Joseph Lawrence Ligos v. Isramco, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

)
JOSEPH LAWRENCE LIGOS, )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0435-SG
)
ISRAMCO, INC., NAPHTHA ISRAEL )
PETROLEUM CORPORATION LTD., )
NAPHTHA HOLDING LTD., I.O.C. - )
ISRAEL OIL COMPANY, LTD., )
NAPHTHA US OIL, INC., HAIM )
TSUFF, ISRAMCO NEGEV 2 )
LIMITED PARTNERSHIP, JOSEPH )
FROM, MAX PRIDGEON, ASAF )
YARKONI, FRANS SLUITER, and NIR )
HASSON, )
)
Defendants. )

MEMORANDUM OPINION

Date Submitted: May 21, 2021
Date Decided: August 31, 2021

Corinne Elise Amato, Kevin H. Davenport, Samuel L. Closic, Stephen D. Dargitz,
and Jason W. Rigby, of PRICKETT, JONES & ELLIOTT, P.A., Wilmington,
Delaware; OF COUNSEL: Eric L. Zagar, J. Daniel Albert, Justin O. Reliford, and
Christopher M. Windover, of KESSLER TOPAZ MELTZER & CHECK, LLP,
Radnor, Pennsylvania, Attorneys for Joseph Lawrence Ligos.

William B. Chandler III, Bradley D. Sorrels, Daniyal M. Iqbal, and Nora M.
Crawford, of WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington,
Delaware; OF COUNSEL: Steven Guggenheim, of WILSON SONSINI
GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for Defendants Max
Pridgeon, Asaf Yarkoni, and Nir Hasson.
S. Mark Hurd and Daniel T. Menken, of MORRIS NICHOLS ARSHT & TUNNEL,
LLP, Wilmington, Delaware; OF COUNSEL: Danny David and Amy Pharr Hefley,
of BAKER BOTTS L.L.P., Houston, Texas, Attorneys for Defendants Haim Tsuff,
Naphtha Israel Petroleum Corporation Ltd., Naphtha Holding Ltd., I.O.C. - Israel
Oil Company, Ltd., Naphtha US Oil, Inc., and Isramco Negev 2 LP.

Bradley R. Aronstam, Adam D. Gold, and Anthony M. Calvano, of ROSS
ARONSTAM & MORITZ, Wilmington, Attorneys for Defendants Joseph From,
Frans Sluiter, and Isramco, Inc.

GLASSCOCK, Vice Chancellor
 Before me is a complaint by Joseph Ligos, a former stockholder of a Delaware

corporation, Isramco, Inc. (“Isramco” or the “Company”), who was cashed out in a

merger in 2019. According to Ligos, the merger was unfair. Because the Company

was controlled, indirectly, through Defendant Haim Tsuff, and because Tsuff also

indirectly controlled the acquiror, Defendant Naphtha Israel Petroleum Corp.

(“Naphtha”) and its affiliates, entire fairness review of the transaction is the default

standard. Obviously, this is because of the agency problem created where a

controller stands on both sides of the transaction.

Nonetheless, the common law of corporations recognizes that conflicted

controller transactions may enhance firm value, and that the risk of litigation under

the high bar of entire fairness may discourage such value-enhancing deals.

Accordingly, the law has encouraged mechanisms to reduce the risk to the

principals—the stockholders—in such transactions, culminating in MFW and its

progeny. 1 Compliance with the MFW rubric allows conflicted transactions to

receive business judgment review, but given the agency risk, compliance with the

rubric is strictly construed. To avoid entire fairness review under MFW, the

company and its controller must demonstrate compliance with two conditions: First,

the deal must be subject ab initio to negotiation by a committee of independent and

disinterested directors, fully empowered and in compliance with the duties of loyalty

1
Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).
and care. Second, the transaction must also be so subject to a “majority of the

minority” stockholder vote in favor, by a fully informed and uncoerced electorate.

If either of these conditions is absent, entire fairness review results.

Currently pending are numerous defendants’ motions to dismiss under Rules

12(b)(6) and 12(b)(2). This opinion addresses only Tsuff’s motion to dismiss under

Rule 12(b)(6), arguing that business judgment must apply because the transaction

was fully compliant with the MFW standard. For the following reasons, that motion

must be denied; it will necessarily inform the other motions under 12(b)(6), however.

