Andrew C. Nielsen v. EBTH, Inc. ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ANDREW C. NIELSEN, JONATHAN )
C. NIELSEN and MICHAEL J. )
REYNOLDS, )
)
Plaintiffs, )
)
v. ) C.A. No. 2019-0164-MTZ
)
EBTH Inc., a Delaware Corporation, )
)
Defendant. )
)
MEMORANDUM OPINION
Date Submitted: June 26, 2019
Date Decided: September 30, 2019
D. McKinley Measley, Lauren Neal Bennett, and Barnaby Grzaslewicz, MORRIS
NICHOLS ARSHT & TUNNELL LLP, Wilmington, Delaware; Joseph C.
Weinstein and Sean L. McGrane, SQUIRE PATTON BOGGS (US) LLP,
Cleveland, Ohio, Attorneys for Plaintiffs Andrew C. Nielsen, Jonathan C. Nielsen,
and Michael J. Reynolds.
Jonathan M. Stemerman, ELLIOTT GREENLEAF P.C., Wilmington, Delaware;
Frances Floriano Goins, ULMER & BERNE, LLP, Cleveland, Ohio; and John M.
Hands, ULMER & BERNE, LLP, Cincinnati, Ohio, Attorneys for Defendant
EBTH, Inc., a Delaware Corporation.
ZURN, Vice Chancellor.
This case presents the common issue of whether the plaintiffs are entitled to
advancement of fees and expenses incurred in a separate action. Advancement
cases often follow a familiar series of steps: 1) a corporation grants its officers or
directors advancement rights; 2) those directors or officers are hauled into court for
acts relating to their role with the corporation; 3) those individuals then seek to
exercise the rights the corporation granted them; and 4) the corporation resists,
arguing that entitlement is improper because the case is exceptional and requires
the Court to deviate from well-settled principles of law. But all advancement cases
present unique facts because the underlying actions take various forms. Despite
the many nuances, few cases present facts that fall short of Delaware’s standard
favoring advancement.
This case follows the common pattern. The plaintiffs are former officers or
directors of the defendant company. The company granted mandatory
advancement rights to the plaintiffs in its certificate of incorporation, as well as in
separate indemnification agreements. While serving in their corporate roles, the
plaintiffs sold their stock in the company in a private transaction. The company
was not a party to the transaction, but entered into an agreement with the buyer that
allowed the buyer to obtain the company’s confidential and proprietary financial
information in considering the transaction. That agreement explicitly authorized
the buyer to seek information from the plaintiffs and one additional person who the
2
plaintiffs controlled. Thereafter, the plaintiffs allegedly provided the buyer with
false, misleading, or otherwise incomplete information about the company’s
financial status, and did so on the company’s behalf. This information was
material to the buyer’s decision to complete the transaction. After the closing, the
buyer discovered the plaintiffs’ misconduct and sued the plaintiffs and the
company, alleging that the plaintiffs used their status as company insiders to
fraudulently induce the buyer to purchase stock for the plaintiffs’ benefit.
The plaintiffs asked for advancement, and the company refused, resulting in
this action. On the plaintiffs’ motion for summary judgment, the company
contends that the plaintiffs are not entitled to advancement because they are not
parties to the underlying action by reason of the fact that they served as officers or
directors of the company. The company argues that this case is unique, and
distinguishable from cases involving claims by a company against its own officers
or directors, because the plaintiffs sold the stock in their individual capacities and
because the company was not a party to the transaction and owed no duty to the
buyer.
I disagree and grant the plaintiffs’ motion for summary judgment. The
plaintiffs are entitled to advancement because, according to the pleadings in the
underlying action, they are parties to that action by reason of the fact that they
served as directors or officers of the company.
3
I. BACKGROUND
This advancement action for expenses and fees-on-fees arises from claims
against plaintiffs Andrew Nielsen (“A. Nielsen”), Jonathan (“J. Nielsen”), and
Michael Reynolds (collectively, “Plaintiffs”) in an action pending in the United
States District Court for the Southern District of Ohio, Light EBTH LLC v. EBTH
Inc. et al., 1:19-cv-00011-TSB, (the “Ohio Action”). Defendant EBTH Inc.
(“EBTH,” or the “Company”) is a Delaware corporation with its principal place of
business in Cincinnati, Ohio. Plaintiffs are former officers of EBTH and former
members of EBTH’s board of directors (the “Board”). At all times relevant to the
Ohio Action and this proceeding, Plaintiffs served as EBTH officers or Board
members.
Plaintiffs contend that they are entitled to advancement for the Ohio Action
under the Company’s charter and its indemnification agreements with Plaintiffs.
On Plaintiffs’ motion for summary judgment (the “Motion”), the facts are drawn
from the evidentiary record developed by the parties, including the undisputed
allegations of the Verified Complaint for Advancement (the “Advancement
Complaint”), the pleadings in the Ohio Action, and other documentary exhibits that
are not factually disputed.
4
A. Plaintiffs Were Officers, Directors, Employees, And Agents Of
EBTH Covered By Advancement Provisions In The EBTH
Charter And Indemnification Agreements.
From May 2012 through early 2018, A. Nielsen served as the Company’s
President and Chief Executive Officer, and as a member of the Board. J. Nielsen
served as the Company’s Chief Revenue Officer from May 2012 through March
2017, as the Company’s Chief Business Officer from March 2017 through May
2018, and as a member of the Board during those times. Reynolds served as the
Company’s Chief Financial Officer from May 2012 through October 2016, as
Chief Operating Officer from October 2016 through March 2018, and as a member
of the Board from May 2012 through late 2016.
By serving in these roles, Plaintiffs benefitted from advancement provisions
in the Company’s Third Amended and Restated Certificate of Incorporation (the
“Charter”) and their Indemnification Agreements with EBTH. The Charter
provides for mandatory indemnification and advancement as follows:
The Corporation shall indemnify and hold harmless, to the fullest
extent permitted by applicable law as it presently exists or may
hereafter be amended, any person (an “Indemnified Person”) who was
or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a “Proceeding”), by reason of the fact
that such person . . . is or was a director or officer of the Corporation
. . . .1
1
Docket Item (“D.I.”) 1 [hereinafter “Compl.”] Ex. A, Art. Tenth, § 1.
5
The Corporation shall advance (i.e., pay in advance) the expenses
. . . incurred by a person in defending any Proceeding in advance of its
final disposition, provided, however, that, to the extent required by
law, such payment of expenses in advance of the final disposition of
the Proceeding shall be made only upon receipt of an unsecured
undertaking by the Indemnified Person to repay all amounts advanced
if it should be ultimately determined that the Indemnified Person is
not entitled to be indemnified under this Article Tenth or otherwise.2
The Charter also contains a “fees-on-fees” provision, providing that in connection
with an action to enforce a right to advancement, “if successful in whole or in part,
[Plaintiffs] shall be entitled to be paid the expense of prosecuting such claim.”3
Under the Charter’s terms, the Company bears the burden of proving the individual
is not entitled to the indemnification or advancement.4
On November 19, 2014, EBTH entered into an Indemnification Agreement
with each Plaintiff.5 Each Indemnification Agreement contains the following
advancement provision:
2
Id. Ex. A, Art. Tenth, § 2.
3
Id. Ex. A, Art. Tenth, § 3.
4
Id. (“In any such action, the Corporation shall have the burden of proving that the
Indemnified Person is not entitled to the requested indemnification or advancement of
expenses under applicable law.”).
