IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE MINDBODY, INC., ) CONSOLIDATED
STOCKHOLDERS LITIGATION ) C.A. No. 2019-0442-KSJM
MEMORANDUM OPINION
Date Submitted: September 8, 2020
Date Decided: October 2, 2020
Joel Friedlander, Jeffrey M. Gorris, Christopher M. Foulds, Christopher Quinn,
FRIEDLANDER & GORRIS, P.A, Wilmington, Delaware; Gregory V. Varallo,
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington,
Delaware; Mark Lebovitch, Jeroen van Kwawegen, Christopher J. Orrico, Andrew
E. Blumberg, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New
York, New York; Co-Lead Counsel for Plaintiffs.
Lisa A. Schmidt, Robert L. Burns, Matthew D. Perri, RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware; Matthew Solum, Yosef J. Riemer, John Del
Monaco, Ian C. Spain, KIRKLAND & ELLIS LLP, New York, New York; Counsel
for Defendants Richard L. Stollmeyer and Brett White.
Ryan D. Stottmann, Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Patrick Gibbs, COOLEY LLP, Palo Alto,
California; Sarah Lightdale, COOLEY LLP, New York, New York; Counsel for
Defendant Eric Liaw.
McCORMICK, V.C.
This court has warned that the paradigmatic claim under Revlon, Inc. v.
MacAndrews & Forbes Holdings, Inc.1 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.”2 According to the
plaintiffs, this cautionary tale provided the template for the 2019 sale of
MINDBODY, Inc. (“Mindbody” or the “Company”) to Vista Equity Partners
(“Vista”) for $36.50 per share.
The plaintiffs allege that the three defendants tilted the sale process in Vista’s
favor due to the following conflicts of interest: Mindbody’s CEO and Chairman,
Richard Stollmeyer, was motivated by a need for liquidity and the prospect of future
employment with Vista. Mindbody’s CFO and COO, Brett T. White, was motivated
by the prospect of future employment. And one of Mindbody’s outside directors, Eric
Liaw, who was nominated to the board by a venture capital stockholder, was motivated
by the stockholder’s desire to exit its Mindbody investment.
The defendants have moved to dismiss the plaintiffs’ claims. They attack the
plaintiffs’ theory of conflict as to each fiduciary and describe the plaintiffs’
allegations concerning efforts to tilt the process in Vista’s favor as inadequate. They
contend that the involvement of an informed and engaged board of directors defeats
1
506 A.2d 173 (Del. 1986).
2
In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1002 (Del. Ch. 2005).
any claim for liability arising from the merger. They further assert that the merger
was ratified under Corwin by a fully-informed, uncoerced stockholder vote. All of
the defendants’ arguments ignore the well-pleaded allegations supporting the
plaintiffs’ paradigmatic Revlon claim, and this decision largely denies the motion.
I. FACTUAL BACKGROUND
The facts are drawn from the First Amended Verified Consolidated Class
Action Complaint (the “Amended Complaint”)3 and documents it incorporates by
reference.
A. The Company
In 2001, Stollmeyer founded Mindbody, a Delaware corporation, to operate
cloud-based business management and payments software for the wellness services
industry. In 2004, Stollmeyer became Chairman of the board of directors (the
“Board”) and CEO of the Company. Before the merger, Stollmeyer held
approximately 265,000 Class A shares, which carried one vote per share, and
approximately 1.5 million Class B shares, which carried ten votes per share.
Stollmeyer controlled 19.8% of the Company’s voting power.
By 2012, Mindbody had received multiple rounds of venture capital funding,
including from venture capital firm Institutional Venture Partners (“IVP”). Before
3
C.A. No. 2019-0442-KSJM, Docket (“Dkt.”) 146, First Am. Verified Consolidated Class
Action Compl. (“Am. Compl.”).
2
the Merger, IVP held approximately 1 million Class A shares and approximately 1.6
million Class B shares, giving IVP control over 24.6% of the Company’s voting
power. Liaw, IVP’s general partner, was appointed to the Board in February 2014.
At all relevant times, the eight-person Board comprised Stollmeyer, Liaw, and
non-parties Katherine Blair Christie, Court Cunningham, Gail Goodman, Cipora
Herman, Adam Miller, and Graham Smith.
B. Mindbody’s Pre-Merger Acquisitions
After going public in 2015, Mindbody made two strategic acquisitions. In
February 2018, Mindbody acquired FitMetrix, Inc. (“FitMetrix”), a company that
integrates fitness studio equipment and fitness wearables with performance tracking
technology. In April 2018, Mindbody acquired Booker Software, Inc. (“Booker”),
a company that offers cloud-based business management software for salons and
spas. Mindbody’s stock price closed at $37.50 per share after the Booker
acquisition.
Throughout 2018, Stollmeyer and White4 assured stockholders and analysts
that the Company’s post-acquisition integration efforts would yield significant
growth in 2019. For example, on a May 8, 2018 earnings call, Stollmeyer explained
that Mindbody was “significantly investing both in Booker and FitMetrix to set the
4
White held approximately 139,000 Class A shares and approximately 166,000 Class B
shares. He did not serve on the Board.
3
stage for a much greater growth to come.”5 He described Mindbody’s goal of exiting
2018 “with a truly unified and aligned business, capable of returning to profitability
and growing strongly for years to come.”6
Similarly, during a July 31, 2018 earnings call, Stollmeyer reported “solid
progress” on the Company’s integration efforts and explained that the Booker and
FitMetrix acquisitions would “fuel strong growth in the target market customer base
in 2019.”7 He further emphasized: “There’s no one in the world that has our go-to-
market capabilities now in any of our target markets and nobody has the strength of
our products . . . . [W]e’re very excited about our long-term growth prospects.”8
White stated on that call: “We remain on target to return to non-GAAP profitability
in 2019 . . . . [W]e’ve done a lot of heavy lifting on the integration.”9
Throughout September 2018, Stollmeyer and White continued to tout the
Company’s acquisitions as likely to spur growth. In a September 9, 2018 email to
Mindbody management, Stollmeyer endorsed an analyst report issued by Wells
Fargo Securities, which provided a price target of $45 per share based on the
Company’s growth projections, which were based on management’s guidance.
