This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
Vice Chancellor Sam Glasscock recently declined to certify a class action challenge to an allegedly unfair side deal in Straight Path Communications Inc.’s 2018 sale to Verizon Communications Inc. until he scrutinizes the use of non-public information in stock trades of Straight Path and its parent by lead plaintiff representative candidates in the matter styled In re Straight Path Communication’s Inc. Consolidated Shareholder Litigation, No. 2017-0486, (Del. Ch. Mar. 11, 2022).
In the five-year-old Delaware Chancery Court litigation, the Vice Chancellor on March 11 rejected a motion to certify a class without a proper class representative. And he said that determination could not be made without a detailed investigation into whether prospective representative plaintiff mutual fund The Arbitrage Fund had profited by intentionally misusing access to confidential information from the plaintiffs’ law firm. Meanwhile, the plaintiffs and the court continue to look for a suitable class representative.
The court noted that although class representative qualifications under Chancery Rule 23(a) or (b) include factors of typicality, adequacy, commonality, and numerosity, here, “no motion is pending naming an adequate lead plaintiff.” Therefore, it said, the inquiry must still focus on whether TAF and its affiliates traded on non-public information, as so doing would be “incompatible with the circumspection expected of voluntary fiduciaries, and thus would make TAF an inappropriate lead plaintiff.”
The finest loyalty
That’s important, the Vice Chancellor said, because, “Using non-public information obtained as a fiduciary for personal gain is not consistent with the behavior expected of a self-designated fiduciary.” And as an appointed fiduciary, the representative plaintiff owes the class a “duty of the finest loyalty,”
The decision comes at a pivotal point in the litigation. In a February 17 opinion, he had denied a defense motion for summary judgment and refused to dismiss Straight Path ex-shareholders’ charges that they were shortchanged by $600 million in the Verizon purchase because insiders at Straight Path and its parent, IDT Corp. likely breached a fiduciary duty by concocting a side deal that wrongly diverted a valuable company asset to themselves. That brought the plaintiffs a step closer to winning a judgment or settlement—if they could get certified as a class. Straight Path Commc’ns Inc. Consol. S’holder Litig., 2022 WL 484420 (Del. Ch. Feb. 17, 2022).
Vice Chancellor Glasscock, in his March 11 ruling, compared the worthiness of several plaintiffs for the role of class representative and made some important distinctions concerning access to, use of and misuse of confidential information for profit in stock trades in the two companies central to the challenged deals in this litigation.
The Vice Chancellor noted that one investor fund, JDSI LLC, had dropped out of contention for the class representative after discovery revealed that it had, at various times, held short positions in IDT after receiving non-public information, which the court said would be “troubling’’ and “disqualifying if true,” because it is “inconsistent with the actions this Court expects of a volunteer fiduciary.”
He said TAF’s situation regarding improper trading allegations of misuse of confidential info is ”more attenuated” in that while TAF itself did not trade in IDT, it did trade in Straight Path, and its affiliates traded in IDT and Straight Path. “But it does not necessarily follow that TAF Affiliates were barred from trading in IDT, depending on their decisionmakers’ access to non-public information,” the Vice Chancellor wrote. “Again, the pertinent inquiry is not merely whether the TAF Affiliates had direct access to non-public documents; the Court must also consider whether the TAF Affiliates had access to TAF’s counsel such that the TAF Affiliates indirectly could obtain non-public information.”
If TAF still seeks the class representative role an evidentiary hearing to determine whether the TAF Affiliates’ trades were improper will be required, he ruled.
But the Vice Chancellor noted that “written caselaw where the purported representative plaintiff trades in the company that allegedly suffered the injury is comparatively slim and tends toward a sale of shares” but the same general concerns apply, as elucidated by In re Celera Corporation Shareholder Litigation, in which the sales occurred after “all material information regarding the lawsuit, settlement, and transaction were disclosed to the marketplace.” In re Celera Corp. S’holder Litig., 2012 WL 1020471, at *1 (Del. Ch. Mar. 23, 2012), aff’d in part, rev’d in part on other grounds, 59 A.3d 418 (Del. 2012)
Accordingly, the Celera court certified the representative, although with numerous warnings.
Intervenor-Plaintiff Ardell Howard
The court suggested that an intervenor plaintiff might provide an easier path to a class representative. Ardell Howard was approved as an intervener/additional plaintiff in the case in July 2021 and has expressed an interest in serving as class representative, he said. The IDT defendants had previously said they would want to conduct some discovery into Howard’s suitability for this position.
Vice Chancellor Glasscock continued the class certification motion with respect to TAF with leave to supplement the record and asked the parties to “confer and inform me as to their preference for moving forward.”