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Chancery Upholds Claims Against Controller’s Family Member

In re Straight Path Communications Inc. Consol. Stockholder Litig., C.A. No. 2017-0486-SG (Del. Ch. Feb. 17, 2022)
This summary judgment decision arose out of a transaction involving the company Straight Path.  Straight Path’s controller had sold company assets to another company controlled by his family, IDT, for an allegedly inadequate price.  One of the assets was an indemnification claim against IDT, which used to be Straight Path’s parent company, for indemnification rights arising following Straight Path’s spin-off.  Straight Path thereafter was sold to Verizon, eliminating derivative standing for the company’s stockholders to challenge derivatively the asset sale to IDT.  Straight Path’s controller allegedly leveraged his control to wrest that indemnification claim from the company’s stockholders prior to the Verizon transaction.  Stockholders brought direct claims against the family members and an affiliated trust in this action.  Their claims previously survived dismissal, and in this decision their claims survived summary judgment. 

Among the issues the Court considered was whether a breach of fiduciary duty claim against the controller’s son, a Straight Path fiduciary, survived summary judgment.  Under Cornerstone, there are three ways in which a plaintiff can assert a non-exculpated claim for breach of fiduciary duty: (1) the fiduciary may harbor a self-interest adverse to the stockholder’s interest, (2) the fiduciary may act to advance the self-interest of an interested party from whom the fiduciary could not be presumed to act independently from, or (3) the fiduciary may act in bad faith.  The claim here arose under the first and second prongs.  While plaintiffs had a weak case of financial self-interest, they had a stronger one for a lack of independence based on the father-son relationship with Straight Path’s controller.  Plaintiffs offered weak but sufficient evidence at the summary judgment stage to support that the controller’s son in fact furthered his father’s interest in the challenged transaction by providing certain information to his father without informing the special committee and by undermining the committee’s work through unauthorized negotiations.   



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