5
Id. Exs. B–D.
6
Advancement of Expenses. Notwithstanding any other provision of
this Agreement, the Company shall advance all Expenses incurred by
or on behalf of Indemnitee in connection with any Proceeding by
reason of Indemnitee’s Corporate Status within thirty (30) days after
the receipt by the Company of a statement or statements from
Indemnitee requesting such advance or advances from time to time,
whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the Expenses
incurred by Indemnitee and shall include or be preceded or
accompanied by a written undertaking by or on behalf of Indemnitee
to repay any Expenses advanced if it shall ultimately be determined
that Indemnitee is not entitled to be indemnified against such
Expenses. Any advances and undertakings to repay pursuant to this
Section 5 shall be unsecured and interest free.6
Section 13 of the Indemnification Agreements defines “Proceeding” as
any threatened, pending or completed action . . . in which Indemnitee
was, is or will be involved as a party or otherwise, by reason of his or
her Corporate Status, by reason of any action taken by him or of any
inaction on his part while acting in his or her Corporate Status . . . .7
Finally, Section 7 of the Indemnification Agreements entitles Plaintiffs to legal
fees and costs incurred in prosecuting their advancement rights, “regardless of
whether Indemnitee ultimately is determined to be entitled to such . . .
advancement of expenses.”8
6
Id. Ex. B § 5, Ex. C § 5, Ex. D § 5. Section 13 of the Indemnification Agreements
defines “Corporate Status” as “the status of a person who is or was a director, officer,
employee, agent or fiduciary of the Company or of any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise that such person is or was
serving at the express written request of the Company.” Id. Ex. B § 13(a), Ex. C § 13(a),
Ex. D § 13(a).
7
Id. Ex. B § 13(f), Ex. C § 13(f), Ex. D § 13(f).
8
Id. Ex. B § 7(d), Ex. C § 7(d), Ex. D § 7(d).
7
B. The Ohio Action Alleges Plaintiffs And EBTH Misrepresented Or
Omitted Material Facts In Connection With A Stock Purchase
Transaction.
I draw the following background from the allegations in the Ohio Action.
Five individuals sold EBTH shares to ten different investors in “an overall offering
by which multiple founders of the Company sold” their shares to multiple buyers, 9
referred to as the “Founder’s Stock Offering.”10 The sellers included Plaintiffs,
who were Company “insiders.”11 Light EBTH (“Light”) purchased shares in the
Founder’s Stock Offering and is the plaintiff in the Ohio Action.12 Light has three
members: two individuals and an entity called SLC, LLC (“SLC”). Light was
formed at the request of EBTH and Plaintiffs in order to avoid investments in
EBTH stock by multiple individuals purchasing modest amounts.
The transaction was memorialized in a Stock Purchase Agreement (the
“SPA”), which reflects that Reynolds sold 328,581 of his EBTH shares to Light for
$801,134.37, and J. Nielsen sold 40,549 of his EBTH shares to Light for
$98,865.12.13 Although A. Nielsen did not sell any EBTH shares to Light, he sold
9
D.I. 46, Ex. 1 ¶ 52 [hereinafter “FAC”].
10
Id. ¶¶ 24, 31, 41.
11
Id. ¶ 53.
12
See id. ¶¶ 1, 16, 51–53.
13
Id. Ex. A, Schedule A.
8
781,845 of his shares to another purchaser in the Founder’s Stock Offering for
$1,906,266.34.14
EBTH was not a party to the SPA, but helped facilitate the Founder’s Stock
Offering. EBTH and SLC executed a Non-Disclosure Agreement (the “NDA”).
Through the NDA, EBTH agreed to make its “non-public, confidential or
proprietary” information available to Light15 and stated that “EBTH, Inc. and its
advisors and agents” would provide this information for purposes of “a potential
investment or other transaction with the Company.”16 Light alleges that the
NDA’s scope included communications relevant to Light’s investment through the
Founder’s Stock Offering.
The NDA specifically identified A. Nielsen, J. Nielsen, Reynolds, and Chip
Nielsen as agents and controlling “Principals” of EBTH, and identified the
Principals as Light’s sole source of EBTH information.17 The Principals acted on
behalf of the Company and each other in connection with any disclosures or
communications made under the NDA and any transaction contemplated by the
NDA.18 A. Nielsen signed the NDA as EBTH’s CEO.
14
Id.
15
Id. ¶ 26.
16
Id. ¶ 27.
17
Id. ¶¶ 28–29.
18
Id. ¶¶ 29–31.
9
Before the transaction closed, Plaintiffs made a series of representations to
Light and other investors regarding EBTH’s financial vitality. Light attributes
these representations to the “collective action” of Plaintiffs and EBTH. 19 On
December 1, 2016, A. Nielsen verbally represented that EBTH’s sales revenue was
expected to rise in 2017.20 On December 3, A. Nielsen, acting on behalf of
Plaintiffs and EBTH, emailed Light a copy of the executed NDA.
Also on December 3, A. Nielsen emailed Light an EBTH pitch deck
containing additional information about the Founder’s Stock Offering, including
the price per share.21 The pitch deck also included material financial projections
for 2016 and 2017, which were consistent with A. Nielsen’s verbal representations.
A. Nielsen sent the pitch deck to Light from his EBTH email address, and J.
Nielsen was copied on the email. The pitch deck bore the EBTH logo. On
December 10, A. Nielsen emailed Light on behalf of Plaintiffs and EBTH and
provided Company financial information for 2015 and 2016 (through October
2016), as well as the Company’s purported growth model. He signed the email as
EBTH’s CEO.
19
Id. at 6 (referring to “The December 3, 2016 Representations and Defendants’
Collective Action”).
20
Id. ¶ 22.
21
Id. ¶¶ 20–21, 23–24.
10
On December 19, A. Nielsen emailed Light “the most current info”
pertaining to the 2017 projections.22 On December 22, A. Nielsen again emailed
Light to provide information about the Founder’s Stock Offering. In that email, A.
Nielsen proposed a valuation of the Company’s common stock that was consistent
with the 2016 projections previously provided on December 3 and December 10
and again presented it as “the most current info.”23 Neither email mentioned any
changes or revisions to the 2016 budget or projections.24 A. Nielsen sent both
emails from his EBTH email address, on behalf of the Plaintiffs and the Company.
On January 3, 2017, SLC asked Plaintiffs to send Light updated financials in
order to assess the proposed stock purchase.25 SLC also raised concerns about the
“Company’s SG&A expenses, and thereby its resulting loss expectations for 2016
and 2017, and raised various questions regarding the Company’s required
transaction size, profitability, and performance.”26 In response, A. Nielsen emailed
Light on January 3 and attached a document that contained certain EBTH financial
information, including some of the Company’s “actual” financials as of November
30, 2016, but omitted certain financial statements and material information about
22
Id. ¶¶ 39–40.
23
Id. ¶ 41.
24
See id. ¶¶ 39–41.
25
Id. ¶ 43.
26
Id. ¶ 44.
11
EBTH’s 2016 projections.27 A. Nielsen sent the email from his EBTH address and
on behalf of the other Plaintiffs and EBTH.