5
Am. Compl. ¶ 34.
6
Id.
7
Id. ¶ 35.
8
Id. ¶ 36 (alteration in original).
9
Id. ¶ 37.
4
On September 18, 2018, the Company hosted an analyst day. There,
Stollmeyer and White “highlighted the Company’s market dominance[] and growth
in various financial metrics.”10 Stollmeyer presented a slide deck that proclaimed
“The Integration is Working” and set forth the Company’s planned integration
timeline.11 After the conference, J.P. Morgan maintained an “Overweight”
recommendation with price target of $48 per share, reporting that Mindbody had “a
great competitive position and a long runway of companies to penetrate and grow as
customers.”12 KeyBanc also maintained an “Overweight” recommendation with a
price target of $47 per share, specifically citing a new payments platform called
“Payment 2.0” that had been rolled out to Mindbody’s salon and spa customers. 13
Mindbody’s stock price increased by almost 7% within a week of the analyst
day. On September 25, 2018, its stock price closed at $43.85 per share.
C. Incentives to Force a Sale of the Company
According to the Amended Complaint, Stollmeyer was motivated to force a
sale of Mindbody despite the Company’s anticipated growth following the FitMetrix
and Booker acquisitions.
10
Id. ¶ 52.
11
Id.
12
Id. ¶ 53.
13
Id. ¶¶ 53–54.
5
Stollmeyer’s personal wealth was concentrated in Mindbody stock. In his
words, his wealth was “locked inside” Mindbody.14 Stollmeyer was unable to
liquidate his holdings on the market, except pursuant to a 10b5-1 plan, which he
analogized to “sucking through a very small straw.”15 In a post-merger podcast
interview, Stollmeyer put it this way:
[F]or the entrepreneur or particularly for the CEO, [an
IPO] is not a liquidity event. Your capital is locked inside
the business, and you can sell tiny bits of it, called the
10b5-1 plan where you decide essentially a year in
advance, a couple of quarters in advance, you come up
with a plan that says sell off a little bit on these predefined
dates. It doesn’t matter if the stock got hammered, it
doesn’t matter if the stock’s high. So, it’s kind of like
sucking through a very small straw. For me, I had been at
it for a long time. . . . We were public in 2015, so I’d been
at it for 15 years. We would have public investors. I
would have them challenge me that I was selling my own
stock, and he was like, “Don’t you believe in your own
company, Rick?” 98% of my net worth is in the stock of
my company, which is extremely volatile. I’m in my 50s
now, and I’ve got kids in college. What kind of question
is that?16
14
Id. ¶¶ 5, 40.
15
Id.
16
Id. ¶ 5 (quoting Alejandro Cremades, Rick Stollmeyer On Selling For $1.9 Billion The
Company That He Created Out Of His Own Garage, https://alejandrocremades.com/rick-
stollmeyer-on-selling-for-1-9-billion-the-company-that-he-created-out-of-his-own-
garage/).
6
Stollmeyer’s personal finances seemed stretched as of 2018.17 He had
invested $1 million in his wife’s wellness company and $300,000 into another
family-affiliated venture. He had pledged $3 million to a local college, of which
$2.4 million was unpaid. He had embarked on a home renovation project of over $1
million and held a sizeable mortgage. He had made loans to his brothers and former
business partner for their own real estate purchases. Plus, he wanted to make a six-
figure investment in his son’s start-up company, a six-figure loan to a friend, and
another six-figure investment in a new venture.
Stollmeyer had taken action to increase his liquidity in the first half of 2018.
He told his financial advisor that he would be “digging into his . . . [line of credit]”
to fund various expenses.18 He also executed a new 10b5-1 plan in February 2018,
pursuant to which he would sell 17,739 shares of Mindbody stock every month. As
Stollmeyer himself explained, these sales were “top of mind” for Stollmeyer due to
his significant personal expenses.19
The Amended Complaint also alleges that IVP was motivated to force a sale
of Mindbody, although the allegations as to IVP are less compelling than those
against Stollmeyer. IVP’s Mindbody investment was held by a fixed-life investment
17
Id. ¶ 42.
18
Id. ¶ 41 (alteration in original).
19
Id.
7
fund, which seeks to exit its investments between three to five years. According to
internal documents, IVP sought to exit its Mindbody investment in 2018, and Liaw
planned to step down from the Board in 2019. As of 2018, however, IVP had not
yet had an exit opportunity. IVP could not easily sell its large block of Mindbody
stock on the public markets without accepting a discount.20
D. Stollmeyer Receives a Direct Expression of Interest from Vista
and Instructs Senior Management Not to Discuss a Sale of the
Company with the Board.
In the years preceding the Company’s initial public offering in 2015,
Stollmeyer had discussed a potential buyout with Vista, a private equity firm.
Stollmeyer and Vista communicated again in 2017, but Vista chose not to engage in
buyout talks at that time because Mindbody stock was trading “at an all-time high.”21
Vista’s attitude changed in late 2018. On August 7, 2018, Stollmeyer met
with an investment banker from Qatalyst Partners (“Qatalyst”) named Jeff Chang.
According to the Amended Complaint, Stollmeyer “shared his frustrations with
running a public company and his preference for selling Mindbody to a private
20
The Amended Complaint also alleges that Stollmeyer and IVP were motivated to sell in
2019 because they faced a potential diminution of their voting power in 2021. Before the
Merger, Stollmeyer and IVP collectively controlled approximately 44% of Mindbody’s
voting equity, mostly through their Class B shares. The Class B shares, however, were set
to convert automatically to single-vote Class A shares sometime in 2021. The automatic
conversion would have reduced Stollmeyer and IVP’s collective voting power to 10%.
This diminution of voting power would make it more difficult for Stollmeyer and IVP to
force a sale of the Company.
