Aetrex Worldwide, Inc. (“Aetrex”) acquired Fitracks, Inc. (“Fitracks”) by merger in 2008 and petitioner Noam Danenberg (“Danenberg”) served as CEO of Fitracks prior to the merger.  In this memorandum opinion, Vice Chancellor Laster granted Danenberg’s motion for summary judgment on advancement of attorneys' fees in a related District of Delaware proceeding and indemnification of attorneys' fees for this proceeding in the Court of Chancery because Aetrex’s claims in the District Court action arise out of representations made by Danenberg in his capacity as an officer of Fitracks.

In 2002, Danenberg founded Fitracks, a company that generates three-dimensional measurements of a person’s foot.  He served as the CEO of Fitracks until the company was acquired in 2008 through a merger with Aetrex, a footwear manufacturer, and became a wholly-owned subsidiary thereof.  As part of the merger negotiations, the parties agreed that Danenberg and other equity holders of Fitracks would receive additional consideration in the merger in the form of an exclusive license granted to a newly created entity to use certain Fitracks technology in developing “Virtual Stores” such as booths or kiosks in shopping malls (the “Virtual Store Provision”).  The license agreement required that a certain number of Virtual Stores be established by certain dates in order to retain the license.  A dispute arose as to whether the first benchmark was met and Aetrex refused to extend the license.

Danenberg’s company commenced an action for breach of the license agreement in the Court of Chancery, but Aetrex removed the action to the Federal District Court for the District of Delaware, sued Danenberg personally for fraud, civil conspiracy, unjust enrichment, and violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and sought to pierce the corporate veil.  Aetrex alleged that for several years prior to the merger, Danenberg had solicited the license, as granted under the Virtual Store Provision, and made representations regarding the intended appearance of the Virtual Stores on which Aetrex relied in entering into the merger agreement and granting the license.  Aetrex also pleaded pre-merger facts in support of its brief asserting personal jurisdiction to maintain its federal complaint.

When Danenberg moved for advancement in the Court of Chancery, Fitracks (which used the same attorneys as Aetrex) represented to the Vice Chancellor, contrary to their representations in the District Court, that Aetrex was not suing Danenberg in the District Court for any pre-merger conduct, and that Aetrex would dismiss any claims based on Danenberg’s alleged pre-September 2, 2008 representations.  The Vice Chancellor, relying on representations by Fitracks and Aetrex, dismissed Danenberg’s advancement claim as moot and granted indemnification for fees related to the advancement action, because Danenberg had succeeded on the merits in eliminating the litigation threat.  Aetrex, however, took no action to amend its federal complaint.

The Vice Chancellor found that the Fitracks bylaws required advancement to any person subject to litigation by reason of the fact that he was a Fitracks officer.  Thus, Fitracks would only need to advance fees related to Danenberg’s pre-merger conduct.  The Vice Chancellor observed that despite its earlier representatives to the Court to the contrary, Aetrex had not amended its federal complaint to remove any allegations based on pre-merger representations, stated that it was not possible at the advancement stage to parse pre- from post-merger conduct, and held that Danenberg was entitled to advancement for fees in the federal proceeding and indemnification for this Court of Chancery proceeding.

The full opinion is available here.