On January 6, in reliance on Plaintiffs’ oral and written statements on
EBTH’s behalf, Light purchased EBTH shares in the Founders Stock Offering.28
Under the SPA, Plaintiffs represented and warranted that the transaction would not
violate any state or federal law,29 and that “[t]o each Seller’s knowledge, since
October 19, 2016, there has not been a material adverse effect on the business of
the Company,”30 “implying that full disclosure of the business’s financial
projections and results through that point in time had been made.”31 The stock
purchase closed on January 9.
Thereafter, a series of post-closing communications revealed that EBTH’s
actual financial state was materially different than Plaintiffs and EBTH represented
to Light before the closing.32 Light learned
27
Id. ¶ 47.
28
See id. ¶¶ 50–53.
29
Id. Ex. 1 § 4(b); see also id. ¶ 54.
30
Id. Ex. 1 § 4(h); see also id. ¶ 55.
31
Id. ¶ 55.
32
See, e.g., id. ¶¶ 57–58, 67, 71, 74, 76, 80.
12
the information provided by [Plaintiffs] as of the consummation of the
stock transaction did not include the detailed, most up-to-date
financial information as had been requested, the most current
projection information for the Company’s 2016 financial
performance, or accurate information available to [Plaintiffs] as of the
time of the parties’ interactions that was necessary to make
[Plaintiffs’] prior disclosures accurate, corrected, complete, and not
misleading under the circumstances.33
Light concluded that Plaintiffs and EBTH were aware of the information’s
fraudulent nature and had the “willful intent” to induce Light to purchase EBTH
shares “through the presentation of an outdated and fabricated growth model to
which [Plaintiffs] claimed to be privy as insiders of the Company.”34
For example, on January 10, EBTH’s Chief Financial Officer emailed the
first routine distribution of EBTH’s financial information to Light and other EBTH
stockholders. The email included “EBTH November 2016 Financials” and was
addressed to Plaintiffs and blind copied to EBTH investors.35 The email contained
more complete and detailed financial information than Light had received prior to
the closing, as well as information that Light had not received prior to the
closing.36 The CFO was not an authorized point of contact under the NDA, so
33
Id. ¶ 48.
34
Id. ¶ 38.
35
Id. ¶ 58.
36
Id. ¶¶ 60–66.
13
Light alleges it could not have contacted him or gathered this information prior to
closing.37
According to Light, the January 10 email demonstrated that (1) EBTH had
reforecasted its 2016 projected losses in October 2016 and materially increased
them over the loss numbers that had been provided to Light; (2) EBTH and
Plaintiffs, as EBTH insiders and management, knew of this October 2016
reforecast; and (3) Plaintiffs, as EBTH insiders, concealed this information and
continued to knowingly misrepresent EBTH’s financials.38 Light alleges that
Plaintiffs and EBTH utilized accurate EBTH information to manage EBTH and
value their own stock, but knowingly gave Light inaccurate information that they
failed to update or correct.39 Light concludes Plaintiffs fraudulently induced Light
to purchase common stock shares of the Company by “repeatedly and materially
misrepresenting the true (and severely deteriorating) financial condition of the
Company.”40
37
See id. ¶¶ 57, 68, 97, 129.
38
Id. ¶ 67.
39
Id.
40
Id. ¶¶ 1, 17.
14
C. Litigation Ensues; Plaintiffs Demand Advancement Of Their
Legal Expenses From The Ohio Action, And EBTH Refuses To
Pay.
On September 5, 2018, Light’s counsel sent a letter to Plaintiffs, demanding
payment of $900,000 in connection with Plaintiffs’ alleged pre-closing statements
and omissions. On September 28, Plaintiffs’ counsel forwarded Light’s September
5 letter to the Company. On November 27, Light’s counsel informed Plaintiffs’
counsel that “[Light] has authorized this Firm to proceed with the filing of a
Complaint against your clients [A. Nielsen, J. Nielsen, and Reynolds].”41 On
December 5, Plaintiffs’ counsel sent the Company a demand for indemnification
and advancement of expenses incurred and to be incurred in connection with
Light’s demand and threatened lawsuit, any lawsuit Light actually filed, and any
future judgments, penalties, fines and amounts paid in settlement.
Light filed the Ohio Action on January 3, 2019, alleging Plaintiffs materially
misrepresented EBTH’s deteriorating financial condition prior to the SPA’s
closing. Light’s complaint (the “Original Ohio Complaint”) included claims
against Plaintiffs for violations of federal and Delaware securities laws, common
law fraud, negligent misrepresentation, civil conspiracy, breach of fiduciary duty,
and in the alternative, unjust enrichment.42 Light also brought a claim of aiding
41
Compl. ¶ 19 (second alteration in original).
42
Id. Ex. H.
15
and abetting breach of fiduciary duty against EBTH, as well as a claim for breach
of contract against J. Nielsen and Reynolds.
On January 10, EBTH denied Plaintiffs’ requests for indemnification and
advancement.43 EBTH asserted that Plaintiffs’ involvement in the Ohio Action
was not by reason of the fact that they were former directors or officers of the
Company.44 EBTH stated Plaintiffs “were not acting in their status as officers of
[EBTH] when they sold their shares”45 and that “[c]learly, [Plaintiffs] were acting
in their personal capacities in the personal sale of their common stock.”46
Undeterred, on January 23, Plaintiffs sent Undertakings for Indemnification
and Advancement of Expenses to EBTH; on February 4, Plaintiffs asked the
Company to reconsider Plaintiffs’ requests. When EBTH did not respond,
Plaintiffs contacted the Company on February 4 and asked for a response. On
February 8, the Company again denied Plaintiffs’ requests, asserting that the
“Complaint [in the Ohio Action] arises out of a private stock transaction whereby
Light . . . purchased stock held by, among others, [Plaintiffs]” and that “[i]t is clear
43
Id. Ex. I.
44
Id. Ex. I at 1–2.
45
Id. Ex. I at 1.
46
Id. Ex. I at 2.
16
from the face of the Complaint that this dispute has nothing to do with EBTH or
[Plaintiffs’] former roles at EBTH.”47
D. Plaintiffs File This Action To Compel The Advancement Of
Expenses In The Ohio Action And To Seek Fees-on-Fees.
On February 27, Plaintiffs filed the Advancement Complaint to compel the
advancement of their fees and expenses incurred defending against the Ohio
Action. On March 21, EBTH answered the Complaint. On April 11, Plaintiffs
filed the pending Motion. The parties briefed the Motion, and I held oral argument
on May 17. At oral argument, EBTH conceded that Plaintiffs were entitled to
advancement for legal costs and fees accrued in defending the Ohio Action’s
breach of fiduciary duty count. EBTH still disputes entitlement as to the other
counts.
On June 3, Light filed a First Amended Complaint in the Ohio Action (the
“Ohio FAC”). The Ohio FAC colors the factual and legal allegations set forth in
the Original Ohio Complaint. It adds a claim for violation of Ohio securities laws;
makes Plaintiffs the subject of the aiding and abetting breach of fiduciary duty
claim; and adds A. Nielsen as a defendant to the breach of contract claim. The
Ohio FAC asserts federal securities violations against Plaintiffs based on their
control over EBTH. In addition, the Ohio FAC further details Plaintiffs’ and
EBTH’s roles in the underlying stock purchase transaction, as well as the relief
47
Id. Ex. O at 1.
