In re Mindbody, Inc., S'holder Litig., No. 484, 2023 (Del. Dec. 2, 2024) (Valihura, J.)

In this decision the Delaware Supreme Court (the “Court”) affirmed in part and reversed in part a post-trial decision by the Court of Chancery, which had garnered significant attention.  The Supreme Court affirmed the Court of Chancery’s rulings that a CEO breached his fiduciary duties of loyalty (by tilting the sale process in a specific buyer’s favor out of his own self-interest) and disclosure (by failing to disclose material aspects of his participation in, and his motivations for, the sale).  The Supreme Court reversed, however, the Court of Chancery’s ruling that the private equity acquirer had aided and abetted the CEO’s disclosure breach, disagreeing with the Court of Chancery that the acquirer’s contractual right to review SEC filings provided a sufficient basis to conclude the acquirer had substantially participated in the breach.  In doing so, the Supreme Court provided guidance for the first time as to the applicability of the Restatement (Second) of Torts factors in examining the “substantial assistance” portion of an aiding and abetting analysis. 

Background

Neither party challenged the trial court’s factual findings.  As a result, the Court adopted the post-trial opinion’s factual recitation practically verbatim.  In 2018, three years after going public, Mindbody, Inc. (“Mindbody” or the “Company”) endured numerous failed initiatives, which coupled with Richard Stollmeyer’s—the CEO and founder of Mindbody—need for liquidity and a board represented venture capital firm’s desire for a near-term sale, caused Stollmeyer to shop the Company. 

By August of 2018, Stollmeyer commenced an informal sale process without the board’s consent or knowledge, which the trial court found ultimately allowed Vista Equity Partners Management, LLC (“Vista”) to obtain a competitive advantage over other potential acquirers.   For example, Stollmeyer engaged an investment banker who set up a meeting with a Vista principal and a senior vice president, where Stollmeyer informed the two of his desire to “find a good home for his company,” information he did not have authorization to disclose.  Shortly after that meeting, Stollmeyer advised the board of his conversation but failed to mention any discussion of a potential sale.  At the request of the Vista representatives, Stollmeyer attended Vista’s CXO Summit.  During a one-on-one meeting with Vista’s founder at the Summit, Stollmeyer stated his intent to explore a sale of Mindbody, something he admitted to not having board authorization to say and information that was not otherwise available to the market. 

Based on Stollmeyer’s statements, Vista commenced its acquisition process, requesting a market study from Bain & Co. nearly one month before Mindbody contacted other potential acquirers.  Ultimately, Vista provided an oral expression of intent to Stollmeyer by stating it “would pay a substantial premium to Mindbody’s recent trading price.”  Stollmeyer then waited two days before informing his management team and another eight days to notify the entire board. 

By the end of October, the board appointed a transaction committee—with the VC firm’s designee serving as chair—to interview financial advisors and to make a recommendation.  Notably, the committee adopted guidelines that required management to obtain authorization before communicating with strategic partners or financial advisors. 

In November, the Company lowered guidance for Q4 earnings during an earnings call, which Stollmeyer acknowledged would affect a potential acquirer’s desire to purchase the Company.  Vista viewed the downgrade as an opportunity for a lower deal price and higher exit profit.  After the earnings call, Stollmeyer’s investment banker told Vista’s representative that Stollmeyer wanted a $40 per share minimum.  Vista was then able to run that number into its financial models.  By mid-November, Stollmeyer informed Vista of the upcoming sales process.  A few days later, Mindbody formally hired the investment banker Stollmeyer had been using during the informal deal process.  They planned to solicit strategic bidders on November 29 and financial sponsors on November 30.  Yet, the investment banker “formally” contacted Vista on November 30 but waited until December 3 and 4 to contact other financial sponsors.  With this leg up, Vista received its final market study two days before other financial sponsors had access to Mindbody’s data room.  At this point, Stollmeyer still had not informed the board of key information regarding the process: the VC firm’s desire to sell, Vista viewing Mindbody’s stock downturn as a buying opportunity, Vista’s intent to make an offer on a premium over its trading price, that Stollmeyer had already met with Vista more than once, his conversation with a Vista portfolio company CEO, and that he planned on stepping down in two or three years. 

Vista submitted an offer to acquire Mindbody for $35 per share, with a 24-hour deadline, three days after the data room opened to the remaining bidders on December 18.  However, the other bidders were further behind in diligence and unprepared to make an offer.  Two days later, Mindbody made a counteroffer of $40 per share, and Vista countered with a $36.50 best and final.  With all other bidders out, the entire board convened and directed management to accept the bid.  Following the merger agreement, Stollmeyer bragged that Vista was “able to conduct all of our outside work before the process launched[.]” 

The merger agreement provided for a 30-day go-shop and gave Vista the contractual right to review Mindbody’s proxy materials.  Under the merger agreement, if Vista became aware of material facts that were omitted from the proxy information, Vista had an obligation to inform Mindbody.  That obligation was a key component of the Court of Chancery’s conclusion that Vista provided substantial assistance and thus aided and abetted the CEO’s disclosure breaches. 

On January 4, 2019, Mindbody determined it had beaten Wall Street consensus estimates for Q4 revenue.  It did not include that information in its January 9 preliminary proxy related to the deal.  After discussing whether to disclose the Q4 earnings while stockholders deliberated over approving the deal, Mindbody’s audit committee voted against disclosure.  Mindbody’s initial proxy also omitted references to some of Stollmeyer’s meetings with Vista and Vista’s expression of interest in mid-October.  The definitive proxy and supplemental disclosures told stockholders about Stollmeyer’s additional meetings with Vista representatives and attendance at the summit but failed to include the substance of his conversations.

Litigation ensued.  After trial, the Court of Chancery found Stollmeyer liable for damages of $1 per share for breaching his duty of loyalty under Revlon.  Also, it awarded damages of $1 per share against Vista and Stollmeyer jointly and severally for the disclosure violations.

Defendants Appeal

On appeal, the defendants challenged the Court of Chancery’s holdings (1) that Stollmeyer breached his fiduciary duty of loyalty under Revlon, (2) that Stollmeyer breached his fiduciary duty of disclosure, (3) that Vista aided and abetted Stollmeyer’s disclosure breach, (4) awarding $1 of damages for Stollmeyer’s Revlon breach, and (5) refusing to apply a settlement credit under DUCATA. 

Regarding the first and second arguments concerning Stollmeyer’s liability, and the resulting damages, the Court affirmed the Chancellor’s holdings that he breached his duties of loyalty and disclosure and owed $1 in damages.  As to loyalty, the “paradigmatic” Revlon claim entails a “conflicted fiduciary who is insufficiently checked by the board and who tilts the sale process toward his own personal interests in ways inconsistent with maximizing stockholder value.”  The trial court’s factual findings supported that Stollmeyer’s subjective intent surrounding his financial position, favoritism for Vista, and desire to sell fast resulted in disabling conflicts.  The same was true as to the disclosure violations, with the Supreme Court agreeing that his omissions, in aggregate, were material, with the strongest claims concerning his tips to Vista concerning pricing and process timing that violated transaction committee guidelines.  The Court believed any reasonable stockholder would find those tips favoring one potential acquirer “indicative of potentially flawed sale process” and “important in considering whether to vote to approve the merger.”  Without that material information, the Court also agreed with the Chancellor that Corwin cleansing defense was unavailable.  The evidence also supported the $1 per share in damages for Stollmeyer’s duty of loyalty breach.  And the Supreme Court agreed that the defendants waived their right to seek settlement credit under DUCATA by failing to adequately apprise the plaintiffs pre-trial that they intended to pursue a settlement credit.

The Court then analyzed the various novel issues implicated by the Chancellor’s holding that Vista aided and abetted Stollmeyer’s disclosure breach, noting “how thin the case law” was on the issues.  That included when the Court can hold third-party buyers  liable for aiding and abetting fiduciary breaches (which the Supreme Court explained it had never done), whether contractual duties in a merger agreement could create fiduciary duties for third parties to the target’s stockholders, and whether a passive failure to act may give rise to liability.  In total, for the reasons discussed below, the Court concluded that Vista had not substantially assisted the disclosure breaches to warrant aiding and abetting liability.

Focusing on the disputed “knowing participation” element, the Court reaffirmed that the knowledge (scienter) prong contains two distinct concepts: the plaintiff must prove that the aider and abettor knew that “the primary party’s conduct constitue[d] a breach” and “that its own conduct regarding the breach was legally improper,” which is distinct from knowledge of the primary party’s conduct. 

The Court began its discussion by acknowledging that participation should “be the most difficult to prove” against a potential acquirer who negotiated at arm’s-length.  Such an acquirer is protected in its attempt to reduce the sale price through arms’-length negotiations so long as it is not exploiting conflicts, and a different rule might deter third parties from deals altogether. 

Turning to the aiding and abetting analysis, the Court adopted the Restatement (Second) of Torts § 876(b) factors to determine whether conduct amounts to “substantial assistance.”  Under those factors, one must actively participate in the breach, rather than have “mere passive awareness.”  In reviewing the Restatement factors, the Court held that Stollmeyer’s November tips supported the trial court’s conclusion that Vista likely knew that Stollmeyer’s conduct constituted a breach but reversed the Chancellor’s finding that Vista knew of the wrongfulness of its own conduct.  Considering Vista’s awareness of its own misconduct, the Court stated that the Chancellor’s finding that Vista participated in the drafting of the proxy materials was not supported by the record evidence, and the trial court did not find Vista actively contributed to drafting or editing the proxy materials.  The Court held that passive awareness of a fiduciary’s disclosure breach that would come from reviewing draft proxy materials did not amount to taking actions to facilitate or assist Stollmeyer’s breach.  Rather, they stood by passively while he breached his own duty of disclosure.

As part of this analysis, the Supreme Court took on perhaps the most interesting portion of the Court of Chancery’s ruling:  what obligations did Vista undertake by negotiating for a contractual obligation in the merger agreement to review and comment on public disclosures for the deal?  It was here that the Supreme Court parted company from the Court of Chancery on both a factual issue and legal conclusion.  Factually, the Supreme Court concluded the finding that Vista had participated in drafting the proxy was not supported by record evidence.  Legally, the contractual obligation in the merger agreement did not impose an independent duty of disclosure to Mindbody’s stockholders on Vista.  That meant there was no basis for the trial court’s ruling that Vista had “withheld information from the stockholders.”  One of the bases for this conclusion was “compelling public policy reasons” of not collapsing the arms’-length distance between the third-party buyer and target to make the buyer consider duties to target stockholders, which could potentially have to “second-guess the materiality determinations and legal judgment of the target’s board,” which does owe fiduciary duties to the target stockholders.

Finally, the Supreme Court analyzed the Restatement’s “state of mind” factor and the evidence the Court of Chancery had evaluated below.  To the Supreme Court, the evidence pointed to below—scrubbing of “incriminating” information from investment committee materials that related to communications with the CEO—was insufficient given the timing of when it occurred (almost a month before the drafting of the proxy) and that it pointed to the fact that the primary violator may have violated his Revlon duties, not his disclosure duties.  Given that the aiding and abetting claim focused on the disclosure breaches, the plaintiffs needed to show that Vista knew its own conduct was wrongfully assisting the CEO in those specific breaches, and the evidence did not do so.

Together, the record analyzed through the Restatement’s factor did “not support a determination that Vista’s conduct [rose] to the level of ‘substantial assistance’ or ‘participation’ in” the CEO’s breach.  That warranted reversing the holding below that Vista aided and abetted Stollmeyer’s disclosure violation.  Because the plaintiffs were only entitled to one recovery of $1 per share, and with the Revlon damages award affirmed, the ruling also meant that the Court did not need to analyze damages for the disclosure violation.

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