21
Am. Compl. ¶ 32.
8
equity fund that would agree to employ Stollmeyer and his management team in the
post-merger entity.”22 Chang reconnected Stollmeyer with one of Vista’s principals,
Monti Saroya, and introduced Stollmeyer to contacts at two other private equity
firms.
Stollmeyer did not meet with either of the two other firms until mid-October
and early November, but he met with Vista right away. Vista had a history of
retaining management in take-private transactions and offering them compensation
packages with significant upside.23 On August 23, 2018, Saroya and another Vista
executive met with Stollmeyer to discuss Mindbody’s business and Stollmeyer’s
goals. Vista invited Stollmeyer to attend a summit for Vista’s portfolio company
founder-CEOs, whom Vista refers to as “CXOs” (the “CXO Summit”).24
The CXO Summit took place on October 8 and 9, 2018. There, Vista hyped
its “history of generating enormous wealth” for its CXOs and presented a slide that
read: “The Math: What’s in It for Me? CXO: $1.1 [Billion] Net Realized Wealth to
Date & $5.3 [Billion] in Potential Wealth Creation.”25 That slide included a bar
22
Id. ¶ 45.
23
The Amended Complaint alleges that Vista retained senior management at seventeen of
the twenty companies it acquired in 2017 and 2018. It also alleges that, in connection with
one of its buyouts, Vista provided buy-side equity that positioned the target entity’s CEO
to receive almost $1 billion over a seven-year period if Vista achieved a substantial return
on its investment.
24
Am. Compl. ¶ 49.
25
Id. ¶ 57.
9
graph that bore entries such as “Net Realized Wealth,” “Current Unrealized Wealth
Creation,” and “Wealth Potential.”26 Another slide explained: “$488.6 [Million]
Earned by Executives Since 2017 CXO.”27 Vista boasted that its funds’ total net
internal rate of return of 23.5% was five times larger than that of the S&P 500, six
times larger than the Russell 3000, and seven times larger than the NASDAQ 100.
After the CXO Summit, Stollmeyer sent a text to Saroya expressing that the
“[p]resentations [were] very impressive.”28 He also texted Mindbody President
Mike Mansbach that the presentations were “mind blowing” and “inspiring.”29 He
stated: “I actually like them. . . . You would too.”30 In October 2018, after the CXO
Summit, Vista and Qatalyst facilitated calls between Stollmeyer and at least two
Vista CXOs who had been retained by Vista post-acquisition.
Not long after that, on October 16, 2018, Saroya provided Stollmeyer with “a
direct expression of interest” to acquire Mindbody at “a substantial premium to [its]
recent trading range.”31 At the time, Mindbody’s thirty-day volume weighted
26
Id.
27
Id.
28
Id. ¶ 59.
29
Id.
30
Id.
31
Id. ¶ 65 (emphasis removed).
10
average price was $38.46, and Mindbody stock traded as high as $41.25 per share in
October.
Stollmeyer informed members of management—White, Mansbach, and
Mindbody general counsel Kimberly Lytikainen—of Vista’s expression of interest.
He said that Chang and Qatalyst “would be our best choice to advise as we explore
the possibility of taking [Mindbody] private in 2019.”32
Stollmeyer did not immediately disclose Vista’s expression of interest to the
Board,33 and he instructed White, Mansbach, and Lytikainen not to discuss a sale of
the Company with Board members: “I plan to socialize this possibility to the Board
Directors [sic] individually over the next week. Please do not hint or otherwise
discuss with them or anyone else until I have a chance to do so and give you the
green light.”34 After receiving Vista’s expression of interest, Stollmeyer advised
senior management that Mindbody “would lean into an acquirer who sees our current
32
Id. ¶ 68.
33
The Amended Complaint alleges that the disclosures concerning Vista’s expression of
interest are inconsistent with contemporaneous documents. For example, the Definitive
Proxy (defined below) states that on October 26, 2018, in response to an inquiry from Vista,
the Board discussed hiring a financial advisor and forming a Strategic Committee. But the
minutes of the Board meeting held on that date do not mention Vista’s expression of
interest, any potential sale process, the hiring of a financial advisor, or the formation of a
committee.
34
Am. Compl. ¶ 69 (emphasis removed).
11
capabilities” and that he “would not support the sale of [Mindbody] at this time in
any other circumstance.”35
On October 28, 2018, Stollmeyer sent Liaw and Goodman certain talking
points in which he expressed his view that Mindbody’s total addressable market was
“enormous and . . . ripe for the taking” and that Mindbody “would like to be able to
move more quickly out of the public eye and have a partner to work with that shares
the vision.”36 These talking points did not mention Vista’s expression of interest.
E. Management Lowers Guidance During the November 2018
Earnings Call.
On November 6, 2018, Stollmeyer and White led an earnings call during
which they lowered the Company’s guidance. Mindbody had planned to hold the
earnings call in October, but management made the decision on October 9, 2018, to
push the earnings call back to November.
With that extra time, Mindbody management looked for ways to issue lowered
guidance. In an October 17, 2018 email to Nicole Gunderson, Mindbody’s senior
director of investor relations, White asked if there was “a creative way to guide
2019” on the upcoming earnings call.37 In her response, Gunderson explained that
“even though the Company would realize the monetization of . . . Payments
35
Id. ¶ 68.
36
Id. ¶ 72.
37
Id. ¶ 79.
12
2.0 . . . , Stollmeyer wanted to guide below Wall Street expectations by ‘throwing
Booker under the bus.’”38
Other contemporaneous communications identified in the Amended
Complaint suggest that Stollmeyer’s desire to lower guidance was inconsistent with
management’s actual expectations.
