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Chancery Court Applies and Affirms Delaware's Corporate Opportunity Doctrine

In Personal Touch Holding Corp. v. Felix Glaubach, C.A. No. 11199-CB (Del. Ch. February 25, 2019), the Delaware Court of Chancery (the “Court”) found that, by personally pursuing and closing a real estate acquisition in which his employer was also interested, a corporate officer and director had, under Delaware’s corporate opportunity doctrine, breached his fiduciary duty of loyalty.

Felix Glaubach (“Glaubach”) was a co-founder of Personal Touch Holding Corp. (the “Company”) and served as its President and a member of its board of directors.  In March 2013, the Company learned that a desirable office building (the “AAA Building”) was for sale.  The Company expressed interest in and had substantive discussions with the seller regarding the acquisition.  Beginning in mid-2014, however, Glaubach initiated separate negotiations in his personal capacity regarding the purchase of the AAA Building and sought to conceal those discussions from the Company’s board. 

Between mid-2013 and late 2014, tensions escalated between Glaubach and his fellow directors concerning several unrelated matters, including compensation paid to other Company executives, proposed management team changes, and Glaubach’s alleged retaliation against employees who had levied sexual harassment allegations against him.  In March 2015, Glaubach filed a derivative action in New York state court against the Company and its outside directors, alleging fraud and breach of fiduciary duty.

On February 10, 2015, the directors were briefed on the Company’s progress in seeking to purchase the AAA Building.  During the meeting, Glaubach did not disclose his own ongoing efforts to complete the same acquisition.  On February 11, 2015, Glaubach, acting in his personal capacity, closed on the purchase of the AAA Building.  On April 29, 2015, Glaubach disclosed to the board that he had purchased the AAA Building and subsequently offered to lease it back to the Company.  Two months later, in June 2015, the Company terminated Glaubach’s employment agreement for cause and removed him as President.

The Company filed its initial complaint on June 24, 2015 and its amended complaint on September 18, 2017 (the “Amended Complaint”).  The Amended Complaint set forth four causes of action.  The Company (1) alleged that Glaubach breached his fiduciary duties, (2) asserted a claim for unjust enrichment, (3) sought the Court’s declaration that Glaubach breached his employment agreement and was validly removed from his position as President, and (4) sought disgorgement of three years of compensation under New York’s “faithless servant” doctrine.  Glaubach filed a counterclaim in March 2016, alleging that the Company terminated him without cause.

With respect to the Company’s first claim, the Court held that Glaubach — in covertly engaging in negotiations and then acquiring the AAA Building for himself — breached his fiduciary duty of loyalty by usurping the Company’s opportunity to make the same acquisition.  Citing Broz v. Cellular Information Systems, Inc., the Court noted that, under Delaware’s corporate opportunity doctrine, a corporate officer or director may not take a business opportunity for himself if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.  After weighing the four factors holistically, the Court found that, by participating in the Company’s initial negotiations for the AAA Building, commencing separate discussions with the seller on his own behalf, and seeking to conceal these negotiations from the Company’s board and management, Glaubach usurped the Company’s opportunity to purchase the AAA Building and thus breached his fiduciary duty of loyalty.  The Court further found that, in writing multiple harassing and self-serving letters to management and the Company’s primary external lender, Glaubach had acted in bad faith and violated his fiduciary duty of loyalty.  In terms of damages, the Court noted that it typically awarded lost profits as a measure of damages for usurpation of ongoing business opportunities.  As a result, in awarding the Company $2.1 million in damages, the Court found that the correct metric was the difference between the AAA Building’s current value at the date of trial and the estimated acquisition price. 

The Court disagreed with the Company’s allegation that Glaubach’s participation in certain other purported self-dealing transactions amounted to an additional breach of his fiduciary duty of loyalty, noting that “in a typical self-dealing transaction, the fiduciary is the recipient of an allegedly improper personal benefit, which usually comes in the form of obtaining something of value or eliminating a liability.”  The Court made a similar finding with regard to other elements of Glaubach’s “campaign of harassment” against Company directors and employees, because “[n]one of this conduct afforded Glaubach any personal benefit at the Company’s expense, none of it was motivated by an intention to harm Personal Touch, and none of it resulted in any apparent harm to the Company.”

With regard to the Company’s second claim, the Court noted that the Company had declined to brief, and thus waived, its claim for unjust enrichment.  On the Company’s third claim, the Court held that the Company was entitled to a declaration that its termination of Glaubach’s employment agreement and removal from his position as President were proper and valid.  The agreement enumerated certain acts of default as a basis for dismissal without further payment, including “willful misconduct, dishonesty, or breach of trust.”  The Court concluded that Glaubach’s intentional violation of his fiduciary duties met those criteria.

Finally, with respect to the Company’s fourth claim, the Court held that the Company had failed to prove that Glaubach’s prior compensation over a three-year period should be forfeited under New York’s “faithless servant” doctrine, because the Company did not prove that (i) Glaubach’s disloyal activity was related to the performance of his duties, and (ii) the disloyalty permeated Glaubach’s service in its most material and substantial part.

Personal Touch Holding Corp. v. Felix Glaubach

Copyright 2019 K & L Gates

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About this Author

Annette E. Becker, Practice Area Leader, Corporate Lawyer, Securities Compliance Attorney
Practice Area Leader – Corporate & Transactional

Annette Becker has over 20 years experience practicing corporate law with an emphasis on U.S. and cross border mergers and acquisitions for emerging, middle market, and Fortune 500 companies. Ms. Becker advises her company clients and their boards as to corporate governance issues and general corporate matters. Ms. Becker’s transactional experience also includes joint ventures and other complex strategic relationships, securities offerings and securities compliance issues, strategic and venture capital investments, financing transactions, recapitalizations and...

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 Frank J. Mazzucco Investment Lawyer K&L Gates Law Firm
Associate

rank Mazzucco is an associate in the firm’s Seattle office. He represents various institutional investors, including public pension funds, university endowments, foundations, and sovereign wealth funds, with respect to domestic and international investments in private equity funds, hedge funds, and other investment vehicles.

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