The parties should inform me, in light of that finding, whether further briefing is

appropriate, and I will then address the remainder of the motions to dismiss.

The Plaintiff raises a number of ways in which he finds that the procedure

here fell short of that called for in MFW. I need address only one to resolve the

motions to dismiss.2 The MFW standard requires that the deal be conditioned on a

majority of the minority vote by stockholders who are uncoerced and fully informed.

Because I find that the record at this pleading stage, together with the Plaintiff-

friendly inferences therefrom, makes it plausible that the vote was materially

uninformed, entire fairness review is applicable, and dismissal under MFW is thus

inappropriate.

2
Left for another stage in the litigation is the question as to whether the burden of proof on entire
fairness must shift to the Plaintiffs given the use of a special committee to negotiate the transaction.

2
 The Complaint alleges that a material factor in arriving at a fair value of

Isramco was the value of certain overriding royalties in an offshore Israeli oil field,

the Tamar Field, in which another entity, Isramco Negev 2 Limited Partnership

(“Negev 2”) owns a working interest. The value of the royalties, in turn, was

dependent on when the right to receive royalties ripened, a matter on which Isramco

and Negev 2 disagree. The royalty issue was, at the time of the merger, in

arbitration. Negev 2 is yet another entity controlled by Tsuff. The value of the

royalties, and the value of the arbitration, were material to the deal price.

According to the merger proxy (the “Proxy”), some facts about the arbitration,

and the value of the arbitration assigned by the Special Committee’s financial

advisor, were disclosed to the minority stockholders. Stockholders were told that

Naphtha, the merger counterparty, held a controlling interest in Negev 2, which was

involved in the arbitration. What they were not told is the following. About the time

that Tsuff formed a desire for Naphtha to acquire Isramco, he approached the

Isramco board of directors (the “Board”) for permission to allow Tsuff himself to

participate in the arbitration. The Board agreed. Under the motion to dismiss

standard, I must assume that, having received permission of the Board to participate,

Tsuff did so, and that he pursued his own, conflicted, self-interest in that arbitration.

It is the Plaintiff’s theory that Tsuff’s self-interest included prolonging the

arbitration throughout the merger negotiations to keep Isramco’s value artificially

3
reduced. While that matter remains for decision on a record, what I can find at the

pleading stage is that both the Board’s agreement to allow Tsuff to participate, and

the participation itself, would have been material to a stockholder attempting to

evaluate the proposed merger. At this pleading stage, this makes business judgment

review under MFW unavailable.

A statement of the relevant facts alleged, and my reasoning, follow.

I. BACKGROUND3

A. The Parties and Relevant Non-Parties 4

Plaintiff Joseph Lawrence Ligos is a former stockholder of Isramco.5 He

continuously owned shares of Isramco stock from the announcement to the

consummation of the Buyout.6

3
Unless otherwise noted, the facts referenced in this Memorandum Opinion are drawn from the
Verified Shareholder Class Action Complaint (referred to herein as the “Complaint”) and the
documents incorporated therein. See generally Compl., Dkt. No. 1. I may also consider documents
produced by the Defendants in response to the Plaintiff’s 8 Del. C. § 220 books and records
demand “to ensure that the plaintiff has not misrepresented their contents and that any inference
the plaintiff seeks to have drawn is a reasonable one.” Voigt v. Metcalf, 2020 WL 614999, at *9
(Del. Ch. Feb. 10, 2020).
4
The Plaintiff voluntarily dismissed J.O.E.L Jerusalem Oil Exploration Ltd. (“JOEL”), Equital,
Ltd. (“Equital”), YHK Investment L.P. (“YHK”), YHK General Manager Ltd. (“YHK Manager”),
and United Kingsway Ltd. (“Kingsway”) without prejudice on August 5, 2020. Notice of
Voluntary Dismissal as to Certain Defs., Dkt. No. 10. Joseph From, Frans Sluiter, and Isramco,
Inc. were also voluntarily dismissed from this action with prejudice on May 26, 2021. Order of
Dismissal with Prejudice as to Certain Defs., Dkt. No. 62.
5
Compl. ¶ 13.
6
Id.

