process. This was a reasonable
decision on the part of Straight Path, and paid off handsomely for its stockholders,
but it is inconsistent with indemnification.
Straight Path’s failure to comply with the notice and consent requirements of
Section 6.07 of the S&DA fatally undermines the Indemnification Claim. Without
proper notice or consent, there was no viable claim for the Special Committee to
pursue or preserve. Because the Indemnification Claim was not viable, it had no
economic value. In other words, had the Special Committee successfully placed the
claim in trust for Straight Path’s stockholders, that asset would have had no value.
Based on the post-trial record, the $10 million Defendants paid was therefore not
unfair.
c. Contribution under Section 6.03
Plaintiff contends that Section 6.03 of the S&DA provides an equitable means
of bypassing the notice and consent defects discussed above.390 Section 6.03
provides:
In circumstances in which the indemnity agreements provided for in Sections 6.01 and 6.02 are unavailable or insufficient, for any reason, to hold harmless an Indemnified Party in respect of any Indemnifiable Losses arising thereunder, each Indemnifying Party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Indemnifiable
390 PL PTOB 117–19; PL PTAB 94–95.
69 Losses, in proportion to the relative fault of the Indemnifying Party or Parties on the one hand and the Indemnified Party or Parties on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such Indemnifiable Losses, as well as any other relevant equitable considerations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the alleged omission to state a material fact relates to information supplied by SPCI or IDT, the Parties’ relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances.391
Even assuming Plaintiff is correct in reading this provision as an equitable backstop,
I find that equity does not support Plaintiff’s claims.
Plaintiff seeks to force contribution from IDT for the penalties Straight Path
paid under the Consent Decree based on the parties’ relative fault. However, even
assuming the FCC investigation of Straight Path was attributable to pre-spin-off
violations by IDT, it would be inequitable to pin the liability on IDT stockholders.
Straight Path rushed into the Consent Decree out of self-interest.392 It did so without
providing IDT with the contractually mandated notice that it would be seeking
indemnity for the penalties under that settlement.393 This interfered with IDT’s
exercise of its contractual right to protect its interests by withholding its consent for
a settlement from which Straight Path enjoyed the benefits, while foisting the
391 JX107.0019. 392 See JX243; JX249.0002 (pressing the FCC toward an early resolution); TT (Davidi) 131:22– 132:13; TT (Todd) 1367:7–15; TT (Zeidman) 1462:19–1463:18. 393 Again, excluding Davidi’s February 2016 email, which predated the FCC investigation. Compare JX161.0001, with JX199.0002 (FCC letter of inquiry dated September 20, 2016).
70 liabilities onto IDT. That is, it would be inequitable to allow Straight Path, through
Plaintiff, to breach its contractual obligations in bypassing the S&DA’s notice and
consent requirements, to put in place a contingent settlement amount, so that the
indemnification asset grew in concert with increasing value of the company sale.
This would saddle IDT with liabilities that Straight Path willingly incurred, that grew
as the windfall of the sale grew. This was all upside to Straight Path, and all
downside to IDT.
The underlying equities do not support a transfer payment from IDT to
Straight Path’s former stockholders. Straight Path was a vessel intended to allow
monetization of the IP Assets. The Spectrum Licenses were included in the spin-off
for tax reasons. They were not considered to be particularly valuable. That
changed—to Straight Path’s great benefit—with a change in law and technology.
Straight Path’s settlement with the FCC allowed the sale of these assets for an eye-
popping price, and as the auction value grew, so did the value of an indemnification
claim, if viable. Accordingly, Plaintiff seeks damages that far exceed IDT’s ability
to pay or its liquidation value. These are not considerations if the question is one of
contract. But to the extent that the question is one of equity, bankrupting IDT in
light of the windfall to Plaintiff is not supported. Plaintiff’s contribution arguments
fail.