17
Light seeks from both Plaintiffs and the Company. Importantly, the Ohio FAC
makes new allegations regarding Plaintiffs’ acts and omissions in connection with
the stock purchase transaction, and alleges that, at every step of the transaction,
Plaintiffs acted as agents of each other and EBTH. The parties agreed the Ohio
FAC affects the disposition of this Motion and therefore completed supplemental
briefing on June 26.48
II. ANALYSIS
A motion for summary judgment will be granted if the pleadings and
materials submitted to the Court “show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of
law.”49 Advancement proceedings are summary by statute.50 As such, summary
judgment is an efficient and appropriate method to expeditiously resolve
advancement disputes because “the relevant question turns on the application of
the terms of the corporate instruments setting forth the purported right to
48
On June 10, 2019, the Court entered a Stipulation and Proposed Order that directed the
parties to submit supplemental briefing about the Ohio FAC. D.I. 43. Also on June 10,
EBTH conceded advancement as to the fiduciary duty count in the Ohio FAC.
D.I. 44 ¶ 10. On June 14, Plaintiffs filed a Motion for the Entry of Advancement Order
for advancement of costs and fees associated with the fiduciary duty count in the Original
Ohio Complaint and the Ohio FAC. Id. at 1. On June 20, I denied that motion, declining
to evaluate fees on the fiduciary duty count until all entitlement issues have been resolved
in this matter. D.I. 52.
49
Ct. Ch. R. 56(c).
50
See 8 Del. C. § 145(k).
18
advancement and the pleadings in the proceedings for which advancement is
sought.”51
There is no genuine dispute of material fact before the Court.52 I need only
address the following questions: (1) whether Plaintiffs are parties to the Ohio
Action by reason of the fact that they served as EBTH officers or directors and are
therefore entitled to advancement as a matter of law, and (2) whether Plaintiffs are
entitled to fees-on-fees for bringing this action.53 Each count in the Ohio FAC is
51
Weaver v. ZeniMax Media, Inc., 2004 WL 243163, at *2 (Del. Ch. Jan. 30, 2004)
(quotation omitted).
52
In briefing, EBTH contended Plaintiffs are not entitled to summary judgment because
there is a genuine dispute of material fact as to whether or not Plaintiffs are parties to the
Ohio Action by reason of the fact that they served as EBTH officers or directors.
D.I. 36 at 2–3. The disputed application of the “by reason of the fact” standard to
undisputed facts does not create a genuine dispute of material fact that precludes
summary judgment. Whether Plaintiffs are parties to the Ohio Action by reason of the
fact of their former roles as EBTH officers or directors is a question of law, not fact.
See, e.g., Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005) (“The Court of
Chancery properly dismissed [defendant’s] ‘official capacity’ defense as a matter of law
in its summary judgment decision.”); VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 83, 86
(Del. 1998) (en banc) (resolving the “narrow legal question” of entitlement by analyzing
the language of Section 145 and the language of the defendant corporation’s
indemnification bylaw); Gentile v. SinglePoint Fin., Inc., 787 A.2d 102, 106 (Del. Ch.)
(“Where such a mandatory provision exists, the rights of potential recipients of such
advancements will be enforced as a contract.”), aff’d, 788 A.2d 111 (Del. 2001) (per
curiam).
At oral argument, EBTH conceded that reasonableness of fees is the only fact in
dispute that would preclude summary judgment. D.I. 40 at 47 [hereinafter “Hearing Tr.”]
(“[T]here are material facts as to the fees that are alleged.”). That dispute has no bearing
on this Motion. I only address the narrow entitlement issue at this stage; reasonableness
of fees will follow, pursuant to the procedures adopted in Danenberg v. Fitracks, Inc.,
58 A.3d 991 (Del. Ch. 2012). See D.I. 52.
53
EBTH also challenges entitlement on the grounds that certain claims in the Ohio
Action are not properly alleged and/or are not supported by applicable Ohio and federal
19
based on Plaintiffs’ alleged misrepresentations, omissions, and active concealment
of material information, and so I address entitlement generally, rather than on a
count-by-count basis.54 Plaintiffs are entitled to advancement and fees-on-fees, for
the reasons that follow.
A. Advancement
As to advancement, the sole issue presented is whether Plaintiffs are parties
to the Ohio Action by reason of the fact that they served as EBTH officers or
directors, where the challenged transaction involves their personal sale of stock.
Advancement “attract[s] capable individuals into corporate service” by
“provid[ing] corporate officials with immediate interim relief from the personal
out-of-pocket financial burden of paying the significant on-going expenses
law. D.I. 53 at 4–5, 7, 18. EBTH’s challenges are misplaced in this advancement case.
The Ohio Courts, not this Court, will assess the validity or sufficiency of the allegations
in the Ohio Action. For purposes of Plaintiffs’ entitlement to advancement, I rely on the
allegations in the underlying pleadings, which I must accept as true.
54
The Ohio FAC supplements the Original Ohio Complaint and best helps the Court
“discern the true nature” of the claims in the Ohio Action. Imbert v. LCM Interest Hldg.
LLC, 2013 WL 1934563, at *6 (Del. Ch. May 7, 2013) (citing Brown v. LiveOps, Inc.,
903 A.2d 324, 329 (Del. Ch. 2006)). My holding is supported by the allegations in both
the Original Ohio Complaint and the Ohio FAC. EBTH argues that the Court should
bifurcate its analysis, considering entitlement under the Original Ohio Complaint
separately from entitlement under the Ohio FAC after it became the “operative pleading.”
D.I. 53 at 19–20. When an amended complaint is filed, the Court has the discretion to
look to that complaint to “discern the true nature” of the underlying proceedings and to
rely on it to make a determination as to entitlement. Imbert, 2013 WL 1934563, at *5–6
(relying on pleadings as a whole and noting importance of the amended complaint in that
action); see also Zaman v. Amedeo Hldgs., Inc., 2008 WL 2168397, at *17 (Del. Ch. May
23, 2008) (relying on the “various complaints” filed in the underlying action to determine
if the “by reason of the fact” standard was satisfied). This Court has determined
entitlement by looking at the pleadings as a whole, and I will do so here.
20
inevitably involved with investigations and legal proceedings.”55 “The broader
salient benefits that the public policy behind [S]ection 145 seeks to accomplish for
Delaware corporations will only be achieved if the promissory terms of
advancement contracts are enforced by courts even when corporate officials . . . are
accused of serious misconduct.”56 Plaintiffs’ entitlement to advancement depends
on the mandatory advancement provisions in EBTH’s Charter and Indemnification
Agreements, which incorporate the “by reason of the fact” standard from Section
145 of the DGCL.57
An advancement claim arises “by reason of the fact” of a person’s corporate
status “if there is a nexus or causal connection between any of the underlying
proceedings contemplated by Section 145(e) and one’s official corporate
capacity.”58 “This language has been interpreted broadly, and includes all actions
brought against an officer or director for wrongdoing that he committed in his
official capacity, and for all misconduct that allegedly occurred in the course of
performing his day-to-day managerial duties.”59 The requisite nexus “exists if
corporate powers were used or necessary for the commission of the alleged
55
Tafeen, 888 A.2d at 211.
56
Id. at 218.
57
Compl. Ex. A, Art. Tenth, §§ 1, 2; id. Ex. B § 5, Ex. C § 5, Ex. D § 5.
58
Tafeen, 888 A.2d at 214.
59
Imbert, 2013 WL 1934563, at *5 (quotation omitted).