4
 Non-party Isramco is a Delaware corporation headquartered in Houston,

Texas.7 In October 2019, Isramco’s controller—Defendant Naphtha—and its

affiliates consummated a going-private transaction by purchasing all of Isramco’s

unaffiliated stock for cash consideration (the “Buyout”).8 Prior to the consummation

of the Buyout, Isramco was publicly traded on the NASDAQ Capital Market. 9

Defendant Naphtha Holding LTD. (“NHL”) is an Israeli company wholly

owned by Naphtha.10 Prior to the Buyout, NHL directly owned approximately

58.6% of Isramco’s outstanding shares.11

Defendant I.O.C. – Israel Oil Company, LTD. (“I.O.C.”) is an Israeli private

company.12 Prior to the Buyout, I.O.C. directly owned approximately 12.1% of

Isramco’s outstanding shares. 13

Defendant Naphtha is an Israeli public company whose securities trade on the

Tel Aviv Stock Exchange. 14 Its principal businesses are exploration and production

of oil and natural gas. 15 Naphtha owns 99.9% of I.O.C. and 100% of NHL.16

7
Id. ¶ 14.
8
Id. at 1–2, ¶ 142.
9
Id. ¶ 14.
10
Id. ¶ 22.
11
Id.
12
Id. ¶ 23.
13
Id.
14
Id. ¶ 21.
15
Id.
16
Id. ¶¶ 22–23.

5
Accordingly, prior to the Buyout, Naphtha beneficially owned 70.7% of Isramco’s

outstanding common stock. 17

Defendant Naphtha US Oil, Inc. (“Merger Sub”) is a Delaware corporation

formed by I.O.C. to effectuate the Buyout.18 I.O.C. owns 100% of the outstanding

shares of common stock of Merger Sub.19

Defendant Haim Tsuff (“Tsuff”) served as Isramco’s President and the

Chairman of its Board from May 1996 until consummation of the Buyout on October

25, 2019.20 He served as the Company’s Chief Executive Officer (“CEO”) from

May 1996 until November 2017, and as Co-CEO from November 2017 until

consummation of the Buyout in October 2019.21 Tsuff is also a director of NHL,

I.O.C., Merger Sub, and Naphtha, and the Chairman of Naphtha’s board of

directors. 22 Prior to the Buyout, Tsuff directly owned 61,679 shares of Isramco

common stock and, through interests in Naphtha, indirectly owned an additional

1,922,517 shares, which collectively totaled approximately 73% of the Company’s

outstanding shares. 23 The relationship of the parties is graphically represented in

Figure 1.

17
Id. ¶ 21.
18
Id. ¶ 24.
19
Id.
20
Id. ¶ 25.
21
Id.
22
Id. ¶¶ 21–24.
23
Id. ¶ 15.

6
 Tsuff, Naphtha, NHL, I.O.C., and Merger Sub are referred to collectively

herein as the “Purchaser Group Defendants.” According to the Proxy, Tsuff was “in

a position to indirectly determine the investment and voting decisions made by each

of the” Purchaser Group Defendants by virtue of his beneficial ownership of Isramco

stock and “the ownership and management structures” of the Purchaser

Defendants. 24

Defendant Negev 2 is an Israeli public limited partnership formed by Isramco

in 1989. 25 Tsuff is the Chairman of its board of directors. 26 Naphtha holds

controlling interests in Negev 2, and I.O.C. fully owns and controls Negev 2’s

general partner, a non-party.27 Negev 2 owns a working interest in the Tamar oil

and gas field located in the Levantine basin in the Mediterranean Sea (the “Tamar

Field”) from which Isramco receives a royalty stream (the “Tamar Royalty”).28 The

Tamar Royalty was the Company’s single largest source of revenue. 29 A dispute

between Negev 2 and Isramco as to the Tamar Royalty was in arbitration at the time

of the Buyout (the “Tamar Arbitration”). 30

Non-Party Eran Saar is the CEO of Naphtha and a director of Negev 2.31

24
Id. (quoting Proxy at 65).
25
Id. ¶¶ 27, 36.
26
Id. ¶ 26.
27
Id. ¶ 27.
28
Id.
29
Id. ¶ 3.
30
Id. ¶¶ 58–63.
31
Id. ¶¶ 72, 76

7
(Figure 1.)

