The issue of ripeness is not often the basis to derail challenges to a merger, but a recent decision by the Delaware Court of Chancery provides an example of how this defense can be effectively used in corporate litigation.Image result for free photo of ripe fruit

In the matter styled In re Straight Path Commc’ns Inc. Consol. S’holder Litig., C.A. No. 2017-0486-SG (Del. Ch. Nov. 20, 2017), the Court declined to decide whether the claims were direct or directive, and deferred ruling on whether demand futility was demonstrated. Instead, the matter was stayed without prejudice to filing a motion to open the case when the facts mature. (Compare ripe fruit.)

Key facts: A faint adumbration of the minimal facts needed to put the legal principles in context includes the deal that was challenged not yet being closed at the time of the court’s holding in this matter. The plaintiffs are current stockholders of what the court described as the “to-be-acquired corporation.” The claims for breach of fiduciary duty are based on a transfer of assets to another entity controlled by the controlling stockholder–which was a condition of his support for the merger. The plaintiffs do not oppose the merger and do not seek an injunction. Rather, they challenge a side deal made with the controlling stockholder.

The claim was that the controller also threatened the members of the Special Committee and their counsel with “personal threats” of litigation and that the controller used those threats to force the Special Committee to agree to his conditions of sale. The controller’s condition of sale was to transfer assets for an unfair price to another entity the controller, along with his family, controlled. The claim is that consideration should have gone to the selling entity.

Key principles: Although the court did not make any rulings on the merits other than determining that the issues were not ripe, it noted basic corporate litigation principles that would generally be applicable. As for ripeness, the court observed:

  • “Delaware courts decline to exercise jurisdiction over a case unless the underlying controversy is ripe in order to conserve limited judicial resources and to avoid rendering a legally binding decision that could result in premature and possibly unsound lawmaking.”
  • Further, “a dispute will be deemed not ripe where the claim is based on uncertain and contingent events that may not occur, or where future events may obviate the need for judicial intervention.” See cases cited at footnotes 30-33.

Regarding the substantive claims, a ruling on which was deferred, the court related that:

  • A claim that a controller transferred to himself assets of the corporation for less than fair value is a claim belonging to the corporation. See n. 34. But a ruling on whether the claim in this case is direct or derivative would only be advisory if the merger failed for lack of the requisite regulatory approval.

Although the claims were asserted as direct, to hedge their bets the plaintiffs also made a demand futility argument. The court explained that:

  • Because directors manage the corporation, in order to obtain authority to sue on behalf of the corporation, a stockholder must establish that pre-suit demand is excused. That is, facts must be adequately pled “that raise a reasonable doubt that the directors could bring their business judgment to bear on behalf of a corporation when considering a demand.” n.41
  • “Demand is not excused simply because the proper standard of review is entire fairness solely due to an interested transaction with a conflicted controller.” n.42.
  • Sale of corporate assets at an unfair price is a quintessential derivative claim if demand excusal is demonstrated pursuant to Rule 23.1.  n.43
  • The court distinguished a case cited by plaintiffs for their argument that demand was excused because the directors did not vote to affirmatively object to or support the continuation of the instant litigation. In that situation, not present in this matter, the directors declined to exercise their power to control the litigation. n.47.

In sum, the court stayed the litigation and deferred ruling on the direct v. derivative issue as well as the demand excusal issue until the facts ripened.