On October 19, 2018, Mindbody’s Chief Strategy Officer, Josh McCarter,
observed that management’s draft presentation for an upcoming Board meeting
concerning the Company’s three-year plan was “shortchanging . . . payments and
related financial services.”39 He emphasized that the payments segment comprised
“almost 40% of [Mindbody’s] revenue” and had “a huge story to it” that Mindbody
could sell to its “team and investors.”40 He made a similar remark on
October 25, 2018, when he again viewed a draft Board presentation and expressed:
“I still feel we’re missing detail on Payments.”41
38
Id. Payments 2.0 was a newly implemented payment platform that simplified the on-
boarding process for new customers. It allowed for instant customer approval and for
Mindbody’s salon and spa customers to begin accepting and receiving payments in as little
as two days, whereas the pre-existing on-boarding process for new customers “could take
several days and 13 different steps to set up.” Id. ¶ 54. Payments 2.0 “incentivized
customers to take advantage of Mindbody’s payment processing services, increasing the
Company’s revenues and profits.” Id.
39
Id. ¶ 80.
40
Id.
41
Id. ¶ 81.
13
On November 3, 2018, one of Mindbody’s managers in financial planning and
analysis texted Mindbody’s senior finance manager: “We minimally beat in October
– that tells me we are on track to hit our forecast . . . . The question is – did the
assumptions we saw in month 1 cause us to think our assumptions for month 2 and
3 need to be revised – I do not know of anything . . . that would materially change
our assumptions for the preceding months.”42
Still, as he prepared for the earnings call, Stollmeyer told White and Mansbach
that “a few hundred thousand of Q4 revenue” would make a “huge difference” come
November 6, 2018.43 One reasonable reading of this email is that Stollmeyer was
looking for a way to negatively affect Mindbody’s stock price.
On the day before the earnings call, November 5, 2018, Stollmeyer convened
the Audit Committee44 to review the Q4 forecast and “align[] around a substantial
guide down for the quarter.”45 Stollmeyer edited the Company’s press release for
the upcoming earnings call to read: “While we remain excited about our long term
growth opportunities, we encountered greater operating challenges than expected in
42
Id. ¶ 84 (emphasis removed).
43
Id. ¶ 83.
44
With the exception of Liaw and Stollmeyer, the Amended Complaint does not identify
which Board members served on the Audit Committee.
45
Id. ¶ 86 (alteration in original).
14
Q3, and this caused our results to come in below expectations.”46 Stollmeyer revised
his script for the earnings call to note “execution challenges”:
We also experienced notable execution challenges in
Q3 . . . . These short term issues reflect in less than
anticipated Q3 revenues, and a significant reset to our Q4
growth expectations. In my view these challenges stem
from growing pains as our people, processes and systems
adjust to the increased complexity of our business post-
acquisitions.47
Stollmeyer and White then led the earnings call on November 6, 2018.
Mindbody’s Form 8-K dated November 6, 2018 projected revenues of $65 to $67
million, reflecting a $1 to $3 million reduction from the projected $68 million
Mindbody had disclosed in August of that year. After White provided this lowered
guidance on the earnings call, Stollmeyer explained:
The combined effects of our recent acquisitions, go-to
market reorganization and expanding consumer and
partner initiatives have made [Mindbody] a considerably
more complex business to operate than it was just 6
months ago, and we did not meet our growth expectations
in the second and third quarters. We expect this to
continue lagging a bit in Q4 as we communicated in our
last call -- or continue to lag the expectations we
communicated in our last call.48
46
Id. ¶ 87.
47
Id.
48
Id. ¶ 89.
15
In response to questions from analysts, Stollmeyer noted: “[W]e’ve been humbled
by the last couple of quarters in dealing with the magnitude of integrating these
businesses and ramping up growth at the same time.” 49
After the earnings call, every analyst but one downgraded or reduced their
price targets for the Company. One senior Mindbody executive confirmed that
analysts were concerned with management’s inconsistent messaging between the
“bullish tone at [Mindbody’s] recent analyst day” and the Company’s new narrative
that there would be “longer than expected integration and growth acceleration of
Booker.”50 Mindbody stock closed at $32.63 the day of the earnings call, and it
opened at $25.00 the next day.
The after-market reaction to the earnings call did not surprise Stollmeyer. On
November 6, 2018 Stollmeyer texted Chang, saying: “We’re not surprised by the
after-market reaction. I’m fine.”51 In an email dated November 7, 2018, Stollmeyer
explained: “We are resetting street expectations to position ourselves up for future
beat and raises. We have a strong year of growth planned in 2019.”52
In a November 13, 2018 interview with an analyst, White repeated
Stollmeyer’s narrative that the guide down was due to integration problems with
49
Id. ¶ 90.
50
Id. ¶ 94.
51
Id. ¶ 96 (emphasis removed).
52
Id. ¶ 97 (emphasis removed).
16
Booker. And Liaw privately explained to his partners at IVP that “the company will
be in the penalty box through Q4 for sure with lots of questions in investors’ minds
until (i) 2019 guidance is provided on the Q4 call and (ii) progress is made against
those goals.”53
F. The Sale Process
At some point after Vista’s expression of interest, the Mindbody Board
formed a committee that eventually became known the “Transaction Committee.”
The Definitive Proxy (defined below) states that the committee was formed on
October 26, but the source of that date is unclear, as the minutes of the
October 26, 2018 Board meeting do not mention the formation of a committee,
Vista’s expression of interest, any potential sale process, or the hiring of a financial
advisors. The committee was chaired by Liaw and additionally comprised
Stollmeyer, Cunningham, and Goodman.54
The Transaction Committee was initially formed “for the limited purpose of
reviewing the potential engagement of a financial advisor to assist Mindbody with
53
Id. ¶ 99.
54
Liaw played some role in forming the committee. Around October 30, 2018, Liaw sent
Lytikainen an email with the subject line “Ad hoc committee.” Id. ¶ 74. Liaw copied
Stollmeyer, Goodman, and Cunningham on the email. The email explained: “The directors
on this email have agreed to form an ad hoc strategy committee for the company.” Id.