8
 B. Factual Background

1. The Tamar Royalty

In May 2001, Isramco joined a partnership that held two offshore exploratory

licenses in the Tamar Field, known as the Matan and Michal licenses, which

generated the Tamar Royalty revenue stream. 32 By March 2007, when the Company

filed its 2006 Form 10-K, Isramco, through its interests in Negev 2, held a 27.5%

working interest and overriding royalties in the Matan and Michal licenses.33

In late 2007, however, the Company decided to close its Israel branch office

and focus instead on development and exploration in the United States. 34 The

Complaint alleges that Isramco’s shift towards operations in the United States was

part of a campaign by Tsuff to strip Isramco of its valuable interests in the Tamar

Field for the benefit of other Tsuff-controlled entities such as Naphtha and

Negev 2.35

In connection with this shift, Isramco and I.O.C. entered into an Israel Branch

Sale Agreement, pursuant to which Isramco sold to I.O.C. its Israel-based activities

and assets conducted and managed by the Company’s Israel branch office. 36 These

32
Id. ¶ 40.
33
Id. ¶ 41.
34
Id. ¶ 42.
35
Id. ¶¶ 42, 55, 57.
36
Id. ¶ 44.

9
assets included Isramco’s general and limited partnership interests in Negev 2, which

continued to own a working interest in the Tamar Field. 37

As a result, by the end of 2008, Isramco’s working interest in the Matan

license was reduced to zero, and its overriding royalties in the Matan license—i.e.,

the Tamar Royalty—were reduced to 1.4375% of the revenues received by Negev 2

from the Tamar Field. 38 The Tamar Royalty was set to increase to 2.7375%,

however, after the triggering of a payout date (the “Payout Date”).39 This

represented a 78% increase, which translated to an additional $8.84 per share in

royalty income. 40 The Payout Date was calculated based on the amount of certain

expenses incurred by Negev 2 relative to the revenue that Negev 2 received from the

Tamar Field.41 In other words, higher costs meant that more revenue was required

to reach the Payout Date.42

The Tamar Royalty was the Company’s single largest source of revenue, and

the Company disclosed in each of its Annual Reports dating back to 2014 that the

Tamar Royalty was “expected to be very significant to the Company for the

foreseeable future.”43

37
Id. ¶¶ 27, 44.
38
Id. ¶ 45.
39
Id. ¶¶ 3, 45.
40
Id. ¶ 3.
41
Id. ¶ 57.
42
Id.
43
Id. ¶¶ 3, 57.

10
 2. Tamar Arbitration

According to the Complaint, beginning in late 2016, Tsuff, through his

beneficial ownership of Negev 2, attempted to delay the Payout Date by continually

adding expenses to the Payout Date calculation.44 Specifically, in 2016, Negev 2

added $39 million in “solo expenses,” such as legal and insurance expenses, to the

Payout Date equation, which pushed the Payout Date back from 2016 to the first

quarter of 2017.45 Then, in February 2017, Negev 2 asserted that the calculation

should also include “financing expenses.”46

In light of Negev 2’s shifting cost calculations, on February 26, 2017, the

Tamar Arbitration commenced between Isramco and Negev 2 concerning “what

costs should be included in the payout calculation” for the purposes of calculating

the timing of the Payout Date. 47 At a preliminary hearing on August 13, 2017,

Negev 2 again added “hundreds of millions of . . . dollars” in expenses to its

purported Payout Date calculation.48

In November 2017, as disclosed in the Proxy, Tsuff and Saar met with Baker

Botts L.L.P. (“Baker Botts”) to discuss a potential purchase by Naphtha of the

remaining Isramco shares. 49 The Proxy does not disclose, however, that, also in

44
Id. ¶¶ 3–4, 69–71.
45
Id. ¶ 71.
46
Id. ¶ 74.
47
Id. ¶¶ 59, 63 (quoting the Company’s 2016 Form 10-K).
48
Id. ¶ 75.
49
Id. ¶ 76 (citing Proxy at 12).

