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Former 24 Hour Chairman Sues Company for More Than $23 Million

Chris A. Davis, who served as chairman of the board of directors for 24 Hour Fitness up until last March, is suing the San Ramon, CA-based company for at least $23.6 million, claiming 24 Hour breached its contract in connection with a phantom stock agreement.

Davis and her attorneys filed the lawsuit Monday in United States District Court for the District of Delaware, Wilmington, DE.

24 Hour Fitness issued a statement Tuesday to Club Industry, saying the company does not comment on pending litigation.

Davis joined the board of directors of 24 Hour in 2006 at the request of Ted Forstmann, founder of Forstmann Little, New York, the private equity firm that owns 24 Hour. When Forstmann stepped down as chairman of the board in December 2008, Davis was appointed chair, a position she held through March 14, 2012. Forstmann Little is not named in the lawsuit. Ted Forstmann died last year.

As board chair, according to the complaint obtained by Club Industry, Davis had extensive involvement in 24 Hour’s oversight of management, including the hiring of key executives, the development of the company’s strategic plans and annual budgets, and a regular review of 24 Hour’s operations and financial performance. Specifically, Davis was directly involved in recruiting and retaining senior managers, including the CEO, CFO, general counsel and chief human resources officer.

Davis commuted from her home in Hilton Head, SC, to Forstmann Little’s offices in New York on a weekly basis and leased, “at her own considerable expense,” a furnished apartment in New York City, according to the complaint. She also traveled once a quarter to 24 Hour’s offices in California.

Forstmann recommended the phantom stock agreement to the board of the directors as compensation for Davis’ past work and to induce her to stay with 24 Hour Fitness “in hopes that the company could execute a successful sale and exit by Forstmann Little,” the complaint says.


“In 2008, given the U.S. economic crisis and expected lengthy delay in the potential for Forstmann Little to exit this investment, Mr. Forstmann became concerned that Ms. Davis might not be willing to continue to spend such significant time away from her family for the next three to four years,” the complaint noted. Forstmann believed that David was “essential” to the company’s growth and understood that Davis would likely be at 24 Hour for only two or three years, according to the complaint.

A phantom stock award is a type of incentive grant in which the recipient is not issued actual shares of stock but receives an account credited with a certain number of shares. The value of the account increases over time based on the appreciation of the stock price and the crediting of phantom dividends.

The phantom stock award in this case was valued at $15 million based on the value of 24 Hour stock at the time, which was $10.21 per share. The 24 Hour board’s compensation committee met on May 19, 2009, and approved the award to Davis. CEO Carl Liebert (who was not named in the lawsuit, nor was his name mentioned in the complaint) signed the phantom stock agreement on June 19, 2009, and Davis signed two days later, according to the complaint.

Based on a Dec. 31, 2011, valuation, Davis’ attorneys claim the phantom stock award is worth more than $23.6 million because 24 Hour’s stock was valued at $16.10 per share. And, that valuation would go higher, Davis’ attorneys claim in the lawsuit, because 24 Hour is actively seeking a buyer that would result in a change of control.

However, on Sept. 17, 24 Hour told Davis in writing that the phantom stock agreement was “not a valid obligation of the company.” Ten days later, Davis made a written demand for payment, which her attorneys claim has not been made.

In addition to one count of a breach of the phantom stock agreement, Davis’s attorneys are suing on one count of unjust enrichment, saying Davis was “impoverished” by incurring the amount of money needed to lease the apartment in New York.

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