71 3. Unified Analysis and Damages
I have found that, based on the record at trial, the Indemnification Claim was
not viable, and the price paid to release the claim was not unfair, because if the asset
had been held in trust for the minority, it would be valueless. That does not end my
analysis. The question is one of entire fairness, and what the stockholders could
have achieved, absent the iniquities. Below, I examine what a reasonable sale
process for a release of the Indemnification Claim would have achieved, absent the
controller imposing an unfair process. That value is greater than zero, because it
involves the value of the claim, given its uncertainty, in a negotiation over its release
at the time of the transaction. “[T]his court has held that a fair price ‘does not
ameliorate a process that was beyond unfair.’”394 “Both aspects of the entire fairness
test — fair dealing and fair price — must be satisfied.”395 In order to determine
whether the settlement of the Indemnification Claim was entirely fair, I analyze
whether Howard’s flagrant process violations caused IDT to pay less than “the value
that the stockholders would have received if the defendants had followed a
reasonable process to obtain the best transaction reasonably available[.]”396 This
assessment provides an opportunity to evaluate the transaction holistically and
394 In re Tesla Motors, Inc. S’holder Litig., 2022 WL 1237185, at *32 (Del. Ch. Apr. 27, 2022), aff'd, 298 A.3d 667 (Del. 2023) (quoting In re Nine Sys. Corp. S'holders Litig., 2014 WL 4383127, at *1 (Del. Ch. Sept. 4, 2014)). 395 In re Tesla Motors, Inc. S’holder Litig., 298 A.3d at 715. 396 Goldstein v. Denner, 2022 WL 1797224, at *3 (Del. Ch. June 2, 2022).
72 “eliminate the ability of the defendants to profit from their breaches of the duty of
loyalty.”397
The facts of record demonstrate that Straight Path had a genuine interest in
settling the Indemnification Claim in order to provide the Spectrum Licenses with
clear title ahead of a sale.398 Similarly, even in an alternate reality in which Howard
had adhered to a reasonable process, IDT’s interest in settling the Indemnification
Claim would have remained. The Special Committee, recognizing the frictions that
the Indemnification Claim brought to the sale process,399 was open to the possibility
of settling the Indemnification Claim for a fair price.400 Accordingly, I assess the
reasonable value of an arms-length settlement, negotiated on March 29, 2017.401
397 See In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *2. 398 TT (Todd) 1224:10–14. 399 TT (Todd) 1380:19–1381:16; TT (Weld) 1835:16–1836:2, 1836:12–21, 1994:17–21, 2004:7– 15. 400 TT (Fortinsky) 2244:6–17. 401 Plaintiff invites me to evaluate the fair value of the Indemnification Claim as of the date the Verizon merger was announced. PL PTAB 106. As support, she cites only to Bomarko. Id. (citing Bomarko, Inc. v. Int'l Telecharge, Inc., 794 A.2d 1161, 1189 (Del. Ch. 1999), aff'd, 766 A.2d 437 (Del. 2000)). But Bomarko does not advocate for such adjustments. Indeed, then-Vice Chancellor Lamb warns against such “rank speculation” in precisely the passage Plaintiff cites. Id. at 1189 n.14. Accordingly, I find the best solution available is to evaluate the fair value as of the date of the original settlement. This is consistent with Delaware courts’ approach to evaluating fair price in the merger context. See Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1186–87 (Del. 1988) (discussing how the evaluation of fair price is appropriately conducted as of the day of the transaction in question, including all relevant information then available). Importantly, in this counterfactual, I need to evaluate how arms-length parties would have valued the claim. I find that the highest, but as yet unconsummated and unsecured, offer at the time of the negotiation would have informed a willing arms-length buyer and seller as to the value of the Indemnification Claim.
73 a. The Framework402
I begin my analysis by calculating the facial value of the Indemnification
Claim, assuming its viability, based on the highest bid as of the date of the
settlement. I then adjust that figure downward to account for the expense Straight
Path would incur litigating the claim against IDT, yielding a baseline value. Taking
this baseline, I apply further discounts to account for the claim-dispositive risks
associated with the parties’ contentions around whether: (i) the claim is a SPCI
Liability, (ii) the liability is attributable to pre- or post-spin-off actions, (iii) notice
and consent was fulfilled, and (iv) the proposed trust structure was viable. This
yields a risk-adjusted value that would have been apparent to reasonable parties as
of March 29, 2017, that I then compare with the lowest estimate of the amount paid,
$10 million.
b. The Unadjusted Value of the Indemnification Claim
A viable Indemnification Claim against IDT for the penalties paid under the
Consent Decree has three components: the $15 million upfront cash penalty, the 196
forfeited licenses, and the 20% of sale proceeds payable to the FCC.403 It is
402 While in some respects the methodology I use to assess the reasonable settlement value of the Indemnification Claim mirrors that used by Professor Hamermesh in his expert report, I do not rely on that report, its analysis, or its conclusions. This approach is broadly similar to that used to value a litigation asset in Bomarko, in which then Vice Chancellor Lamb discounted the claim based on his assessment of the probability of success before subtracting the reasonable costs of prosecuting the claim. Bomarko, 794 A.2d at 1189–90. 403 JX316.