11
November 2017, the Company’s Board met and the Board’s Conflict Committee

“‘(i) reauthorized the limited involvement of Haim Tsuff in the Tamar [A]rbitration

and (ii) approved the assistance of Eran Saar . . . in the Tamar [A]rbitration.’” 50

On November 27, 2017, a few weeks after the Conflict Committee authorized

Tsuff’s and Saar’s involvement in the Tamar Arbitration, Negev 2 submitted a

revised position in the Tamar Arbitration asserting $950 million in additional

expenses to the Payout Date calculation, which it contended would delay the Payout

Date “until the end of 2019.”51 Isramco, in contrast, believed that the Payout Date

was “around the middle of 2015.” 52

Isramco and Negev 2 also disagreed as to the amount at stake in the Tamar

Arbitration. Specifically, Isramco disclosed in its 2016 Form 10-K that it believed

the scope of the disagreement was approximately $15 million, and it later disclosed

in its 2017 Form 10-K that it believed this figure to be $45 million, not including the

value of Isramco’s counterclaims against Negev 2.53 In contrast, Negev 2 estimated

the scope of disagreement to be approximately $73 million, before taxes.54

Isramco submitted a Statement of Claim in the Tamar Arbitration on February

25, 2018, and Negev 2 submitted its response on August 8, 2018. 55 The Company

50
Id. ¶ 77; Decl. of Daniel T. Menken in Support of Naphtha OB, Ex. 9 at 2.
51
Compl. ¶ 78.
52
Id. ¶ 61 (quoting the Company’s 2017 Form 10-K).
53
Id. ¶ 62.
54
Id.
55
Id. ¶ 63.

12
disclosed in its Form 10-Q for the quarter ended June 30, 2019 that the Tamar

Arbitration was “in its early stages with the parties expected to complete the

discovery process in the coming months,” and “[t]he Company expect[ed] the

discovery and evidentiary filings . . . to conclude in 2019, with evidentiary hearings

to occur in February of 2020.”56

3. The Buyout

On March 21, 2018, with the Tamar Arbitration still ongoing, and one month

after Isramco filed its Statement of Claim, the Purchaser Group Defendants filed an

amendment to their Schedule 13D disclosing that they were in the preliminary stages

of evaluating a potential acquisition of unaffiliated shares of Company stock or

another going-private transaction involving the Company.57 Naphtha thereafter

submitted a letter to the Board on May 24, 2018 indicating that it was interested in

exploring the possibility of a transaction involving Naphtha’s acquisition of all

unaffiliated shares of Isramco stock in exchange for cash (the “Indication of

Interest”). 58 The Indication of Interest stated that Naphtha expected “that the

Company’s board of directors will appoint a special committee of independent

56
Id. ¶ 63 (quoting the Company’s Q2 2019 10-Q).
57
Id. ¶ 80.
58
Id. ¶ 81.

13
directors to engage in this process and make a recommendation to the Company’s

board of directors with respect to any Transaction.” 59

On June 5, 2018, the Board met and appointed a special committee (the

“Special Committee”) to review, evaluate, and negotiate a potential transaction with

Naphtha. 60 On October 5, 2018, the Special Committee selected Duff & Phelps

Securities, LLC and Duff & Phelps, LLC (together, “Duff & Phelps”) as a financial

advisor. 61 The Board never reversed the November 2017 decision to authorize

Tsuff’s and Saar’s involvement in the Tamar Arbitration.62

On January 8, 2019, over a year after the Board reauthorized Tsuff and

authorized Saar to participate in the Tamar Arbitration, Naphtha submitted an initial

proposal to acquire the unaffiliated shares of Isramco stock for $110.36 per share in

cash. 63 The January 8, 2019 proposal stated that the transaction would be

conditioned on the Special Committee’s recommendation and a majority vote of the

Company’s minority stockholders.64 After three months of negotiations, which

included numerous discussions related to the Tamar Royalty and Tamar

Arbitration, 65 Naphtha increased its proposal to $121.40 per share on April 4, 2019,

59
Id. ¶ 82.
60
Id. ¶ 84.
61
Id. ¶ 87.
62
Id. ¶ 90.
63
Id. ¶ 91.
64
Id. ¶ 83.
65
See, e.g., id. ¶¶ 95–96, 98–100, 105–06, 108–16, 119–21, 124–25, 130–32, 134, 136.

