Defendant Richard Stollmeyer founded Mindbody, Inc., a software-as-a-service company serving the fitness, wellness, and beauty industry, in 2000. In 2015, he took the company public while remaining its CEO. Following the IPO, Stollmeyer held Class B shares that gave him the second largest block of votes; however, these shares were due to be diluted in October 2021 under a sunset clause, which would reduce his voting power to less than 4%. Mindbody's largest stockholder at the time, Institutional Venture Partners (IVP), was considering an exit due to the same sunset provision. For these and other reasons, Stollmeyer decided he wanted to sell the company.
In August 2018, an investment banker offered to connect Stollmeyer with a private equity firm and potential acquirer, defendant Vista Equity Partners Management, LLC. Stollmeyer met with Vista representatives in September 2018, but while he disclosed the meeting to Mindbody’s board, he did not detail the meeting or discuss his meeting with the investment banker. The Board directed Stollmeyer to familiarize himself with the topic of potentially selling Mindbody but not to get "too far advanced" in his conversations with Vista.
The following month, Stollmeyer requested and held a meeting with Vista's founder to discuss Vista’s potential acquisition of Mindbody. Stollmeyer then took further steps to discuss a possible sale with the investment banker and Vista, without fully informing or receiving authorization from Mindbody’s board. The board created a transaction committee, but it was chaired by a company shareholder with a personal interest in an expedited sale, and engaged the same investment banker that had introduced Stollmeyer to Vista. The investment banker later tipped Vista off to Mindbody’s target sale price, giving Vista a further advantage in bidding to acquire the company. Vista submitted a formal bid, which it later revised to US$36.50 per share, and on December 23, 2018, the parties signed a Merger Agreement for Vista to acquire Mindbody.
The owners of the second largest block of Mindbody shares brought suit in the Court of Chancery on behalf of a class of Mindbody's stockholders. The Plaintiffs claimed that Stollmeyer and members of the Board breached their fiduciary duties in connection with the Merger, and that Vista aided and abetted those fiduciary breaches. As to Stollmeyer, the Plaintiffs argued that he: (1) breached his fiduciary duties to stockholders by tilting the sale process in favor of Vista; and (2) committed disclosure violations by omitting details of the sale process and information related to Mindbody's revenue. The plaintiffs also alleged that Vista aided and abetted the sale process breaches and disclosure violations.
The Court analyzed the plaintiffs' claims under Revlon, evaluated the viability of Corwin, and assessed disclosure as an independent path to liability. The Court ultimately found that the conduct leading to the Merger fell outside the range of reasonableness.
In its Revlon analysis, the court found that Stollmeyer suffered from disabling conflicts as a fiduciary because he was (1) motivated by his need for liquidity; (2) partial to Vista before the formal sale process began; and (3) was aware of timing challenges for effectuating the transaction. The court found that the Board was unaware of Stollmeyer’s conflicts or resulting defects in the sale process, that the board had failed to adequately oversee Stollmeyer as a result, and that his actions had deprived the Board of the information necessary to participate in a reasonable decision-making process.
The court also held that Corwin cleansing did not apply because stockholders were not aware of Stollmeyer’s conflicts or the way in which the process favored Vista.
The court found that Vista aided and abetted Stollmeyer’s disclosure violations because Vista knew the materiality of the information omitted from the Proxy Materials, which it had removed from the Investment Committee materials. Furthermore, the Merger Agreement contractually obligated Vista to correct any material omissions in the Proxy Materials, which it did not do despite participating in drafting and reviewing those materials. The court found defendants jointly and severally liable for damages of US$1 per share, reflecting the difference between the purchase price and the price the court found Vista would have paid under a fair process.
Authored by Ryan M. Philp, David R. Michaeli, and Jocelyn Hassel.