17
evaluating potential strategic alternatives and evaluating candidates for this role,
including Qatalyst.”55
Qatalyst and one other potential advisor presented to the committee on
November 14, 2018. Stollmeyer had already met with Qatalyst before the meeting
and had received text messages containing deal advice from Qatalyst the morning of
the meeting. During the meeting, Stollmeyer pushed to retain Qatalyst in part
because Qatalyst had “proven results with [Mindbody’s] most likely suitors.”56
Qatalyst presented a process timeline that contemplated four to five weeks for the
submission of indications of interest, another four weeks to submit a final bid, and a
tentative deal announcement date of February 18, 2019. The Transaction Committee
took Stollmeyer’s direction and authorized the retention of Qatalyst.
Stollmeyer and Qatalyst then selected potential bidders for Qatalyst to contact.
The Amended Complaint alleges that the list of potential bidders did not include
“logical” financial or strategic buyers, including those that “may not have needed
Stollmeyer and his management team to build Mindbody into a great company.”57
During the selection process, McCarter recommended that Mindbody reach out to
Global Payments Inc. because “[t]hey are making a push into [certain software] so
55
Id. ¶ 102 (emphasis removed).
56
Id.
57
Id. ¶ 105.
18
they would possible [sic] be a good one if we’re trying to push valuation up.”58
Stollmeyer rejected this recommendation for personal reasons, explaining to
McCarter that he “didn’t want to work for a Payments company.” 59
The Board expanded the Transaction Committee’s mandate on
November 26, 2018. As expanded, the Transaction Committee’s mandate was:
[T]o advise, direct and oversee management of
[Mindbody] in the review and negotiation of strategic
alternatives, to evaluate indications of interest related
thereto, to initiate solicitations of indications of interest, to
meet on a regular basis with the management of
[Mindbody] concerning such activities, and to make
recommendations to the Board of Directors with respect to
the foregoing . . . .60
Stollmeyer had been in touch with Vista throughout this time. He had texted
Saroya a few days after the earnings call and met Saroya at Vista’s San Francisco
offices thereafter. Vista sent diligence requests in late November 2018 to
Stollmeyer, White, and Liaw. Stollmeyer and White used that list to populate a data
room for Vista. Vista and entities providing financing to Vista received access to
over 1,000 documents. Stollmeyer and Saroya repeatedly communicated concerning
Vista’s review of the data room. Stollmeyer provided Saroya with real-time input
on Vista’s valuation model.
58
Id. (emphasis removed).
59
Id. (emphasis removed).
60
Id. ¶ 108.
19
Other potential acquirers received less information and in a less timely
fashion. Four private equity firms received access to a data room containing only
thirty-five documents between December 15 and December 19, 2018. Another
private equity firm was not granted access to the data room at all. One interested
technology company received access to just 36 documents between December 17
and 20, 2018. And when it asked for certain information, Stollmeyer refused to
provide it, taking the position that “we’d like to hold off on sharing our marketplace
analysis on this until we have price [sic] on the table.”61 Stollmeyer later admitted
that he did not want to work for that technology company. 62
Vista submitted an offer to buy Mindbody at $35 per share on
December 18, 2018.63 The offer letter stated that Vista was “thoroughly impressed
with Mindbody’s executive management team” and “look[ed] forward to forming a
successful and productive partnership with them going forward.”64 It further stated
that Vista “seeks to invest in and partner with superior management teams” and that,
“[t]hrough equity participation programs and incentive structures, Vista seeks to
align management’s incentives with its own in any potential transaction.”65 Qatalyst
61
Id. ¶ 119.
62
Id. ¶ 112.
63
Id. ¶ 116.
64
Id. ¶ 118 (alteration in original).
65
Id. (alteration in original) (emphasis removed).
20
informed Stollmeyer and White that management could expect to receive a 10%
equity stake in the post-merger entity, doubling management’s pre-deal stake in the
Company.66
At the time Vista submitted its offer, other potential acquirers were still early
or mid-way through the diligence process. As Qatalyst informed the Transaction
Committee on December 19, 2018, two firms were still engaged in due diligence at
that time, and a third was early in its due diligence process. The Transaction
Committee directed Qatalyst to communicate to all potential bidders “the
competitive nature of the process, accelerated timeline, and the need for prompt
indications of interest.”67 Qatalyst instructed two of the firms to provide an
indication of interest within the next 24 to 48 hours.
In response to the Transaction Committee’s acceleration of the process, all
other potential bidders withdrew. They indicated that could not produce bids on “a
timeline that would be competitive with Vista.”68
G. The Board Approves a Sale to Vista.
On December 20, 2018, the Board met with Qatalyst and senior management
to discuss Vista’s bid. The Board instructed Qatalyst to seek a $40 per share price
66
Id. ¶¶ 62, 124.
67
Id. ¶ 121.
68
Id. ¶ 122.
21
from Vista. Qatalyst relayed the message. Vista then made a “best and final” offer
of $36.50 per share on December 21, 2018.69 Liaw emailed his IVP colleagues
stating that he thought Vista would “come up to $38” but that the market was
depressed and “the rest of the possible field is far behind.”70
The Board held a meeting to discuss the counteroffer on December 23, 2018.
Qatalyst advised that other potential bidders needed time to complete due diligence
before they could submit bids. Qatalyst then delivered a fairness opinion. The Board
unanimously approved a sale of Mindbody to Vista at a price of $36.50 per share
(the “Merger”) and entered into a merger agreement dated December 23, 2018 (the
“Merger Agreement”).
Mindbody and Vista announced the Merger on December 24, 2018. The
Amended Complaint alleges that the Company “tout[ed] that the Merger provided a
68% premium to Mindbody’s per share closing price of $21.72 on December 21.”71
But the deal price of $36.50 was also an 18.2% discount to Mindbody’s 52-week
high of $44.60 per share, a 16.8% discount to Mindbody’s stock price in late
September of $43.85 per share, and a 5.1% discount to Mindbody’s 30-day volume
weighted average price before Vista’s initial expression of interest.
69
Id. ¶ 124.
70
Id. (emphasis removed).