14
which the Special Committee approved on the same day. 66 On May 20, 2019, Duff

& Phelps presented its fairness opinion to the Special Committee, which included

an assessment of various potential outcomes to the Tamar Arbitration.67 The Special

Committee then recommended that the Board approve the Buyout, and the Board

met, with Tsuff recused, and approved the Buyout and resolved to recommend to the

Company’s stockholders that they do the same. 68

On October 22, 2019, a majority of the unaffiliated Isramco stockholders

voted to approve the Buyout. 69 The Proxy described aspects of the Tamar

Arbitration, including Duff & Phelps’s assessment regarding the potential proceeds

from the arbitration, and that Naphtha controlled Negev 2,70 but it did not disclose

the Conflict Committee’s decision in November 2017 to reauthorize Tsuff’s

participation in the Tamar Arbitration.71

C. Procedural History

The Plaintiff initiated this action on June 4, 2020.72 The Complaint brings

claims for breach of fiduciary duty against the Purchaser Group Defendants (Count

66
Id. ¶¶ 136–38.
67
Id. ¶ 141.
68
Proxy at 21.
69
Compl. ¶ 142.
70
Proxy at 12, 31.
71
Compl. ¶ 148.
72
See Compl.

15
I) and the Director Defendants 73 (Count II), for unjust enrichment against the

Purchaser Group Defendants (Count III), and for aiding breaches of fiduciary duty

against Negev 2 (Count IV) and Kingsway, YHK Manager, YHK, Equital, JOEL,

Naphtha, I.O.C., and Merger Sub (Count V). 74 On August 5, 2020, the Plaintiff

dismissed his claims against JOEL, Equital, YHK, YHK Manager, and Kingsway

without prejudice.75

On September 21, 2020, three groups of defendants filed separate motions to

dismiss: (i) Naphtha, NHL, I.O.C., and Tsuff; 76 (ii) From, Sluiter, and Isramco (the

“Isramco Motion”); 77 and (iii) Pridgeon, Yarkoni, and Hasson.78 Negev 2 moved to

dismiss on December 14, 2020. 79 The parties fully briefed the four motions by

February 26, 2021.80

73
The Complaint defines the Director Defendants to include Tsuff, Joseph From, Max Pridgeon,
Asaf Yarkoni, Frans Sluiter and Nir Hasson. Compl. ¶ 33. The Plaintiff subsequently dismissed
From and Sluiter with prejudice on May 26, 2021. Order of Dismissal with Prejudice as to Certain
Defs., Dkt. No. 62.
74
Compl. ¶ 159–87.
75
Notice of Voluntary Dismissal as to Certain Defs., Dkt. No. 10.
76
Mot. to Dismiss of Defs. Naphtha, Holdings, US Oil, and Tsuff, Dkt. No. 23 [hereinafter
“Naphtha Mot.”]; Opening Br. in Supp. of Naphtha Mot., Dkt. No. 24 [hereinafter “Naphtha OB”].
77
Defs. From, Sluiter, and Isramco’s Mot. to Dismiss, Dkt. No. 26 [hereinafter “Isramco Mot.”];
Opening Br. in Supp. of Isramco Mot., Dkt. No. 26.
78
Defs. Pridgeon, Yarkoni, and Hasson’s Motion to Dismiss, Dkt. No. 28 [hereinafter “Special
Committee Mot.”]; Opening Br. in Supp. of Special Committee Mot., Dkt. No 28.
79
Def. Negev’s Mot. to Dismiss, Dkt. No. 39 [hereinafter “Negev 2 Mot.”]; Opening Br. in Supp.
of Negev Mot., Dkt. No. 40 [hereinafter “Negev 2 OB”].
80
Pl.’s Answering Br. in Opp’n to Naphtha Mot., Isramco Mot., and Special Committee Mot., Dkt.
No. 36 [hereinafter “Pl.’s First Br.”]; Reply Br. in Further Supp. of Isramco Mot., Dkt. No. 45;
Reply Br. in Further Supp. of Special Committee Mot., Dkt. No 46; Reply Br. in Supp. of Naphtha
Mot., Dkt. No. 47; Pl.’s Answering Br. in Opp’n to Negev 2 Mot., Dkt. No. 52; Reply Br. in Supp.
of Negev 2 Mot., Dkt. No. 54.