21
misconduct.”60 The nexus is also established if the underlying claim is
“inextricably intertwined” with the actions taken in the plaintiffs’ former capacities
as officers or directors, such that the plaintiffs would necessarily be required to
defend those actions and possibly disprove allegations that they acted improperly
in those capacities.61
1. Light Explicitly Challenges Plaintiffs’ Conduct As Officers
Or Directors Of EBTH.
By its plain text, the Ohio FAC explicitly and repeatedly challenges
Plaintiffs’ conduct as EBTH officers and directors. In alleging that Plaintiffs and
EBTH collectively and fraudulently induced Light to purchase EBTH stock, the
Ohio FAC emphasizes each Plaintiff’s role within EBTH.62 The Ohio FAC states:
At all relevant times, [Plaintiffs] controlled the Company and acted as
agents on its behalf and each other as related to [Light’s] purchase of
stock at issue herein. As alleged below, each of the [Plaintiffs] was a
central and primary participant in [Plaintiffs’ and EBTH’s] joint
action to promote the stock sale at issue to [Light], enter into
agreements between [Light], on the one hand, and all three
[Plaintiffs], on the other, and to make materially false and/or
deceptive financial statements and disclosures provided to [Light]
only through the three [Plaintiffs] on behalf of each other and of the
Company.63
60
Hyatt v. Al Jazeera Am. Hldgs. II, LLC, 2016 WL 1301743, at *8 (Del. Ch.
Mar. 31, 2016) (quotation omitted).
61
Id. at *9 (alteration omitted) (quoting Rizk v. Tractmanager, Inc., C.A. No. 9073-ML,
at 21 (Del. Ch. May 30, 2014) (MASTER’S FINAL REPORT)); see Davis v.
EMSI Hldg. Co., 2017 WL 1732386, at *10 (Del. Ch. May 3, 2017).
62
See FAC ¶¶ 5–10.
63
Id. ¶ 11.
22
The Ohio FAC repeatedly alleges Plaintiffs acted on EBTH’s behalf and in
their roles as EBTH’s agents and managers that directed and controlled the
Company:
 “Prior to the transaction, on or about December 3, 2016,
[Plaintiffs], acting on behalf of the Company but in furtherance of
their collective scheme to defraud, provided a copy of an EBTH
pitch deck that included . . . material financial projection
information about the Company.”64
 “[T]hrough their statements, disclosures, and dealings leading up
to the stock transaction, [Plaintiffs] were speaking and making
statements on behalf of each other and on behalf of the Company
and acting in their roles as agents of the Company and
management principals thereof who directed and controlled
Company policy.”65
 “The December 10, 2016 Email was sent to Mark Sullivan and
Ellen Schubert by A. Nielsen on behalf of all of [Plaintiffs and
EBTH], who were referenced as ‘we’ therein . . . .”66
 “[Plaintiffs and EBTH] next provided a December 19, 2016 email
sent to Mark Sullivan by A. Nielsen from his Company email on
behalf of all of [Plaintiffs and EBTH], again referenced as ‘we’
therein . . . .”67
 “In a December 22, 2016 email to Mark Sullivan, sent from a
Company email address on behalf of [Plaintiffs and EBTH], A.
Nielsen again described the proposed transaction as a ‘Founder’s
Stock Offering’ to sell up to 2,950,000 shares of common stock
owned at that time by the principals of the Company . . . .”68
64
Id. ¶ 20 (emphasis added).
65
Id. ¶ 31 (emphasis added).
66
Id. ¶ 33 (emphasis added).
67
Id. ¶ 39 (emphasis added).
68
Id. ¶ 41 (emphasis added).
23
 “In response to this specific inquiry concerning the Company’s
2016 and 2017 expenses, operations, and profitability, A. Nielsen
sent a January 3, 2017 email from his Company email address and
on behalf of [Plaintiffs and EBTH], again referenced as ‘we’
therein . . . .”69
 “Moreover, given the extent of [Plaintiffs’] respective roles with
the Company, and their actions on its behalf exposing it and
themselves to Section 10(b) liability, [Plaintiffs and EBTH]
knowingly made the above-stated false statements and/or
omissions of material fact in conflict with their duties to disclose
arising from the NDA . . . .”70
 “Moreover, as the issuer of the stock on behalf of whom the
statements and omissions were made under the NDA, and as the
controlling persons who participated in both the disclosure process
and the stock transaction, each of the Company and [Plaintiffs] had
the opportunity to engage in the deceptive schemes, statements,
and practices to which [Light] was exposed and by which it was
deceived and induced into purchasing Company stock.”71
 “Given the extent of [Plaintiffs’] respective roles with the
Company, and their actions on its behalf, [Plaintiffs and EBTH]
knowingly made the above-stated material false statements and/or
omissions of material fact.”72
 “[Plaintiffs], through their independent conduct and their control
of the Company, combined and agreed between them to engage in
concerted action and through an improper scheme and practice
designed to defraud and induce [Light] to sign the Common Stock
Purchase Agreement and to purchase shares of the Company.”73
69
Id. ¶ 45 (emphasis added).
70
Id. ¶ 95 (emphasis added).
71
Id. ¶ 98 (emphasis added).
72
Id. ¶ 109 (emphasis added).
73
Id. ¶ 135 (emphasis added).
24
 “[Plaintiffs], through their independent conduct and their control
of the Company, willfully, maliciously, and with reckless
indifference caused harm to [Light] . . . .”74
 “[Light] brings this claim as a shareholder for [Plaintiffs’] breach
of their fiduciary duties owed to the Company and resulting from
their provision of false and inaccurate information on behalf of the
Company but in the furtherance of their individual sales of
Company stock . . . .”75
 “By virtue of their positions as members of the Company’s Board,
and/or officers of the Company, [Plaintiffs] owed fiduciary duties
as set forth and alleged herein above.”76
Light’s claims are “brought against [each] officer or director for wrongdoing
that he committed in his official capacity.”77 Plaintiffs will be required “to defend
their actions as officers and directors of the Company” 78 and possibly disprove
allegations that they acted improperly in those capacities in the Ohio Action.79
This is sufficient to satisfy the “by reason of the fact” standard.
2. Plaintiffs Accessed And Misused Confidential EBTH
Information By Virtue Of Their Roles With EBTH.
Plaintiffs are also entitled to advancement because the Ohio FAC alleges
Plaintiffs accessed and shared (or purposefully withheld) EBTH’s confidential
financial information by reason of the fact that they served the Company.
74
Id. ¶ 137 (emphasis added).
75
Id. ¶ 140 (emphasis added).
76
Id. ¶ 152 (emphasis added).
77
Imbert, 2013 WL 1934563, at *5 (quotation omitted).
78
Davis, 2017 WL 1732386, at *10.
79
Rizk, C.A. No. 9073-ML, at 22–23.
25
“[W]here the claims asserted against a defendant in an action are based on the
misuse of confidential information that the defendant learned in his or her official
corporate capacity, that action qualifies as being asserted ‘by reason of the fact’ of
that corporate capacity.”80 Advancement is appropriate if the “[t]he gravamen of
the underlying complaint is that [the plaintiff] had access to proprietary
information by reason of the fact that he was a director and officer of [the
defendant] and that he wrongly used that information for his personal benefit.”81
The relevant inquiry “is into whether the [wrongful] scheme is alleged to have
employed the corporate powers (or, for example, confidential inside information
acquired through the corporate status) conferred upon the officer by virtue of his
status.”82
The Ohio FAC alleges that Plaintiffs were able to share false, misleading, or
incomplete EBTH information because they were Company “insiders” with
authority to control EBTH’s financial narrative.83 Through the NDA, EBTH
explicitly authorized Plaintiffs to share the Company’s confidential and proprietary
80
Pontone v. Milso Indus. Corp., 100 A.3d 1023, 1052 (Del. Ch. 2014); see also
Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *9 (Del. Ch. Dec. 23, 2014).
81
Brown, 903 A.2d at 330.
82
Perconti v. Thornton Oil Corp., 2002 WL 982419, at *7 (Del. Ch. May 3, 2002).
83
FAC ¶¶ 19, 38, 53, 67, 69–70, 97.
26
information in relation to the stock purchase transaction with Light, through SLC.84
The Ohio FAC alleges that, pursuant to the NDA,
all contacts, requests, and discussions with EBTH Inc. and its advisors
and agents regarding any potential investment in the Company’s stock
or other transaction with the Company were to occur only through the
Principals of the Company (including and limited to specifically to
Andy Nielsen, Jon Nielsen, Mike Reynolds or Chip Nielsen), who were
specifically identified as its agents and controlling “Principals” and
were thereby, without limitation, acting as express and apparent
agents of the Company and of each other in connection with the
transactions contemplated by the NDA and their statements and
representations related thereto.85
A. Nielsen signed the NDA as EBTH’s CEO.86 Under the NDA, EBTH permitted
Light to communicate about the Company’s finances solely with Plaintiffs and
Chip Nielsen (who Plaintiffs allegedly controlled). Plaintiffs spoke (or failed to
speak) to Light in their roles as EBTH “Principals.”
So empowered, Plaintiffs allegedly provided Light with false information.
Because they controlled EBTH’s financial records, Plaintiffs were able to prepare
and provide Light with documents that included false information, omitted material
information, and misrepresented, among other things, that EBTH had favorable
84
The Ohio FAC alleges Plaintiffs owed Light the duty to speak fully and truthfully
under several sources: the NDA (id. ¶¶ 95, 98, 115, 125–126, 143); the SPA
(id. ¶¶ 158, 160); state and federal security laws, because Plaintiffs were controlling
persons or issuers of stock (id. ¶¶ 93, 95, 107, 109); and fiduciary duties stemming from
Plaintiffs’ roles as EBTH officers or Board (id. ¶¶ 140–41, 152–54).
85
Id. ¶ 29 (emphasis added).
86
Id. ¶ 30.
27
projections for 2016.87 As insiders, Plaintiffs “deliberately provided only selected
information” and knew that the information they provided did not reflect EBTH’s
true financial state.88
For example, Plaintiffs provided Light with an EBTH pitch deck. 89 A.
Nielsen allegedly sent the pitch deck on behalf of EBTH and the other Plaintiffs.
He sent it “from his Company email account and bearing the signature block of A.
Nielsen as Chief Executive Officer of the Company.” 90 The email was “copied to
J. Nielsen at his Company email address, and the EBTH pitch deck itself [was]
marked on every page with the name and logo of the Company.”91
Plaintiffs subsequently provided Light with additional information that was
consistent with the pitch deck, but did not reflect the Company’s true financial
condition.92 In crafting the financial statements they shared with Light, Plaintiffs
purposefully removed key information from spreadsheets.93 Plaintiffs allegedly
concealed that the Company completed a reforecast in early October 2016 and
87
See id. ¶¶ 35, 37–38, 47–48, 59–60, 62–67, 69–70.
88
Id. ¶ 49.
89
Id. ¶ 20.
90
Id. ¶ 23.
91
Id.
92
See id. ¶¶ 33, 38, 41, 60.
93
See, e.g., id. ¶¶ 37, 46–48, 61–64, 66.
28
failed to disclose that information in order to remedy previous inconsistent
statements.94
In emails, Plaintiffs leveraged their insider status, directing Light to “pay
most attention” to false, misleading, or incomplete information in documents that
Plaintiffs controlled.95 Plaintiffs represented that the documents and other written
representations provided the Company’s “most current” information before the
Founder’s Stock Offering.96 This was not the case.97
All of the foregoing projections, financial assessments, and
representations were made by insiders, engaged in the management of
the Company, who had complete[] access to and responsibility for the
Company’s financial projections and reporting, who were
knowledgeable regarding the accurate information at the time that
inaccurate projections were provided to [Light], and who failed to
provide updated and corrected information to [Light] (including
through the apparent adulteration of financial documents) during the
ongoing communications of the parties prior to the closing of the
stock sale transaction. . . . Thus, the facts show that [Plaintiffs and
EBTH], as corporate insiders and participants in the stock transaction,
acted through a knowing and deliberate scheme to induce [Light] to
purchase Company stock from them in a reckless and highly
unreasonable manner given their positions as informed insiders who
were presenting a false narrative and statement of the Company’s
financial condition and failing to update and correct that deceptive
depiction.98
94
See id. ¶¶ 35, 38, 47–48, 60, 63–65.
95
See id. ¶¶ 33, 36, 38.
96
Id. ¶¶ 39–41.
97
See id. ¶¶ 48, 57–68, 71, 74, 76.
98
Id. ¶¶ 69–70 (emphasis added).
29
Light relied on Plaintiffs’ information and trusted its accuracy because they
were Company insiders.99 Because the NDA limited Light’s sources of
information to Plaintiffs and one other insider, Light had no way of knowing that
the information Plaintiffs provided was false.100
Advancement is appropriate because the “gravamen” of the Ohio FAC is
that Plaintiffs misused proprietary EBTH information, which they accessed,
filtered, and distributed by reason of the fact that they were directors or officers of
the Company.101 Plaintiffs were Principals of EBTH under the NDA “by reason of
the fact” of their roles at EBTH, and therefore are parties to the Ohio Action by
reason of that fact as well.102 Plaintiffs will need to defend Light’s claims that,
while acting on EBTH’s behalf, they provided Light with false or misleading
information, knew the information was false or misleading, and could have
corrected any false or misleading statements by virtue of their roles with the
Company. Light’s allegations that Plaintiffs misused “confidential inside
99
See id. ¶¶ 68–70, 87, 99, 110, 117, 128.
100
See id. ¶¶ 68–71, 98–99, 109–10, 118, 125, 128–29.
101
See Brown, 903 A.2d at 330; see also Sider v. Hertz Global Hldgs., Inc., C.A. No.
2019-0237, at 58 (Del. Ch. May 14, 2019) (TRANSCRIPT) (“It is difficult to think of a
less personal task than preparing a corporation’s financial statements or a task more
deeply tied to the use of corporate powers.”).
102
EBTH argues that the NDA did not create a duty to disclose and will not be
dispositive in the Ohio Action. D.I. 53 at 16–17. As mentioned, that argument on the
merits must be made in the Ohio Action. See supra note 53. Light alleged that the NDA
created a duty on behalf of EBTH and Plaintiffs as principals of EBTH.
See, e.g., FAC ¶ 95. I accept those allegations as true in this action.
30
information acquired through the corporate status” satisfy the “by reason of the
fact” standard.103
3. Plaintiffs Are Entitled To Advancement Even If They Entered
Into The SPA In Their Personal Capacities.
