Judge says two private equity firms enabled "egregious" behavior
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Two private equity firms aided and abetted "egregious breaches" of fiduciary duty, a Delaware Chancery Court judge ruled earlier this week. And it could take a big bite out of their fund returns.
Why it matters: The judge's remedy is novel, and could become a blueprint for other courts.
- In short, plaintiff Encompass Health will be entitled to 43% of any profits and sale proceeds from VitalCaring Group, a portfolio company of Nautic Partners and Vistria Group.
Catch up quick: Encompass is a home health and hospice firm formed by April Anthony, which she and a private equity firm sold in 2014 to a publicly traded company that later rebranded as Encompass.
- Anthony continued to run the homecare division, but eventually chafed at how the broader business was being run. At first she tried to buy the company, in secret partnership with Nautic and Vistria, and then later chose to form a new, competitive company with her new PE partners.
- As the court found during its seven-day trial, Anthony repeatedly breached fiduciary duties to Encompass, with the PE firms serving as "active participants."
Zoom in: Some of Anthony's misdeeds came while she was still employed at Encompass, sharing confidential information with the PE firms (to enable the failed buyout) or identifying acquisition targets for NewCo without first sharing those opportunities with Encompass.
- Some was after she left, directly recruiting senior employees and negotiating deals in violation of her noncompete agreements.
- Nautic and Vistria helped her, but took pains to keep it secret. For example, sometimes they sent emails to Anthony's husband instead of to her, or tried to effectively launder communications via law firms. They also used codenames, with Vistria referring to Anthony as "Voldemort" or "our Idaho friend."
- Moreover, as the judge noted, both firms (and the offending partners at those firms) had been previously enmeshed in similar litigation.
The bottom line: Nautic, Vistria and Anthony have invested hundreds of millions of dollars into VitalCaring, but it's been hit hard by an industry downturn and has yet to turn a profit. As such, the judge couldn't really grant Encompass' request that profits be disgorged.
- Instead, she settled on a bespoke version of what's known as a constructive trust. The basic idea is to make sure the bad actors are still incentivized to make the company successful, but to share rewards with the aggrieved party.
- As the judge wrote: "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."
- She also granted over $1 million in mitigation damages and plaintiffs' attorney fees.
- Neither Nautic nor Vistria responded to interview requests.
Read the court's opinion:
