In re Mindbody, Inc., Stockholder Litigation
N/A - Full citation not provided in text. (2024)
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Rule of Law:
A buyer's failure to exercise a contractual right to correct known material omissions in a target company's proxy statement does not, by itself, constitute the 'substantial assistance' required to hold the buyer liable for aiding and abetting the seller's breach of its disclosure duty to its shareholders.
Facts:
- Richard Stollmeyer, CEO of Mindbody, was experiencing personal financial pressure and desired a liquidity event.
- Without board authorization, Stollmeyer initiated discussions with private equity firm Vista Equity Partners, stating he was 'tired' and wanted to find a 'good home' for Mindbody.
- Stollmeyer attended a Vista conference where he was impressed by the wealth creation potential, subsequently telling a colleague he 'love[d] them' and that Vista 'really love[s] me.'
- Stollmeyer's financial advisor, Qatalyst, tipped Vista that Stollmeyer's price target was at least $40 per share, and Stollmeyer later personally tipped Vista that a formal sale process was about to begin.
- Vista utilized this early, non-public information to begin due diligence and develop its acquisition strategy, which it called 'Sprinting,' well before other potential bidders were contacted.
- Mindbody's management, including Stollmeyer, issued conservative Q4 guidance that caused the company's stock to drop 20%, making a sale appear more attractive.
- Due to Vista's significant head start, the formal sale process lacked robust competition, leading to Vista's 'best and final' offer of $36.50 per share being accepted.
- The merger agreement gave Vista a right to review Mindbody's proxy statement, which omitted Stollmeyer's pre-process contacts and tips, but Vista did not request any corrections.
Procedural Posture:
- Mindbody stockholders sued Richard Stollmeyer (CEO) and Vista Equity Partners (acquirer) in the Delaware Court of Chancery for breaches of fiduciary duty and aiding and abetting.
- After a bench trial, the Court of Chancery found Stollmeyer had breached his duties of loyalty under Revlon and his duty of disclosure.
- The trial court also found that Vista had aided and abetted Stollmeyer's breach of his duty of disclosure.
- The court awarded damages of $1 per share against Stollmeyer and held Vista jointly and severally liable for the disclosure breach damages, allowing for only one recovery.
- In a subsequent opinion, the trial court held that the defendants had waived their right to seek a settlement credit under the Delaware Uniform Contribution Among Tortfeasors Act (DUCATA).
- Stollmeyer and Vista, as appellants, appealed the liability, damages, and waiver rulings to the Supreme Court of Delaware.
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Issue:
Does a buyer's failure to use its contractual right to review and comment on a target's proxy statement to correct known material omissions amount to 'knowing participation' sufficient to hold the buyer liable for aiding and abetting the target CEO's breach of his duty of disclosure?
Opinions:
Majority - Valihura, J.
No. A buyer's inaction, even when it has a contractual right to review and comment on a target's proxy, does not rise to the level of 'knowing participation' required for aiding and abetting liability. To be liable, a third-party buyer must provide 'substantial assistance' to the fiduciary's breach. Here, Vista's failure to correct omissions that the primary wrongdoer, Stollmeyer, already knew about constituted passive awareness, not the active assistance required by law. The contractual review right did not create an independent fiduciary duty from Vista to Mindbody's shareholders. While the court affirmed that Stollmeyer breached his duties of loyalty under Revlon by tilting the sale process for personal reasons and his duty of disclosure by allowing material omissions in the proxy, it reversed the trial court's finding that Vista aided and abetted that disclosure breach. The court affirmed the $1 per share damages award against Stollmeyer for the Revlon breach, finding a sufficient, if thin, evidentiary basis that Vista would have paid $37.50 per share in a fair process. The court also affirmed the trial court's holding that the defendants waived their right to a settlement credit by failing to raise the issue until a footnote in their final post-trial brief.
Analysis:
This decision significantly clarifies and heightens the standard for holding an arms'-length buyer liable for aiding and abetting a target fiduciary's breaches. By requiring 'substantial assistance' rather than mere passive awareness, the court provides greater protection to buyers in M&A transactions, ensuring they are not held to a quasi-fiduciary standard for the seller's disclosure failures. The ruling establishes that standard contractual proxy review rights in a merger agreement do not, in themselves, create a duty to the target's shareholders or transform a failure to act into culpable participation. This precedent will likely reduce litigation risk for acquirers and allow them to negotiate deals without fear of liability for the target's misconduct, so long as they do not actively conspire or assist in it.
