DealLawyers.com Blog

Last week, in In re Mindbody Stockholder Litigation, (Del. Ch.; 3/23), Chancellor McCormick held that Mindbody’s former CEO and its acquiror were jointly and severally liable for $44 million in damages to the company’s former stockholders due to the CEO’s breach of his fiduciary duties arising out of the sale process & misleading proxy disclosures.

I summarized the facts of the case, which were pretty egregious, in an earlier blog addressing the defendants’ motion to dismiss. The plaintiffs alleged that the target’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.

Those conflicts also weren’t disclosed in the merger proxy, and neither were the target’s positive fourth quarter results – even though the target had those results were in hand prior to the vote. 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.

Although other standards of review were potentially available, the Chancellor determined to evaluate the CEO’s conduct under Revlon. She found that it fell far short of what his fiduciary duties required and was sufficient to taint the board’s entire process. She also found that Vista was liable for aiding & abetting the disclosure violations in the proxy materials. This excerpt from Debevoise’s recent memo on the decision summarizes her reasoning:

According to the court, the case presented a “paradigmatic” Revlon claim: Stollmeyer suffered a disabling conflict as a result of his interest in near-term liquidity as well as his expectation of lucrative post-merger employment by what would be a Vista portfolio company. According to the court, this led Stollmeyer to tilt the sale process by driving down Mindbody’s stock price and giving Vista informational and timing advantages over other bidders. The court also found that the board, unaware of Stollmeyer’s conflicts, failed adequately to manage them.

The court did not permit plaintiffs to advance a claim against Vista for aiding and abetting the sale process-related fiduciary duty breaches because plaintiffs failed to plead that claim until after trial. The court did hold, however, that Vista, which had a contractual obligation to correct any omissions in the proxy materials, aided and abetted the disclosure violations, which the court found to be an independent source of liability for both Vista and Stollmeyer—in addition to their making Corwin defense inapplicable,

Vice Chancellor McCormick held that the evidence demonstrated that Vista would have paid $37.50 had the CEO not “corrupted the process,” and the difference between that amount and the $36.50 per share actually paid by Vista formed the basis for her damage award against the CEO. She held Vista jointly and severally liable for the same amount, observing that although the precise amount of the harm stockholders suffered as a result of the misleading disclosures couldn’t be clearly established, “a $1 increase in the per share price would not have rendered the deal undesirable for Vista, nor would it represent a windfall to the class.”

– John Jenkins