74 undisputed that the highest bid as of March 29, 2017, was $800 million.404 To
determine the value of the forfeited licenses, I draw on the expert report, largely
unrebutted, of Plaintiff’s valuation expert, J. Armand Musey. 405 After making
adjustments for license geography and overlap,406 Mr. Musey determined that that
the forfeited licenses accounted for 14.8% of the value of the total portfolio.407
Applying this to the highest prevailing bid of March 29, 2017, yields an unadjusted
forfeited license value of $118.4 million. The same manipulation using the 20%
payable to the FCC results in $160 million.
Adding up the three components, I find that a viable Indemnification Claim
had an unadjusted value of $293.4 million as of March 29, 2017.
c. Cost of Litigation
The first adjustment I make to this number is for the projected expense that
Straight Path would incur by prosecuting the Indemnification Claim through to
recovery. Defendants suggest an adjustment of $30 million,408 based on the amount
the Special Committee projected it would need to fund the litigation trust.409 Plaintiff
404 PTO ¶ 151. 405 JX732. 406 Id.; TT (Musey) 2983:6–7. 407 See PL PTOB 95 (converting Mr. Musey’s dollar figure conclusion into a percentage of the portfolio value). 408 DF PTOB 165. 409 See, e.g., JX433 (outlining the litigation trust structure for bidders, including its proposed funding amounts and sources).
75 suggests a flat 15% adjustment consistent with this Court’s decision in Bomarko.410
Because the Special Committee did not discuss hiring a plaintiff’s firm to pursue the
Indemnification Claim on contingency411—the main scenario in which a flat
percentage adjustment makes sense—I find that Defendants’ suggested adjustment
of $30 million is consistent with what the Special Committee reasonably would have
assumed at the time of the settlement.
Thus, the baseline value of a viable Indemnification Claim was $263.4 million
after incorporating the estimated cost of litigation but before adjusting for litigation
risk.
d. Necessary Adjustments
As discussed in Section II.B.2, Straight Path’s prosecution of the
Indemnification Claim faced numerous claim-dispositive hurdles to collection. As
Plaintiff notes, Bomarko “is the most analogous authority” when it comes to valuing
a litigation asset.412 There, the Court applied a 20% discount to the value of the
claim based on its “assessment of the probability of success on the merits[,]” which
were “unusually strong[.]”413 While I adopt Bomarko’s intuitive approach, I cannot
410 PL PTAB 106; Bomarko, 794 A.2d at 1189–90. It appears that the Bomarko Court estimated that 15% yielded a figure that was appropriate to the facts and circumstances of the claim in that case, rather than assuming contingent representation. Id. 411 TT (Fortinksy) 2112:24–2113:12. 412 PL PTAB 106. 413 Bomarko, 794 A.2d at 1189.
76 do as the Plaintiff asks and import that decision’s adjustments wholesale.414 Instead,
in order to assess the Indemnification Claim’s probability of success on the merits,
I calculate an overall discount based on the aggregate probability that the claim could
survive all four of the dispositive hurdles it faced. Although I have determined, on
a trial record, that the Indemnification Claim—if preserved—would not have value,
here I base the assessment of value in light of the risk of non-viability, as it would
have appeared based on the information available to the Special Committee and its
counsel—and its IDT counterparties—as of March 29, 2017.
