Shareholder Suit Over $3B Straight Path, Verizon Merger Halted

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By Yin Wilczek

Straight Path Communications Inc. must be allowed to complete its $3.1 billion sale to Verizon Communications Inc. before an investor can sue the company’s board members and controlling shareholder over the deal, a Delaware state judge said.

At this point, the investor’s claim that Straight Path’s board and controlling shareholder improperly maneuvered the sale is not ready for adjudication, Vice Chancellor Sam Glasscock III said Nov. 20 ( In re Straight Path Commc’ns Inc. Consol. S’holder Litig. , 2017 BL 414975, Del. Ch., No. 2017-0486-SG, 11/20/17 ). At issue is whether the controlling shareholder secured a benefit from the acquisition that didn’t flow to other Straight Path shareholders.

The judge also declined to address whether the investor’s lawsuit is direct or derivative. In either case, a ruling wouldn’t constitute a good use of the court’s time because the opinion would become merely “advisory” should the merger fail, Glasscock said.

A direct lawsuit is one in which the shareholder sues over harm he or she suffers, while a derivative lawsuit is one in which the shareholder sues a third party, usually a corporate insider such as a director, on the company’s behalf. A shareholder has to overcome more procedural hurdles to make out a derivative claim.

Straight Path, based in Glen Allen, Va., controls a vast swath of airwaves considered vital for the fifth generation of wireless services, or 5G. In May, Verizon agreed to buy Straight Path after a protracted bidding war with rival AT&T Inc. The merger must be approved by regulators.

Indemnification Claim

Straight Path was spun off from IDT Corp. in 2013. As part of the transaction, IDT agreed to indemnify Straight Path for liabilities predating the spinoff.

In January this year, Straight Path reached a $100 million settlement with the Federal Communications Commission to resolve an investigation over whether it failed to deploy wireless services as required by its spectrum licenses. The company agreed to surrender some of the licenses and to pay $15 million upfront. It also agreed that $85 million would be suspended unless it sells the rest of its licenses or surrenders them to the FCC within 12 months. As an additional penalty, Straight Path agreed to pay 20 percent of any sales proceeds to the Treasury.

JDS1 LLC, in a lawsuit filed in July, said the FCC penalties were for pre-spinoff conduct and created an enormous potential liability of more than $500 million for IDT and Howard Jonas, who controls both IDT and Straight Path. The shareholder alleged that Straight Path directors and Jonas improperly released IDT from the indemnification claim, which allowed Straight Path to be acquired at a price unfair to shareholders while Jonas reaped “lucrative side benefits.”

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bloomberglaw.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bloomberg.com

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