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ln re Mindbody, lnc. Stockholders Litigation,
No. 2019-0442-KSJM (Del. Ch. Oct. 2, 2020)
Why it is important
Summary
In In re Mindbody, Inc. Stockholders Litigation,
the plaintiffs alleged that the defendants, the
officers and directors of Mindbody, Inc., breached
their fiduciary duties in connection with a goingprivate sale transaction due to conflicts of interest.
The plaintiffs alleged that, among other things,
the defendants “tilted the sale process” in favor of
the buyer based on personal financial stakes in the
going-private transaction, including promises of
future employment. The Delaware Court of Chancery
permitted claims to go forward against two executives,
but dismissed claims against the outside director.
In doing so, the Court of Chancery declined to apply
the business judgment rule and instead applied
enhanced scrutiny under Delaware’s Revlon standard,
which presumptively applies to change-of-control
transactions, and rejected defendants’ position that
the transaction was ratified by the stockholders under
Corwin on the grounds that the alleged conflicts
were not disclosed. This case serves as a reminder to
corporate officers that all potential conflicts of interest
– including an interest in continued employment,
as is often the case – will be closely scrutinized and
may create a risk of liability if they assume a role in
negotiating or approving a transaction, especially in
situations involving going-private transactions that
traditionally draw additional scrutiny.
Richard Stollmeyer founded Mindbody, Inc.
(Mindbody or the Company) in 2001 and became
the chairman of the board of directors and CEO of
the company in 2004. In 2012, venture capital firm
Institutional Venture Partners (IVP) purchased stock
in Mindbody and, in 2014, IVP’s general partner,
Eric Liaw, was appointed to the Mindbody board of
directors. Following two key acquisitions in 2018,
Mindbody’s stock price increased significantly.
Before Mindbody went public in 2015, and again in
2017, Stollmeyer communicated with Vista Equity
Partners (Vista) regarding the prospect of a takeprivate sale of Mindbody. Vista, however, “chose
not to engage in buyout talks at that time because
Mindbody stock was trading ‘at an all-time high.’”
In 2018, however, Vista changed its mind and
expressed interest in acquiring Mindbody. Following
the expression of interest, Mindbody management
lowered the Company’s guidance and, on the
earnings call for Q4 2018, noted several challenges
facing the Company. In response, Mindbody’s stock
price fell.
Later in November 2018, Mindbody pursued a
take-private transaction, forming a Transaction
Committee that hired a financial advisor to select
potential bidders, including Vista. After some price
negotiation, on December 23, 2018, the board
approved the sale to Vista, which was announced on
December 24, 2018.
Following the announcement of the transaction with
Vista, the plaintiffs brought suit against Stollmeyer,
Brett White, Mindbody’s CFO and COO, and Liaw,
alleging that they breached their fiduciary duties
by “initiating, timing, and tilting the sales process
in favor of Vista in their own self-interest” and
by “failing to disclose all material information
to Mindbody stockholders’ in advance of the
stockholder vote on the Merger.” The shareholders
asserted that each was conflicted because: (1)
Stollmeyer was motivated by his desire to obtain
liquidity and the prospect of future employment,
(2) Liaw was motivated by IVP’s desire to exit the
investment, and (3) White was motivated by the
prospect of future employment.
The court declined to dismiss the claims against
Stollmeyer and White. Applying enhanced scrutiny
under Revlon, the court found that the plaintiffs
sufficiently alleged that Stollmeyer was motivated by
his own desire for liquidity and his own employment
prospects, and that Stollmeyer purposely drove
down the stock price and provided Vista with
“information and timing advantages” throughout the
sales process. In so holding, the court held that the
formation of an independent committee to oversee
the transaction, standing alone, was insufficient
to overcome a pleading-stage inference of conflict.
Similarly, the court concluded that the plaintiffs
adequately alleged that White either acted with
gross negligence or reckless indifference throughout
the sales process, including in altering Mindbody’s
forecasts and providing timing and informational
advantages to Vista.
With regard to Liaw, however, the plaintiffs’ allegations
that Liaw was motivated to liquidate IVP’s investment
were insufficient to allege a claim for breach of
fiduciary duty. The court found the complaint lacked
any allegations that Liaw was involved in lowering
the Company’s guidance or in providing Vista any
advantages during the sales process.
Finally, the court declined to find that a fully
informed stockholder vote supported dismissal
under Corwin. Based on the allegations against
Stollmeyer, the court stated that “[g]enerally,
where facts alleged make the paradigmatic Revlon
claim reasonably conceivable, it will be difficult to
show on a motion to dismiss that the stockholder
vote was fully informed.” Here, the court found
that the allegations regarding Stollmeyer’s alleged
undisclosed conflicts were sufficient to defeat a
Corwin defense at the pleading stage.
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