16
 I heard oral argument on all motions to dismiss on May 21, 2021. 81 On May

26, 2021, the Plaintiff voluntarily dismissed From, Sluiter, and Isramco from this

action, mooting the Isramco Motion, and I consider the remaining motions submitted

for decision as of that date.82

II. ANALYSIS

A. Legal Standards

The Defendants seek dismissal under Rule 12(b)(6).83 At the pleading stage,

I must take as true all well-pled allegations and draw inferences therefrom in the

light most favorable to the Plaintiff.84 I may only grant the motions to dismiss if I

find it not “reasonably conceivable” that the Plaintiff may prevail. 85

When a controller exists on both sides of a merger, the default standard of

review is entire fairness.86 This is because the existence of a controller is likely to

undermine the dual statutory protections of disinterested board and stockholder

approval. 87 Under the rubric laid out in MFW, however, a controller can deploy

these dual procedural protections and gain the benefit of business judgment review

81
Tr. of Oral Arg. on Defs.’ Mots. to Dismiss, Dkt. No. 63.
82
Order of Dismissal with Prejudice as to Certain Defs., Dkt. No. 62.
83
Certain Defendants have also moved to dismiss for lack of personal jurisdiction under Rule
12(b)(2). See Naphtha OB § II; Negev 2 OB § II. Because this Memorandum Opinion decides
only the motions to dismiss under Rule 12(b)(6) arguing that the transaction was fully compliant
with the MFW rubric, I do not discuss the Rule 12(b)(2) standard in this opinion.
84
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536-37 (Del.
2011).
85
Id. at 537.
86
M & F Worldwide, 88 A.3d at 644.
87
Id.

17
of the transaction.88 Specifically, for a controller transaction to be subject to

business judgment review under MFW, the transaction must be (i) approved by an

independent and empowered special committee and (ii) by an uncoerced, informed

majority of the Company’s minority stockholders. 89

The Plaintiff attacks the Defendants’ compliance with the MFW protocol on

numerous grounds. The second requirement of MFW is dispositive here, I find,

because the minority stockholders were not adequately informed when they voted to

approve the Buyout.

B. The Minority Stockholder Vote Was Uninformed

The Plaintiff argues that the Proxy was incomplete because it did not disclose,

among other things, that the Conflict Committee reauthorized Tsuff’s participation

in the Tamar Arbitration.90 The Plaintiff contends that it was material for

stockholders to know that Tsuff participated in a proceeding that impacted the

valuation of Isramco, especially given the temporal proximity between the

reauthorization, the initial meeting among Tsuff, Saar and Baker Botts to discuss a

potential Isramco transaction, and Negev 2’s submission of a revised position in the

arbitration that the Payout Date would not occur until the end of 2019. 91 The

88
Id.
89
Id. 654.
90
Compl. ¶ 148.
91
Pl.’s First Br. at 55–57.

18
Plaintiff also contends that this omission was material because Tsuff’s participation

created the reasonable impression that Naphtha used Tsuff’s knowledge of the

Tamar Arbitration to inform its Indication of Interest. 92

The Defendants argue that the Conflict Committee’s decision to reauthorize

Tsuff’s participation in the Tamar Arbitration adds nothing to the “total mix” of

information and is merely “cumulative to the information already disclosed”—i.e.,

that Negev 2 was involved in the proceedings, and Naphtha held a controlling

interest in Negev 2, as well as Isramco.93 The Defendants contend that because the

minority stockholders were informed of Naphtha’s controlling interest in Negev 2,

they already knew that Naphtha had a window into the Tamar Arbitration

proceedings.94

The Defendants also assert that, for the Plaintiff to establish that this omission

was material, the Complaint must have pled what Tsuff’s role was in the Tamar

Arbitration, what information he learned that he otherwise would not have known,

what information he passed on to Naphtha, and how that information affected

Naphtha’s Indication of Interest. 95

92
Compl. ¶ 148; Pl.’s First Br. at 56.
93
Naphtha OB at 45. See Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *12 (Del. Ch. June
30, 2014).
94
Naphtha OB at 45.
95
Naphtha OB at 44–45.

