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In re Straight Path Communications Inc. Consolidated Stockholder Litigation

Court of Chancery of Delaware

July 26, 2018

In re Straight Path Communications Inc. Consolidated Stockholder Litigation,

          Submitted: July 23, 2018

          Ned Weinberger, Esquire Thomas Curry, Esquire Labaton Sucharow LLP

          Rudolf Koch, Esquire Kevin M. Gallagher, Esquire Sarah A. Clark, Esquire Anthony M. Calvano, Esquire Richards, Layton & Finger, P.A.

          Kevin G. Abrams, Esquire Michael A. Barlow, Esquire April M. Ferraro, Esquire Abrams & Bayliss LLP

         Dear Counsel:

         I have reviewed the Defendants'[1] request that I certify an interlocutory appeal of my Memorandum Opinion of June 25, 2018 (the "Mem. Op."), together with the Plaintiffs' opposition. An Order consistent with Supreme Court Rule 42 is attached, certifying the interlocutory appeal. This Letter Opinion supports that Order.

         The viability of this post-merger action depends on the nature of the Plaintiffs' claim. If that claim is derivative of a cause of action owned by Nominal Defendant Straight Path Communications Inc., then that cause of action passed to the buyer, Verizon, in the merger of Straight Path into Verizon, which closed on February 28, 2018.[2] Any standing these Plaintiffs had to prosecute that cause of action went by the board at that time.[3] On the other hand, if the Plaintiffs' claim is direct, the merger had no bearing on its viability or on the Plaintiffs' standing.[4]

         In the Mem. Op., I found that the actions complained of-involving a conflicted transaction to settle claims and transfer assets to a controller-were sufficiently intertwined with the merger that they represented a claim that some of the fruits of the merger were diverted to the controller at the expense of the non-controller stockholders, rendering that transaction unfair.[5] Accordingly, I found the Plaintiffs had pled a direct claim, and denied in relevant part the Motions to Dismiss.[6]

         Our Supreme Court has made it clear, via Rule 42, that interlocutory appeals are disfavored as, generally, inefficient.[7] The Supreme Court has directed the trial courts to deny motions to certify interlocutory appeals unless a specific analysis of enumerated factors demonstrates to the trial court that the proposed appeal is in that small subset of cases where interlocutory review is appropriate in the interests of justice and efficiency.[8]

         The Defendants point out that, if my decision on the Motions to Dismiss were reversed, the matter would be at an end.[9] An interlocutory appeal, therefore, might avoid the necessity for discovery and trial, the expense and effort of which would be wasted if a reversal came only upon final review on appeal. In other words, the Mem. Op. resolved a substantial issue of material importance to the parties.[10] True, but insufficient; the same is true with respect to any denial of a case-dispositive motion. The Defendants also point out, however, that this matter satisfies more than one of the criteria applicable under Rule 42(b)(iii), which embody the analysis mandated to the trial court, as discussed above.

         The question presented in the Mem. Op. involves whether a challenge to a sale of corporate assets to a controller for an unfair price, upon which the controller conditions consent to a merger, states a direct claim under Parnes v. Bally Entertainment Corp.[11] and its progeny. Under Parnes, "[a] stockholder who directly attacks the fairness or validity of a merger alleges an injury to the stockholders, not the corporation, and may pursue such a claim even after the merger at issue has been consummated."[12] Unlike in Parnes itself, [13] however, here there was no challenge to the merger price as such; the challenged sale upon which the merger was conditioned removed corporate assets that would otherwise have been withheld from the merger sale and transferred to a trust for the benefit of the stockholders.[14] As a result, the total consideration received by the stockholders post-merger was decreased by the challenged sale, but the merger price itself was not affected, and was not challenged by the Plaintiffs.

         This precise question has not been directly addressed by prior case law. In that sense, the issue satisfies Rule 42(b)(iii)(A), which asks whether the decision "involves a question of law resolved for the first time in this State." As stated above, review may terminate the litigation, satisfying Rule 42(b)(iii)(G). Finally, I note that the resolution of the matter will be instructive on the application of Parnes in light of the Supreme Court precedent in Kramer, which teaches that transactions prior to a merger that are challenged, essentially, as waste, belong solely to the company, and do not state direct claims.[15] Guidance on this issue, in my mind, would serve considerations of justice, satisfying Rule 42(b)(iii)(H).[16]

         In light of this analysis, and despite the costs of interlocutory appeal to litigants and to the courts, I find that review by the Supreme Court of this issue on an interlocutory basis is in the interest of ...

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