71
Id. ¶ 127.
22
The day the deal was announced, an investor asked Stollmeyer whether he
was “going to retire . . . [o]r keep running it.”72 Stollmeyer responded: “Vista loves
me and wants us to step on the gas. No retirement in my headlights!”73 Stollmeyer
expressed similar sentiments to two of his financial advisors in a text message:
“Vista’s in love with me (and me with them). No retirement in my headlights.
However, I will likely sell most or all of my stock. It will be incumbent upon them
to provide compelling incentives.”74
H. The Go-Shop
The Merger Agreement provided a thirty-day go-shop period during which
Mindbody could solicit and negotiate alternative acquisition proposals. The go-shop
started on December 24, 2018—Christmas Eve—and ended on January 22, 2019.
The go-shop provision required that a competing bidder make a contractually
defined “Superior Proposal” that had to be accepted within the go-shop period to
reduce the termination fee. Mindbody populated the go-shop data room with
diligence Vista had received before making its initial bid of $35 per share, but “with
some subtractions.”75 The go-shop data room did not include additional diligence
Vista received before making its final bid of $36.50 per share. Two prospective
72
Id. ¶ 155.
73
Id. ¶¶ 10, 155 (emphasis removed).
74
Id. ¶ 155 (emphasis removed).
75
Id. ¶ 137.
23
acquirers communicated that they could not compete for Mindbody because of the
go-shop’s highly compressed timeline. And Mindbody delayed its negotiations with
a potential strategic buyer concerning a non-disclosure agreement until only one
week was left in the go-shop period. White then delayed approving the potential
strategic buyer’s diligence requests.
Stollmeyer and White were on vacation during the go-shop period.
Stollmeyer went on vacation after the holidays and traveled to a remote location
where “cell service was spotty.”76 White was on vacation until January 4, 2019. On
January 6, 2019, White texted Stollmeyer: “I assume that we will be declining any
go shop management discussion until you return, correct?”77 Stollmeyer did not
return from his vacation until January 14, 2019, with only eight days remaining in
the go-shop period.
On January 11, 2019, while still on vacation, Stollmeyer accepted Vista’s
invitation to its February 2, 2019 CXO summit in Atlanta. Stollmeyer canceled his
travel plans for that week so he could attend the CXO summit and attend the Super
Bowl in Vista’s suite. The Amended Complaint contains a photograph depicting
Stollmeyer at the Super Bowl on February 3, 2019, with Saroya and a Vista CXO.78
76
Id. ¶ 135.
77
Id.
78
Id. ¶ 9.
24
I. Mindbody Fails to Disclose Its Q4 Results.
Meanwhile, Mindbody received its Q4 results in early January, reflecting
estimated revenues of $68.3 million. Recall that Stollmeyer and White had lowered
guidance from $68 million to $65 to $67 million on the November 6, 2018 earnings
call. As Stollmeyer commented in a January 5, 2019 email to senior management:
“Our estimated revenue of $68.3M reflects +37% growth [year-over-year] and a
massive beat against the Street’s consensus midpoint of $66M.”79 Mindbody’s Q4
revenues also exceeded the Company’s Q4 guidance before the guide down on
November 6, 2018.
Vista assumed that Mindbody would not provide it with the Q4 results because
Mindbody would then be required to provide other potential bidders with the Q4
results during the go-shop period. Vista employees commented in internal emails
that “anything [Mindbody] share[s] with us will need to go to other buyers[,] so they
may not share all the detail until after the go-shop.”80
White provided the Q4 results to Vista on January 8, 2020—before the go-
shop ended—but neither White nor Stollmeyer provided the Q4 results to other
potential bidders before the go-shop period expired.
79
Id. ¶ 139.
80
Id. ¶ 141 (first and second alterations in original).
25
After the go-shop, Mindbody internally discussed disclosing the Q4 results to
stockholders. On January 24, 2019, White emailed the Audit Committee stating that
“[s]ince [Mindbody’s] Q4 ’18 revenue exceeded consensus pretty meaningfully
($68.3m actual vs $66m consensus) we think the right thin[g] to do is to publicly
release this information via 8-K no later than Feb. 7 so the shareholders have the
information before they vote.”81 Liaw responded that he “agree[d] with this
approach.”82 Another Board member, Smith, responded that he wanted to know
what would happen “if the vote fails on Feb. 14” before weighing in on whether the
Q4 results should be publicly disclosed.83
Mindbody’s outside counsel, Cooley LLP (“Cooley”), even drafted a press
release concerning the Q4 results. On January 31, 2019, Cooley sent the pre-
announcement release to Vista and asked if “Vista ha[d] a different view on this
approach.”84 Counsel followed up the next day, asking: “[A]ny thoughts on the pre-
announcement? We are happy to discuss if Vista had different views on this
approach.”85 Mindbody did not disclose the Q4 results to stockholders before the
stockholder vote on the Merger.
81
Id. ¶ 142.
82
Id.
83
Id.
84
Id. ¶ 143.
85
Id.
26
J. The Merger Proxy and the Stockholder Vote
Mindbody filed its definitive proxy statement on January 23, 2019 (the
“Definitive Proxy”)86 and a supplemental proxy statement on February 7, 2019 (the
“Supplemental Proxy” and with the Definitive Proxy, the “Proxy”).87 The Amended
Complaint alleges that the Definitive Proxy omitted two categories of material
information.
The first category concerns Stollmeyer’s alleged conflicts and dealings with
Vista. The Definitive Proxy stated that “Vista and [Mindbody] had not engaged in
any employment or retention-related discussions with regard to [Mindbody]
management,”88 but the Supplemental Proxy stated more carefully that “Vista and
[Mindbody] had not discussed the terms of post-closing employment or equity
participation for [Mindbody] management.”89 Neither the Definitive Proxy nor the
Supplemental Proxy revealed the CXO Summit or the extent of Stollmeyer’s
interactions with Vista. The Proxy did not disclose that Vista expressed an interest
in acquiring Mindbody at “a substantial premium to recent trading range” on
86
Dkt. 169, Aff. of Matthew D. Perri, Esq. in Supp. of Defs.’ Combined Opening Br. in
Supp. of Their Mot. to Dismiss (“Perri Aff.”) Ex. 2.