i. SPCI Liability under Subpart (ii) – 50%
The first hurdle to prosecution of the Indemnification Claim is whether the
penalties under the Consent Decree are carved out from indemnification as SPCI
Liabilities. Specifically, the language of subpart (ii) of the SPCI Liabilities
definition creates ambiguity as to whether liabilities traceable to pre-spin-off activity
are allocated to Straight Path or IDT.415 The Special Committee was aware of this
ambiguity prior to settlement and understood that it was detrimental to the
Indemnification Claim.416 Resolving this ambiguity, the Special Committee could
414 See PL PTAB 106 (seeking to apply Bomarko’s methodology to utilize litigation discounts in valuing the Indemnification Claim). 415 JX107.0009. I decline to address the impact of subpart (iv), given my finding that the language is unambiguous. Straight Path II, 2022 WL 484420, at *11. In any event, its exclusion does not change the result of this analysis. 416 See, e.g., TT (Todd) 1230:6–9 (acknowledging that he thought the language was ambiguous from the first read), 1231:8–1232:2 (describing Weld’s concern about the language); TT (Weld)
77 anticipate, with the necessity of developing a trial record of the drafters’ intent,417
creating real uncertainty as to which interpretation would prevail. Accordingly, I
find that the Special Committee could have reasonably assigned Plaintiff’s
interpretation of subpart (ii) a 50% probability of success on the merits.
ii. Attributable to Post-Spin-Off Actions – 80%
Assuming a favorable ruling on subpart (ii), Straight Path would have next
needed to show that the penalties under the Consent Decree were attributable to pre-
spin-off violations. The Special Committee believed that the penalties related to pre-
spin-off conduct.418 Documentation around the Consent Decree supports this belief,
making mention of buildout issues associated with substantial service
demonstrations,419 which occurred pre-spin-off. However, the Special Committee
would also need to balance this belief against the possibility that Straight Path’s
conduct, including both its response to the FiberTower allegations and lack of post-
spin-off remediation,420 played a role in the FCC’s investigation. Accordingly, I find
1729:10–1731:23 (describing how the language of subpart (ii) “undercuts” the Indemnification Claim, leading Weld to believe the language had potentially been altered). Given that the language of subpart (ii) dates back to the first draft of the S&DA, I need not address the alteration theory further. See JX92.0010 (using the same language, including the drafting errors). 417 Indeed, I denied summary judgment as to subpart (ii) for this very reason. Straight Path II, 2022 WL 484420, at *11. 418 See TT (Todd) 1278:20–1280:3, 1360:1–10; TT (Weld) 1929:8–17. 419 JX316.0002. 420 See, e.g., TT (Weld) 1871:10–18 (describing Straight Path’s response as “a bit fast”); TT (Zeidman) 1505:21–1506:13 (admitting that Straight Path was not necessarily in full compliance with FCC requirements).
78 that, as of March 29, 2017, the Special Committee could have reasonably assigned
an 80% probability to vindication of its belief that the FCC investigation related to
IDT’s pre-spin-off conduct.
iii. Notice & Consent Fulfilled – 20%
Though it was aware of the notice and consent requirements under Section
6.07 of the S&DA,421 the Special Committee operated under the assumption that it
did not need to provide written notice to or obtain explicit consent from IDT prior
to settling with the FCC.422 Instead, the independent directors believed that IDT’s
actual notice of the settlement was sufficient.423 Given the plain text of Section 6.07,
I find that this belief was unreasonable. Thus, given the lack of written notice and
explicit consent, Plaintiff could only advance a theory that an indemnification claim
could be brought against IDT post-settlement without material prejudice, based only
on implied consent.424 The flaws in this theory were clear at the summary judgment
stage, when it only narrowly avoided dismissal.425 I therefore find, upon review of
Section 6.07, that a reasonable Special Committee could only assume a 20%
probability that the notice and consent requirements had been met.
421 TT (Zeidman) 1525:24–1527:6. 422 TT (Todd) 1220:13–1221:16, 1223:12–24; TT (Zeidman) 1526:17–1527:6, 1529:24–1530:13 (testifying that the Special Committee did not believe it needed IDT’s consent to settle with the FCC or to pursue an indemnification claim). 423 TT (Todd) 1220:13–1221:16. 424 PL PTOB 112–17. 425 Straight Path II, 2022 WL 484420, at *11.