The SPA governed Plaintiffs’ sale of their personal stock. According to
EBTH, Plaintiffs’ actions were purely personal and do not establish a nexus to
conduct taken in their official capacities because the Company was not formally
involved in the stock purchase transaction, and because Plaintiffs, not EBTH,
benefitted from the transaction. EBTH alleges that Light is a “complete legal
stranger” to the Company because EBTH was not a party to the SPA and because
SLC, not Light, entered into the NDA.104 Relying on the belief that the Company
was far removed from the transaction, EBTH contends that advancement is
improper because the Ohio Action only implicates Plaintiffs’ personal contractual
obligations.105 I disagree.
Advancement rights do not attach “when the parties are litigating a specific
and personal contractual obligation that does not involve the exercise of judgment,
103
Perconti, 2002 WL 982419, at *7.
104
D.I. 53 at 17; D.I. 36 at 6, 23.
105
D.I. 53 at 11–12; see also D.I. 36 at 14–15.
31
discretion, or decision-making authority on behalf of the corporation.”106 “When a
corporation seeks to avoid an officer’s demand for advancement on the ground that
the claim the officer is defending is not an advanceable claim, in order to prevail,
the claim at issue must clearly involve a specific and limited contractual obligation
without any nexus or causal connection to official duties.”107 This is a difficult
standard, and the Court will favor advancement if “[t]he claims in the underlying
action are not nearly so limited.”108
The Delaware Supreme Court has directed an expansive approach when
assessing the capacity in which a party seeking advancement entered into an
agreement.109 Advancement will be appropriate where the collective pleadings and
papers demonstrate that the underlying allegations “are not merely allegations that
Plaintiffs have breached specific contractual terms personal to them.”110 This may
be true even where the former officer or director was acting in her personal
capacity as a seller when making certain representations and warranties, where the
106
Hyatt, 2016 WL 1301743, at *8 (quotation omitted); see also Weaver,
2004 WL 243163, at *3 (“‘[B]y reason of the fact’ is not construed so broadly as to
encompass every suit brought against an officer and director.”).
107
Davis, 2017 WL 1732386, at *10 (quotation omitted).
108
Id.109
VonFeldt, 714 A.2d at 85 (“In keeping with the aversion to undue formalism, we
decline to engage in the hyper-technical exercise of trying to measure the ‘scope’ of Stifel
Financial’s request against the various roles VonFeldt filled at SNC. Stifel Financial was
surely aware that, in today’s corporate world, directors will commonly extend their
official activities beyond the four walls of the boardroom.”).
110
Davis, 2017 WL 1732386, at *10.
32
former director or officer was not formally acting on behalf of the corporation
when the wrongful act occurred, and where the underlying transaction did not
involve the corporation.111 The fact that the director or officer’s conduct was
motivated by greed or personal gain will not preclude advancement.112
Although EBTH was not a party to the SPA, the Ohio FAC alleges that by
entering into the NDA with SLC, EBTH anointed Plaintiffs as exclusive sources of
confidential Company information to support the SPA. As Principals under the
NDA, Plaintiffs exercised their judgment, discretion, or decision-making authority
on EBTH’s behalf when they shared confidential Company information with Light.
The Ohio FAC sufficiently demonstrates that Plaintiffs’ roles as EBTH Principals
were inextricably intertwined with their roles as sellers pursuant to the SPA.
The fact that Plaintiffs entered into the SPA as individual sellers and not in
their formal capacities as officers and directors of the Company is not dispositive.
Then-Master LeGrow granted advancement where a corporate insider entered into
111
See, e.g., id. (noting plaintiffs were sued for breaching personal representations in a
stock purchase agreement); Rizk, C.A. No. 9073-ML, at 21 (noting plaintiff was sued “in
his capacity as a seller”); Pontone, 100 A.3d at 1050 (noting plaintiff was not affiliated
with the company as an officer or director at the time the misconduct occurred); Brown,
903 A.2d at 324 (noting company sued plaintiff and indicating company was not a party
to transaction where plaintiff “wrongfully misappropriated the corporation’s confidential
information and used it in forming a competing enterprise”).
112
Tafeen, 888 A.2d at 214 (noting case law “reflects a consistent line of authority
upholding the contractual and statutory advancement and indemnification rights of
corporate officials charged with serious misconduct allegedly inspired by personal greed”
(quotation omitted)).
33
a transaction as an individual seller and was later sued for breaching
representations and warranties made in that capacity. In Rizk v. Tractmanager,
Inc., a former CEO was sued for breach of contract from alleged
misrepresentations in the underlying Merger Agreement.113 The company argued
that the CEO was not entitled to advancement because the representations were
made in his capacity as a seller, not as CEO.114 In particular, the defendant argued
that the sellers “made a series of representations and warranties in the Merger
Agreement, placed money and equity in escrow to cover potential indemnification
liabilities associated with breaches of those representations and warranties, and that
those escrowed funds are the subject of the breach of contract claim.”115 Master
LeGrow rejected this argument and granted advancement because the breach of
contract claim was “inextricably [] intertwined” with actions taken in plaintiff’s
former capacity as CEO.116
113
Rizk, C.A. No. 9073-ML, at 20–21. After then-Master LeGrow issued her final report,
the Rizk defendants filed a Notice of Exceptions to the final report. See Rizk D.I. 52. The
action was then assigned to a Vice Chancellor for the purpose of hearing the exceptions
to the final report. See Rizk D.I. 53. Before the Court had the opportunity to address
those exceptions, the parties stipulated to dismissal with prejudice. See Rizk v.
Tractmanager, Inc., 2014 WL 5788767 (Del. Ch. Nov. 5, 2014) (granting stipulation of
dismissal with prejudice). The final report was never adopted by the Court.
114
Rizk, C.A. No. 9073-ML, at 21.
115
Id. at 20–21 (internal quotation marks omitted).
116
Id. at 21.
34
I am persuaded by the analysis in Rizk. EBTH’s argument to the contrary
“would place a narrow reading on the ‘by reason of the fact’ standard, a standard
this Court consistently interprets broadly and in favor of advancement.” 117 While
Plaintiffs entered into the SPA in their personal capacities, the Company supported
the transaction, and Plaintiffs allegedly used their Company status to misrepresent
EBTH’s confidential information for their personal gain. EBTH has failed to show
that Light’s claims “clearly involve a specific and limited contractual obligation
without any nexus or causal connection to official duties.”118
Relatedly, EBTH argues that Plaintiffs did not misuse their corporate powers
because they could have breached their contractual obligations under the SPA even
if they were never EBTH officers or directors.119 EBTH “cites no authority in
support of its argument that this inquiry should turn on whether a non-officer
employee could engage in the wrongdoing alleged in the complaint, and such a
rule appears inconsistent with the summary nature of advancement proceedings
and the record typically considered by the Court in resolving these disputes.”120
117
Id. at 17–18 (citing Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316,
at *6–7 (Del. Ch. May 30, 2008)).
118
Davis, 2017 WL 1732386, at *10 (quotation omitted).
119
D.I. 36 at 16–18.
120
Rizk, C.A. No. 9073-ML, at 17.
35
In Rizk, then-Master LeGrow rejected this position because it “would place a
narrow reading on the ‘by reason of the fact’ standard”121 and “would create an
artificial distinction in which advancement was dependent on whether the conduct
at issue in the underlying complaint was conduct in which only an officer could
engage.”122 “This distinction is particularly ill-fitted in this case” because
according to the FAC, Plaintiffs served as EBTH officers or directors at all times
relevant to the stock purchase transaction.123 Accepting EBTH’s argument would
impermissibly require the Court “to undertake fact-finding outside the limited
inquiry typically involved in an advancement dispute.”124
The Ohio FAC asserts Plaintiffs breached the SPA because they were able to
access and misuse EBTH’s confidential information by virtue of their positions
with the Company. EBTH’s proposed thought exercise, which asks this Court to
consider whether Plaintiffs hypothetically could have accessed Company
information and misused it in breach of the SPA if they had not served in their
respective roles with EBTH, is not sanctioned by Delaware law and does not
preclude advancement.