87
Perri Aff. Ex. 11.
88
Definitive Proxy at 32.
89
Supplemental Proxy at 5.
27
October 16, 2018.90 The Proxy also did not disclose that Stollmeyer and White gave
Vista more information and input more timely than they gave other bidders.
The second category concerns the Q4 guidance and Q4 actuals. The Proxy
did not disclose Mindbody’s actual Q4 results, thereby leaving stockholders under
the impression that the Merger price offered a substantial premium when it is
reasonably conceivable that the premium resulted from the Q4 “guide down” on
November 6, 2018 that depressed the Company’s stock price.
On February 14, 2019, the holders of a majority of Mindbody’s voting power
voted to approve the Merger. As a condition to Vista’s execution of the Merger
Agreement, Stollmeyer and IVP executed irrevocable proxies directing the holder to
vote all Mindbody shares they beneficially owned in favor of the Merger.
Collectively, these irrevocable proxies represented approximately 32.1% of
Mindbody’s outstanding voting power (and approximately 46.2% of the vote when
taking into account Mindbody options and RSUs). The Merger closed the next day.
K. This Litigation
On January 29, 2019, after the Merger was announced and the Definitive
Proxy issued, a Mindbody stockholder named Philip Ryan, Jr. filed a class action
lawsuit in this court (the “Ryan Action”) challenging the validity of the
90
Am. Compl. ¶ 65 (emphasis removed).
28
February 14, 2019 stockholder vote.91 Ryan also alleged that the members of the
Board breached their fiduciary duties, including by failing to make proper
disclosures in the Definitive Proxy. After the Supplemental Proxy issued, Ryan
amended his complaint on February 13, 2019, largely maintaining his original claims
and additionally alleging that the Supplemental Proxy was deficient.92
On January 30, 2019, another Mindbody stockholder, Luxor Capital Partners,
LP, and its affiliates (collectively, the “Luxor Entities” or “Plaintiffs”) filed a Section
220 action in this court (the “Section 220 Action”).93 With documents obtained
through the Section 220 Action, on June 12, 2019, the Luxor Entities filed a class
action lawsuit in this court for breach of fiduciary duty against Stollmeyer, White,
and Liaw (the “Luxor Action”).94 On October 1, 2019, the court issued an Order
consolidating the Ryan Action and the Luxor Action, severing Ryan’s claims
challenging the technical validity of the stockholder vote, and appointing the Luxor
91
Ryan v. Mindbody, Inc., C.A. No. 2019-0061-KSJM, Dkt. 1, Verified Class Action
Compl.
92
Dkt. 6, Am. Verified Class Action Compl.
93
Luxor Cap. P’rs, LP v. Mindbody, Inc., C.A. No. 2019-0070-JTL, Dkt. 1, Verified
Compl. for Inspection of Books and Records. The affiliates comprise Luxor Capital
Partners Offshore Master Fund, LP, Luxor Wavefront, LP, and Lugard Road Capital
Master Fund, LP. At the time of the sale to Vista, the Luxor Entities beneficially owned
approximately 9 million Class A shares of Mindbody stock, representing approximately
18.9% of Mindbody’s outstanding common stock.
94
Luxor Cap. P’rs LP v. Stollmeyer, C.A. No. 2019-0442-KSJM, Dkt. 1, Verified Class
Action Compl.
29
Entities as lead plaintiffs to pursue the remaining claims. 95
The Luxor Entities filed their Verified Consolidated Class Action Complaint
on October 17, 2019,96 and then filed the Amended Complaint on February 20, 2020.
The Amended Complaint asserts two Counts. In Count I, Plaintiffs claim that
Stollmeyer and White breached their fiduciary duties in their capacities as officers
by initiating, timing, and tilting the sale process in favor of Vista in their own self-
interest. In Count II, Plaintiffs claim that Stollmeyer and Liaw breached their
fiduciary duties in their capacities as directors by failing “to disclose all material
information to Mindbody stockholders” in advance of the stockholder vote on the
Merger.97
Stollmeyer, White, and Liaw (collectively “Defendants”) moved to dismiss
the Amended Complaint on March 12, 2020.98 The parties completed briefing by
May 19, 2020,99 and the court held oral argument on May 27, 2020.100 After
95
Dkt. 36, Order Consolidating Related Actions, Severing Claim, and Establishing a
Leadership Structure.
96
Dkt. 45, Verified Consolidated Class Action Compl.
97
Am. Compl. ¶ 185.
98
Dkt. 167, Defs.’ Mot. to Dismiss First Am. Verified Consolidated Class Action Compl.
99
Dkt. 168, Defs.’ Combined Opening Br. in Supp. of Their Mots. to Dismiss (“Defs.’
Opening Br.”); Dkt. 174, Pls.’ Omnibus Answering Br. in Opp’n to Defs.’ Mots. to Dismiss
(“Pls.’ Answering Br.”); Dkt. 180, Defs.’ Combined Reply Br. in Supp. of their Mots. to
Dismiss (“Defs.’ Reply Br.”).
100
Dkt. 198, Oral Arg. on Defs.’ Mots. to Dismiss Held via Zoom.
30
argument, the Delaware Supreme Court published City of Fort Myers General
Employees’ Pension Fund v. Haley, addressing issues relevant to Defendants’
motion to dismiss.101 The court requested supplemental briefing on questions arising
from Haley,102 which the parties completed on September 8, 2020.103
II. LEGAL ANALYSIS
Defendants have moved to dismiss both Counts of the Amended Complaint
pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim on which
relief can be granted. “[T]he governing pleading standard in Delaware to survive a
motion to dismiss is reasonable ‘conceivability.’”104 When considering such a
motion, the court must “accept all well-pleaded factual allegations in the [c]omplaint
as true . . . , draw all reasonable inferences in favor of the plaintiff, and deny the
motion unless the plaintiff could not recover under any reasonably conceivable set
of circumstances susceptible of proof.”105 The court, however, need not “accept
101
-- A.3d --, 2020 WL 3529586 (Del. June 30, 2020).
