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Structuring and implementing a good sale process is essential if directors and officers are to satisfy their fiduciary obligations in M&A transactions. That’s easier said than done, and the twists and turns of transactions often require tough judgment calls to be made in real time. All those gray areas may be why I find the Chancery Court’s recent decision in In re Mindbody Stockholders Litigation,(Del. Ch.; 10/20) sort of refreshing – there’s not a lot of “gray” in the allegations made here.

Whether the plaintiffs’ allegations are true or not remains to be seen, but their complaint lays out a fairly comprehensive roadmap for corporate fiduciaries on how not to conduct a sale process. The plaintiffs allege that the company’s CEO, Richard Stollmeyer, intended to tip the playing field in favor of his preferred private equity bidder, Vista Equity Partners, and failed to disclose a variety of material conflicts to his own board. Check out this excerpt from Troutman Pepper’s memo on the case:

The court held that it was reasonably conceivable that Stollmeyer tilted the sale process in favor of Vista (i) by lowering the Company’s guidance on the November 2018 earnings call to depress its stock to make it a more attractive target for Vista and (ii) by providing Vista with timing and informational advantages in diligence and in the go-shop process. The court also found that the go-shop was ineffective from a process standpoint because it spanned Christmas and New Year’s Eve and required a competing bidder to make a bid, and the Company to accept that bid, within a mere 30 days.

Finally, the court held that it was reasonably conceivable that Stollmeyer failed to disclose his material conflicts to the board, including (i) his initial outreach to Qatalyst [the special committee’s investment banker] in August 2018, (ii) his desire to find a private equity buyer that would retain the management team, (iii) his failure to immediately disclose Vista’s initial indication of interest to the board, (iv) his failure to inform the board of his dealings with Qatalyst before the committee retained Qatalyst, and (v) his elimination of bidders with whom he did not wish to work from the sale and go-shop process, while providing Vista with timing and informational advantages.

Vice Chancellor McCormick also held that Corwin was unavailable to cleanse the transaction notwithstanding the fact that Mindbody’s shareholders approved it. The failure to disclose the CEO’s alleged conflicts of interests with the buyer and his efforts to tilt the sale process in its favor in the merger proxy featured prominently in the Vice Chancellor’s conclusion.

But that wasn’t the only disclosure issue that concerned her.  The company also failed to disclose its positive fourth quarter results prior to the shareholder vote – even though those results were in hand.  Vice Chancellor McCormick concluded that this failure rendered the proxy’s description of the merger consideration as representing a 68% premium to the then-current trading price of the Company’s shares misleading.

In declining to dismiss the case, the Vice Chancellor noted that the “paradigmatic” Revlon claim arises when “a supine board under the sway of an overweening CEO bent on a certain direction tilts the sales process for reasons inimical to the stockholders’ desire for the best price.”  She went on to say that “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.”

– John Jenkins