19
 The Defendants seek to impose too high a bar at this stage of the proceedings.

Making all plaintiff-friendly inferences, it is plausible that after obtaining the

Conflict Committee’s reauthorization to participate in the proceedings, Tsuff did

participate. I can also infer at this stage that Tsuff, who, as the ultimate controller

of Isramco, Negev 2, and Naphtha, stood on both sides of the Buyout and the Tamar

Arbitration, acted for his own interests in the Tamar Arbitration.96 The Plaintiff

theorizes that Tsuff advanced his own interests by delaying the outcome of the

Tamar Arbitration—which concerned the Company’s largest revenue stream, the

Tamar Royalty—in order to artificially deflate the value that the Special Committee

ascribed to Isramco.97 Whether that is true is a matter to be developed by the record;

for now, it is enough to say that Tsuff’s participation in the Tamar Arbitration would

have been material to the minority stockholders attempting to evaluate the Buyout.98

Moreover, the Conflict Committee’s decision itself to reauthorize Tsuff’s

participation was also material to the minority stockholders. Absent a disclosure to

the contrary, the Isramco stockholders were entitled to presume that the Board would

act in the stockholders’ best interests, rather than the controller’s, especially in a

96
See Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *13 n.64 (Del.
Ch. June 21, 2019) (“reasonable to infer that [potentially conflicted director] was acting in his own
interests”).
97
Compl. ¶ 5.
98
See In re Tesla Motors, Inc. S’holder Litig., 2020 WL 553902, at *9 (Del. Ch. Feb. 4, 2020)
(controller’s “involvement in the process beyond what was disclosed in the proxy would likely
have been something a reasonable stockholder would have considered important when deciding
whether to vote for the [m]erger”).

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buyout that purportedly employed the dual protections against controller conflicts

laid out in MFW. 99 This included the Board’s acting to pursue Isramco’s interest in

the Tamar Arbitration. In other words, the independent stockholders would not

assume, absent disclosure, that the Board would permit the controller to participate

in the arbitration. The progress and likely outcome of the Tamar Arbitration, and its

effect on the timing and value of the Tamar Royalties, was material to the valuation

of the Company, which obviously is the overriding concern of a stockholder

contemplating a merger. That the Conflict Committee decided to allow Tsuff to

participate in the Tamar Arbitration, which plausibly impacted Isramco’s valuation,

was therefore material for stockholders to know. 100

I note that a finding, as here, that the Plaintiff has adequately pled an

uninformed stockholder vote is sufficient to negate the application of the business

judgement rule to the transaction under the MFW line of cases. A finding that the

Board did not adequately inform the stockholder vote is not enough, standing alone,

99
See In re GGP, Inc. S’holder Litig., 2021 WL 2102326, at *13 (Del. Ch. May 25, 2021)
(“Delaware law presumes ‘that a director’s decision is based on the corporate merits of the subject
matter before the board rather than extraneous considerations or influence,’” including in the
controller context) (citing In re W. Nat. Corp. S’holders Litig., 2000 WL 710192, at *11 (Del. Ch.
May 22, 2000)).
100
Cf. Chester Cty., 2019 WL 2564093, at *13 n.64 (accepting “reasonable . . . infer[ence] that
[director’s] . . . own interests . . . or those of his management team or employees . . . overtook his
duties to the stockholders when he was charged with obtaining the highest deal price,” “that
information is material”).

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to plead a breach of duty action against individual directors, however.101 Here,

Isramco has an exculpation clause for director liability. 102 Accordingly, a pleading

that any director breached a duty for failure to disclose or lack of candor, to

withstand a motion to dismiss, must allege facts making it “reasonably conceivable”

that such a failure to disclose was in bad faith or otherwise disloyal. This

determination awaits the parties’ review of this decision and any supplemental

briefing.

* * *

Defendant Tsuff’s motion to dismiss the Plaintiff’s breach of fiduciary duty

claim against him (Count I) rests solely on the argument that the Buyout met the

conditions laid out in MFW and should therefore be evaluated under the business

judgment rule. Because I have determined that application of business judgement

review under MFW is not available, Tsuff’s motion to dismiss is denied as to Count I.

The remaining motions to dismiss raise other distinct issues and therefore remain

outstanding.

III. CONCLUSION

For the foregoing reasons, Defendant Tsuff’s motion to dismiss is denied as

to Count I. The other Defendants’ motions to dismiss remain outstanding. The

101
Nor does the Conflict Committee’s decision to allow Tsuff’s participation in the Tamar
Arbitration necessarily imply a breach of duty.
102
Isramco, Inc. Certificate of Incorporation at 16.

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parties should confer, provide a form of order consistent with the decision above,

and inform me in light of this decision whether further briefing is appropriate.

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