121
Id.122
Id. at 18 (emphasis in original).
123
Id.
124
Id.
36
4. The Nature of the Underlying Claims Does Not Preclude
Advancement.
Finally, EBTH argues that advancement is inappropriate because certain
claims in the Ohio Action—specifically the breach of contract and unjust
enrichment claims—are not premised on Plaintiffs’ fiduciary duties to the
Company, as evidenced by the fact that the claims seek rescission as a remedy.125
The “by reason of the fact” standard can be met even where the cause of action
does not specify a breach of fiduciary duty, if “the conduct that is alleged to be a
breach of the SPA is the same conduct through which Plaintiffs are alleged to have
misused their corporate powers.”126
Here, the Ohio FAC presents a “quintessential” fiduciary duty claim for
which EBTH has conceded advancement.127 That claim is premised on the same
conduct that underlies the other claims in the Ohio FAC. As such, those claims
“all could be seen as fiduciary allegations” because they involve the charge that
125
See D.I. 53 at 4–8; D.I. 36 at 24–25.
126
Davis, 2017 WL 1732386, at *9 (distinguishing Cochran v. Stifel Fin. Corp., 2000
WL 1847676 (Del. Ch. Dec. 13, 2000), aff’d in part, rev’d in part, 809 A.2d 555 (Del.
2002)); see also Pontone, 100 A.3d at 1051.
127
See Hearing Tr. at 5, 31–32, 42; see also Zaman, 2008 WL 2168397, at *17 (“In
considering whether a corporate official faces an official capacity claim, the key inquiry
is whether the claim depends on a showing that the official breached duties,
quintessentially fiduciary duties, he owed to the corporation in that capacity or faces
liability from a third party due to actions taken in his official capacity.”).
37
Plaintiffs failed to live up to their duties of loyalty and care to the corporation.128
For example, Light alleges that Plaintiffs owed fiduciary duties by virtue of their
positions with the Company, and that Plaintiffs “acted contrary to their fiduciary
duties to the Company when they provided materially inaccurate and/or incomplete
financial information to [Light] . . . and exposed the Company to resulting
liability.”129 The Ohio FAC’s claims are “grounded in [Plaintiffs’] alleged misuse
of the substantial fiduciary responsibility they were given as key managerial
agents” generally and under the NDA.130 The Ohio FAC’s allegations, “couched
as breaches of representations and warranties in the SPA, are not merely
allegations that Plaintiffs have breached specific contractual terms personal to
them. Instead, Plaintiffs will be required to defend their actions as officers and
directors of the Company and their alleged intentional abuse of their corporate
powers.”131
B. Fees-on-Fees
Plaintiffs are entitled to fees-on-fees in prosecuting this action. “Plaintiffs
who successfully prosecute an advancement suit are generally entitled to an
appropriate award of fees for the expenses incurred in litigating the suit, unless the
128
Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761, at *6 (Del. Ch. June 18, 2002);
see also FAC ¶¶ 141–46.
129
FAC ¶ 144.
130
Davis, 2017 WL 1732386, at *9 (quotation omitted).
131
Id. at *10.
38
parties have agreed otherwise.”132 Here, the parties have not agreed otherwise.
The Charter and Indemnification Agreements grant Plaintiffs broad rights to
expenses in prosecuting an advancement suit.
Plaintiffs rely primarily on the Charter for fees-on-fees proportional to their
success, as the Indemnification Agreements’ unconditional fees-on-fees grant is
too broad.133 Section 7(d) of the Indemnification Agreements entitles Plaintiffs to
fees-on-fees “regardless of whether Indemnitee ultimately is determined to be
entitled to such . . . advancement of expenses.”134 In Levy v. HLI Operating
Company, Inc., Vice Chancellor Lamb invalidated a provision allowing for fees-
on-fees regardless of whether the plaintiff was successful in bringing the
advancement action.135 The Court held that such provisions are contrary to public
policy and void as a matter of law.136 Having voided the provision, the Court
132
Thompson v. Orix USA Corp., 2016 WL 3226933, at *7 (Del. Ch. June 3, 2016).
133
In their brief, Plaintiffs recognized that provisions such as Section 7(d) of the
Indemnification Agreements “have been ruled void under Delaware law,” citing Levy v.
HLI Operating Co., 924 A.2d 210 (Del. Ch. 2007). D.I. 37 at 25 n.14. But at oral
argument, Plaintiffs argued that Levy left open the possibility of full indemnification for
partial success, and requested full indemnification under Section 7(d) in view of
Defendants’ concession of advancement on the fiduciary duty claim. Hearing Tr. at 31–
32. I do not reach that issue because Plaintiffs succeeded, in whole, on their Motion.
134
Compl. Ex. B § 7(d), Ex. C § 7(d), Ex. D § 7(d).
135
See Levy, 924 A.2d at 225–27.
136
See id. at 226 (“[S]ection 145 . . . is best read as limiting a corporation’s power to
indemnify fees on fees to those situations where success is achieved on the underlying
claim. . . . [A]llowing a contractual provision such as the one in [this case] to stand
contravenes notions of sound public policy previously noted by this court.”).
39
explained that the plaintiffs were still entitled to fees in proportion to the extent of
their success in bringing the action.137
EBTH’s Charter grants Plaintiffs appropriately proportional fees: “if
successful in whole or in part, [Plaintiffs] shall be entitled to be paid the expense of
prosecuting such claim.”138 Plaintiffs are entitled to fees-on-fees in an amount
proportional to their success in this action. Because Plaintiffs succeeded in full on
their Motion, they are entitled to reimbursement of their legal fees and expenses
incurred in this litigation.
III. CONCLUSION
For the foregoing reasons, Plaintiffs’ motion for summary judgment is
GRANTED. The Plaintiffs are entitled to advancement of expenses and fees in the
Ohio Action and fees-on-fees incurred in bringing this action. The parties shall
submit a stipulated form of order within ten days of this opinion imposing the
137
Id. at 225–26 (“A contractual agreement for indemnification of fees on fees, then,
cannot overstep this bright-line legal boundary. A party must succeed (at least to some
extent) on its underlying indemnification action to have a legally cognizable claim for
monies expended in forcing its indemnitor to make it whole.”); id. at 227 (“For these
reasons, the provision found in section 4 of the indemnification agreements which
purports to require Old Hayes to indemnify the plaintiffs for fees and expenses incurred
in this action regardless of their success on the merits is invalid. . . . Any fees and
expenses advanced to Christophe and Witt are subject, in an inverse proportion to the
level of success they ultimately achieve in this case, to a right of recovery by Old
Hayes.” (footnotes omitted)).
138
Compl. Ex. A, Art. Tenth, § 3.
40
framework detailed by this Court in Danenberg v. Fitracks, Inc.,139 which shall
govern the submission of further requests for advancement and the prompt
resolution of any disputes that arise regarding such requests.
139
Fitracks, Inc., 58 A.3d at 1001–03.
41