Barry M. Klayman and Mark E. Felger

In Personal Touch Holding v. Glaubach, C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019), Chancellor Andre G. Bouchard expounded on the limits of the corporate opportunity doctrine. Central to this post-trial opinion is his discussion regarding the contours of the “line of business” test and the need to apply the concept flexibly and sensibly when determining whether a corporation has an interest in a line of business.

As set forth in the opinion, the facts with respect to the alleged corporate opportunity were not complicated. The plaintiff, Personal Touch, was in the business of providing home health care services, including nursing, physical therapy and long-term care. It operated through various subsidiaries with locations in seven states.

The defendant, Felix Glaubach, co-founded the organization that later became Personal Touch. Glaubach served as president of the company until the middle of 2015, when he was terminated from that position. Along with the other co-founder, he served as a special director on the company's board of directors, which entitled each of them to three votes, while the remainder of the board—four outside directors—had one vote each.

In February 2013, the company learned that a building owned by AAA New York adjacent to one of the company's subsidiaries in Jamaica, New York, was for sale. The company had been seeking additional office space in Jamaica for several years and was especially interested in the building due to its location. Management believed that the AAA building could be used to relocate the company's corporate offices, to expand operations in the area or as storage.

The company made an offer to buy the building, but AAA decided not to proceed with a sale at that time because its relocation plans had fallen through. The company continued to inquire about the availability of the building over the next several months, and was told by AAA that they wanted to move and would call the company when they were ready to do so.

In 2014, Glaubach instructed his assistant at the company to contact AAA to see whether it was ready to sell the building. The assistant discussed the sale of the building with AAA during the summer of 2014. Both were under the impression that they were negotiating the sale of the building to the company. However, at some point, Glaubach told his assistant that he wanted to buy the building himself in order to develop it or sell it for a profit. He also wanted to keep the negotiations secret, so his assistant stopped using his company email account, began using a personal email account, and arranged to meet with AAA outside of the company's offices.

In February 2015, the day after a company board meeting, at which the purchase of the AAA building was discussed in Glaubach's presence without comment from him, Glaubach purchased the AAA building. Glaubach subsequently offered to lease the building to the company.

The company brought suit against Glaubach for, among other claims, breach of his fiduciary duties, specifically including usurpation of a corporate opportunity by secretly acquiring the AAA building. The corporate opportunity doctrine holds that a corporate officer or director may not take a business opportunity for himself if: the corporation is financially able to exploit the opportunity; the opportunity is within the corporation's line of business; the corporation has an interest or expectancy in the opportunity; and by taking the opportunity for his own, the fiduciary will be placed in a position inimicable to his duties to the corporation. These four factors are known as the Broz factors, after the U.S. Supreme Court case that enunciated them.

The chancellor found that the company was financially able to acquire the AAA building in the price range paid by Glaubach during the time period when the purchase discussions were occurring with AAA. He also found that the company had a clear interest and expectancy in acquiring the AAA building, and that Glaubach acted inimicably to his fiduciary duties. Glaubach put his self-interest above his duty of loyalty to the company by choosing to compete directly with the company to acquire for himself an admittedly “vital property” while making concerted efforts to conceal his activities from the company until after he closed on the deal. Thus, three of the four Broz factors were easily met.

The more substantive issue raised by Glaubach was whether the opportunity to acquire the AAA building was within the company's line of business. Noting that the company historically had leased office space and that it had owned a piece of real estate only once before, Glaubach argued that owning real estate was not in the company's line of business. He argued that the company's two main lines of business were managing a long-term health care program providing home-based services to patients who would otherwise be in nursing homes and providing other home health  care services.

The company argued that its past practice of leasing office space, rather than owning it, did not matter because the “line of business” inquiry should be construed broadly based on the current needs of the company, not past practices.

The chancellor held that the “line of business” concept was intended to be applied flexibly, reasonably and sensibly, to the facts and circumstances of the particular case, and latitude should be allowed for development and expansion of the corporation's business. Although the company had never been engaged in the business of purchasing and leasing real estate, here the company was presented with a rare opportunity to acquire a building with a highly desirable location that it could use to relocate or expand its health care operations. In that sense, the opportunity to acquire the AAA building fit within the company's existing line of business.

The chancellor thought it equally sensible to consider that the line of business test was simply not relevant under the circumstances of the case. The company had a clear interest and expectancy in acquiring the AAA building, and the opportunity it presented concerned an operational decision about how to manage or expand an existing business—i.e., whether it is better to buy or lease office space—as opposed to the opportunity to acquire a new business. Even if the opportunity to acquire the AAA building could be said not to fall within the company's existing line of business under a strict interpretation of that concept, it was sufficient that the company had a clear interest and expectancy in the property at the time the opportunity to acquire it arose.

The chancellor also had to determine the appropriate measure of damages for the lost business opportunity. Typically the Delaware Court of Chancery has awarded lost profits as a measure of damages for usurpation of ongoing business opportunities. The company argued for a measure of damages reflecting the difference between the building's value at the time of trial and the amount that Glaubach paid for it. Glaubach argued that no damages should be awarded until such time, if ever, that he sold the building and realized a profit on it. The chancellor rejected his argument, since it would afford the company no remedy for Glaubach's breach of duty. He thus awarded the company the difference between the current value of the building and the amount that Glaubach paid for it.

The dispute over whether the defendant had usurped an opportunity in the company's line of business seems somewhat contrived. The company was not seeking to go into the real estate business, but rather was seeking the means to accommodate its existing line of business. Operating a business requires a myriad of ancillary services to support the business, some of which can be outsourced and some of which may better be performed in-house, depending on the business judgment of the managers of the business. Too strict a definition of “line of business” condemns a business to a strait jacket that will inhibit organic growth and expansion. Once the company expressed legitimate interest in acquiring the AAA building, the opportunity should have been off limits to its fiduciaries. In that sense, the chancellor's analysis downplaying the applicability of the line of business test seems correct.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.