In Danenberg v. Fitracks, C.A. No. 6454-VCL (Jan. 3, 2012), the Court of Chancery granted summary judgment in favor of the petitioner Danenberg on the issues of liability for advancement and indemnification on the grounds that the claims in the underlying case pending in Delaware arose out of representations Danenberg made in his capacity as the CEO of Fitracks.
This summary was prepared by Kevin F. Brady
Fitracks was acquired by Aetrex in a triangular merger in 2008. As part of the merger agreement, Danenberg and others were given the right to form a new company that would receive an exclusive worldwide license to develop “Virtual Stores.” Danenberg formed Just4Fit, Inc., as the entity through which Danenberg pursued the Virtual Store concept. Aetrex and Just4Fit executed a Virtual Store License Agreement that required that Just4Fit establish a certain numbers of Virtual Stores by certain dates to retain its license. A dispute subsequently arose as to whether Just4Fit hit those benchmarks. Litigation ensued in the District of Delaware wherein Aetrex alleged, among other things, fraud, civil conspiracy, and unjust enrichment. Aetrex argued that “Danenberg solicited Aetrex with an idea to develop a ‘Virtual Store’ concept and that representations made to Aetrex and provided by Danenberg as to the intended appearance . . . of Virtual Stores, and that ‘[i]n reliance on Danenberg’s representations regarding (among other things) the intended purpose and appearance of Virtual Stores, Aetrex agreed to grant Danenberg a limited license to open Virtual Stores in the form that Danenberg had represented to Aetrex prior to signing the V[irtual] S[tores] License Agreement.’”
Danenberg moved to dismiss the underlying case for lack of personal jurisdiction. In its brief in opposition to the motion to dismiss, Aetrex represented to the Court that it was relying on Danenberg’s pre-merger representations. In May 2011, Danenberg filed a petition in the Court of Chancery seeking advancement and in September 2011, the parties cross-moved for summary judgment on liability for advancement in the District Court action and indemnification in the Court of Chancery action. The lawyers for Fitracks (who were the same lawyers for Aetrex in the District Court) represented to the Court of Chancery, contrary to their representations to the District Court, that they were not suing Danenberg for any pre-merger conduct.
Fitracks’ bylaws provide that Fitracks is required to indemnify “its directors and executive officers . . . to the fullest extent not prohibited by the Delaware General Corporation Law or any other applicable law . . .” With respect to advancement, the Bylaws focus on whether the individual was named as a defendant “by reason of the fact” that he was a Fitracks’ officer.
Thus the Court’s inquiry focused on whether the allegations in the District Court action sufficiently implicated Danenberg’s conduct when he was CEO of Fitracks. The Court determined that although the Virtual Store License Agreement ultimately was signed post-closing (and although there were some post-closing negotiations over terms), these events were the consequences of the core agreement to provide additional consideration to Danenberg and others in the form of the Virtual Store Provision. In addition, the Court found that the claims in Aetrex’s complaint “necessarily relate in significant part to representations made by Danenberg in his covered corporate capacity during the pre-merger negotiations” and that Aetrex “cannot disavow its representations for the limited purpose of avoiding the advancement obligations it triggered by choosing to sue Danenberg personally.”
As a result, the Court concluded that Danenberg was entitled to advancement for 100% of his fees and expenses for defending against the underlying action. Moreover, because Danenberg was successful on the merits in seeking advancement in this action, the Court found that he was entitled to indemnification for the fees and expenses incurred in this proceeding.