Tied With Beyonce: I Care A Lot

In a memorandum opinion, the Delaware Court of Chancery found a breach of the duty of loyalty on the part of a highly successful home health care entrepreneur 

In 1998, April Anthony founded a Dallas, Texas-based home health and hospice firm called Encompass Home Health & Hospice (“Encompass Home Health”). It was her second home health venture. Her first—Liberty Health Services—began as a small business with about 25 employees serving 50 in-home patients. It was sold for $40 million in 1996.

Anthony used the $3 million she made from the Liberty sale to buy 17 struggling Texas home healthcare providers. She combined the companies to form Encompass Home Health. After early struggles, the new business made remarkable strides. Anthony became a driving force in the home healthcare industry.

Today, Anthony is #45 on Forbes’s list of America’s Richest Self-Made Women, tied with Beyonce Knowles.

Opinion summary

Delaware law demands that corporate officers act with the utmost loyalty to the entity they serve. They must avoid advantaging themselves at the corporation’s expense. They cannot compete with the corporation or divert corporate opportunities from it without its consent. And they must undertake good faith efforts to advance the corporation’s best interests.

The former officers at issue here lost sight of this enduring duty.

April Anthony is the wildly successful founder of Encompass Home Health & Hospice and its former CEO. She became disillusioned after her business was bought by a large public healthcare company. She and two of her fellow officers— Luke James and Chris Walker—secretly partnered with two private equity firms to forge another path.

Anthony first tried to buy back her business. When she failed, she and her partners decided to form a new home health and hospice company instead.

Anthony and her co-venturers identified three acquisition targets to form the base of their enterprise. Their scheme was kept from Encompass. They took opportunities, resources, and information belonging to Encompass to set themselves up for success. After the new company was formed, Anthony induced Encompass employees to join her.

Anthony’s private equity partners were active participants in the fiduciaries’ misconduct. They undertook stunning efforts to conceal their actions. Documents were exchanged on the golf course or through webs of lawyers. Code names like “Voldemort” referred to Anthony in written correspondence. A sham employee recruitment process was used to create a paper trail. Records showing Anthony’s involvement were deleted or scrubbed.

The result of this deceit is VitalCaring Group, which provides home-based healthcare services in the Southern United States and plans to expand nationwide. Anthony is its CEO, James its President, and Walker its CFO. Anthony and the two private equity firms are each one-third partners.

Encompass sued to right these wrongs. After trial, the defendants are liable for breaches of the duty of loyalty or aiding and abetting such breaches. This is an easy call.

The remedy proves more challenging. VitalCaring has yet to turn a profit and there is nothing for it to disgorge.

Still, equity cannot grant the defendants a pass. The private equity firms remain years away from their anticipated exit. They may do so at a considerable profit—as they have in prior investments that initially faltered.

Encompass is entitled to an equitable payment stream from any such future gains. It is also awarded certain mitigation damages and attorneys’ fees. To deny it any recovery on these egregious facts would bless a willful campaign of disloyalty.

(Mike Frisch)