79 iv. Trust Viable – 40%
Finally, I turn to the viability of the trust that would preserve the
Indemnification Claim. As a threshold matter, the Special Committee believed, on
the advice of counsel, that the structure of the trust was feasible.426 I therefore apply
only a minimal 10% discount representing the uncertainty of litigation around
contractual permissibility and the possibility that Defendants’ anti-assignment
arguments might succeed.427
The proposed structure involved Straight Path—which would be owned by
the acquiror, not the former stockholders—nominally retaining the Indemnification
Claim in a trust post-merger.428 The buyer would fund the trust from the merger
proceeds,429 but would otherwise be walled off from all decision-making around the
Indemnification Claim.430 Any proceeds from the litigation would flow to the former
Straight Path stockholders as beneficiaries.431
The problem with this proposed structure is that it would likely require the
acquirer to be involved in litigation around the Indemnification Claim, with little or
no upside. Straight Path’s new owner would not have control over the litigation or
426 TT (Fortinsky) 2286:15–2287:6, 2293:15–18. 427 Accord Bomarko, 794 A.2d at 1189 (applying a 20% discount to an “unusually strong” claim, based on the same factors). 428 JX394.0001. 429 Id. 430 TT (Todd) 1380:19–1381:16; TT (Zeidman) 1539:8–17. 431 JX432.0016–23; TT (Fortinsky) 2105:10–2106:6.
80 partake in any recovery but would nonetheless be on the hook for any counterclaims
brought by IDT.432 Though these risks could perhaps be mitigated through further
contractual allocations,433 I find that the Special Committee should reasonably have
assumed probability of at least 50% that the acquirer would not be interested in
preserving the Indemnification Claim. Reducing this 50% by the earlier 10%
discount results in a total combined risk adjustment of 40% for trust viability.434
e. Comparison with Price Paid
Combining these various adjustments for claim-dispositive risks yields an
overall risk adjustment to 3.2% of the potential value of the claim.435 Multiplying
this by the baseline of $263.4 million results in a risk-adjusted value for a viable
Indemnification Claim of $8.4288 million as of March 29, 2017.436 A settlement in
that vicinity would have been a reasonable result of a fair, uncontrolled negotiation
of a release of the Indemnification Claim. Plaintiff and the class therefore suffered
no damages as a result of the coerced settlement at $10 million.
432 TT (Fortinsky) 2119:19–2121:12. 433 Id. at 2119:8–22. 434 Again, this analysis attempts to look at the hypothetical negotiating position of an Independent Committee unconstrained by an unfair process. Because I found, supra, that the Indemnification Claim would not have had value had it been preserved, due to failure of Straight Path to comply with its duties of notice and consent, I did not reach the question of actual viability in light of assignability and the infelicities of any attempt to have a buyer act as a trustee for the stockholders regarding the claim. It is worth noting the I find the latter a formidable barrier to viability, however. 435 (0.5 * 0.8 * 0.2 * 0.4 = 0.032). 436 Because this figure falls below the $10 million paid, I decline to address the issue of IDT’s ability to pay.
81 f. Unified Fairness Conclusion
Howard used his controller position to bully the Special Committee into
release of the Indemnification Claim at a price he unilaterally determined to be
proper. Absent that bullying, the Committee would have retained the Claim as a
stockholder asset or engaged in a fair negotiation for a release. Instead, it was forced
to capitulate to Howard’s demands. While the price was fair, the transaction was
tainted by Howard’s flagrant breach of duty, and was not entirely fair.
C. Plaintiff’s Claims
Despite the lack of damages, I find that Howard breached his duty of loyalty
to the minority stockholders through his coercion of the Special Committee.437
However, the aiding and abetting claim against IDT requires a showing of
damages.438 Accordingly, this secondary claim fails.
III. CONCLUSION
Consistent with the above, I find Howard Jonas liable to pay the class nominal
damages. Plaintiff’s remaining claims are dismissed. The parties should inform me
as to the form of nominal damages should take and submit a suitable form of order.
437 See Beard Rsch., Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010), aff’d sub nom. Asdi, Inc. v. Beard Rsch., Inc., 11 A.3d 749 (Del. 2010) (“A claim for breach of fiduciary duty requires proof of two elements: (1) that a fiduciary duty existed and (2) that the defendant breached that duty”). 438 See RBC Cap. Markets, LLC v. Jervis, 129 A.3d 816, 861 (Del. 2015) (reciting the elements of aiding and abetting breach of fiduciary duty, including damages).
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