Court Keeps Alive Investor Suit Over Verizon, Straight Path Deal

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By Jacob Rund

Stockholders of Straight Path Communications Inc. can press on with self-dealing claims against the company’s CEO and controlling stockholder that stem from its $3.1 billion sale to Verizon Communications Inc., a Delaware court decided.

Chancery Court Judge Sam Glasscock III, in a June 25 opinion, refused to dismiss allegations that former Straight Path controlling stockholder Howard Jonas and Straight Path CEO Davidi Jonas breached their fiduciary duties and siphoned potential benefits away from other shareholders.

Verizon closed its acquisition of Glen Allen, Va.-based Straight Path in February, giving it control of valuable spectrum licenses used to enable certain wireless services. It outbid rival AT&T Inc. for control of the company, which was spun off from the Jonas-founded IDT Corp. in 2013.

According to the complaint, Jonas and IDT improperly manipulated the Straight Path sale to save IDT from paying hundreds of millions of dollars to settle an indemnification claim.

FCC Settlement

IDT agreed, as a part of the spin-off, to indemnify Straight Path for liabilities that predated the split. Straight Path reached a $100 million settlement with the Federal Communications Commission in January 2017 over an investigation into its alleged failure to deploy wireless services as required by its spectrum licenses.

Straight Path agreed to pay $15 million upfront and give the Treasury Department 20 percent of the proceeds generated by the mandated sale of its spectrum licenses. The company gave almost $615 million to the government after the Verizon deal became final.

The investor-driven lawsuit accuses Jonas of using his clout as Straight Path’s controlling stockholder to force the company to settle the indemnification claim against IDT for $10 million. Jonas also persuaded Straight Path to sell certain intellectual property assets to IDT for tens of millions of dollars less than they were valued in the FCC’s consent decree.

Another of Jonas’ sons, Shmuel, serves as IDT’s CEO. Shmuel Jonas and his siblings, including Straight Path CEO Davidi Jonas, held a 10 percent equity interest in IDT, which Glasscock said could have lost significant value had Verizon been able to exercise the indemnification claim. Shmuel Jonas isn’t a defendant in the shareholder suit.

The suing investors “alleged enough facts to suggest that the Verizon merger, conditioned as it was on the transfer of assets to Howard Jonas’s benefit, was unfair to Straight Path’s stockholders,” Glasscock wrote. Claims against IDT for aiding and abetting Howard and Davidi Jonas’ alleged misconduct were also allowed to continue.

Glasscock held that the claims of fiduciary duty breaches are direct, and not derivative as the defense argued. This allowed the lawsuit to survive. Stockholders lose their right to sue derivatively — against a third party on behalf of a company — once they cease to hold shares following a merger.

The case is In re Straight Path Commc’ns Inc. Litig. , 2018 BL 223670, Del. Ch., C.A. No. 2017-0486-SG, 6/25/18 .

To contact the reporter on this story: Jacob Rund in Washington at jrund@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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