102
Dkt. 201, Letter from the Hon. Kathaleen St. J. McCormick to Counsel Requesting
Suppl. Briefing.
103
Dkt. 203, Pls.’ Suppl. Br.; Dk. 204, Defs.’ Suppl. Br. in Supp. of Dismissal of the
Verified Consolidated Class Action Compl. (“Defs.’ Suppl. Br.”).
104
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del.
2011).
105
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).
31
conclusory allegations unsupported by specific facts or . . . draw unreasonable
inferences in favor of the non-moving party.”106
Plaintiffs’ theory of the case focuses on Stollmeyer, and this analysis follows
suit. The analysis begins by applying the Rule 12(b)(6) standard to Plaintiffs’ claims
against Stollmeyer, which are subject to enhanced scrutiny under Revlon unless
Defendants can demonstrate that Corwin cleansing applies. The analysis then
addresses Plaintiffs’ response to Corwin, which argues that the stockholder vote was
not fully informed. The analysis last addresses the claims against White and Liaw.
A. Plaintiffs Have Pleaded a Claim for Breach of Fiduciary Duty
Against Stollmeyer.
The cash-for-stock Merger was a final-stage transaction presumptively
subject to enhanced scrutiny under Revlon.107 The court must therefore examine
whether the fiduciaries of the corporation have performed their fiduciary duties “in
the service of a specific objective: maximizing the sale price of the enterprise.”108
106
Price v. E.I. du Pont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011) (citing Clinton
v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
107
506 A.2d 173 at 183.
108
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (citing Revlon, 506 A.2d at
183); see also Revlon, 506 A.2d at 182–83 (explaining that, in the change-of-control
context, the duty of loyalty requires “the maximization of the company’s value at a sale for
the stockholders’ benefit”); Paramount Commc’ns Inc. v. QVC Network, Inc., 637 A.2d
34, 44 (Del. 1994) (“In the sale of control context, the directors must focus on one primary
objective—to secure the transaction offering the best value reasonably available for the
stockholders—and they must exercise their fiduciary duties to further that end.”).
32
Under Revlon, “directors are generally free to select the path to value maximization,
so long as they choose a reasonable route to get there.”109
In Toys “R” Us, this court observed that “the paradigmatic context for a good
Revlon claim . . . is 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.”110 Put slightly differently, the paradigmatic
Revlon claim involves a conflicted fiduciary who is insufficiently checked by the
board and who tilts the sale process toward his own personal interests in ways
inconsistent with maximizing stockholder value.
Even when Revlon applies, a plaintiff must still plead facts sufficient to state
a non-exculpated claim against directors protected by an exculpatory charter
provision. This is because “Revlon neither creates a new type of fiduciary duty in
the sale-of-control context nor alters the nature of the fiduciary duties that generally
109
In re Answers Corp. S’holders Litig., 2011 WL 1366780, at *3 (Del. Ch. Apr. 11, 2011).
110
877 A.2d 975, 1002 (Del. Ch. 2005) (quoted favorably in Kahn v. Stern, 183 A.3d 715,
2018 WL 1341719, at *1 n.4 (Del. 2018) (ORDER)); see also Leo E. Strine, Documenting
the Deal: How Quality Control and Candor Can Improve Boardroom Decision-Making
and Reduce the Litigation Target Zone, 70 Bus. Law. 679, 683 (2015) (noting that non-
management directors rely principally upon management for advice, that a problem can
arise in that regard where management is conflicted, and that such a situation arises, for
example, “if a CEO has corralled his top four managers, gone off without board
authorization, baked up a proposal with his favorite private equity shop, and caused his
managers and himself to make contractual commitments to vote for the private equity
proposal and not to work for anyone else”).
33
apply”111—it is just “a context-specific articulation of the directors’ duties.”112 Well
pleaded facts that track the paradigmatic Revlon theory will typically support a non-
exculpated claim as to the conflicted fiduciary.113
A plaintiff need not plead a claim as to every board member or as to a majority
of the board to state a claim for liability under Revlon.114 The sins of just one
fiduciary can support a viable Revlon claim. A plaintiff can state a Revlon claim by
pleading that one conflicted fiduciary failed to provide material information to the
board or that the board failed to sufficiently oversee the conflicted fiduciary. 115
In this case, the Amended Complaint tracks the paradigmatic Revlon plotline.
Plaintiffs allege that Stollmeyer was conflicted because he had an interest in near-
term liquidity and an expectation that he would receive post-Merger employment
111
Malpiede, 780 A.2d at 1083.
112
Kahn, 2018 WL 1341719, at *1 n.3; see Malpiede, 780 A.2d at 1083–84 (“Although the
Revlon doctrine imposes enhanced judicial scrutiny of certain transactions involving a sale
of control, it does not eliminate the requirement that plaintiffs plead sufficient facts to
support the underlying claims for a breach of fiduciary duties in conducting the sale.”).
113
See In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1179–80 (Del.
2015) (observing that one way for a plaintiff to state a non-exculpated claim is to allege
“facts supporting a rational inference that the director harbored self-interest adverse to the
stockholders’ interests” and that the director acted to furtherance of that interest).
114
Kahn, 2018 WL 1341719, at *1.
115
Id. at *1 n.4; Mills Acq. Co. v. MacMillan, Inc., 559 A.2d 1261, 1283 (Del. 1989); In re
Xura, Inc. S’holder Litig., 2018 WL 6498677, at *13 (Del. Ch. Dec. 10, 2018); Toys “R”
Us, 877 A.2d at 1002–03. See generally Joel Edan Friedlander, Confronting the Problem
of Fraud on the Board, 75 Bus. Law. 1441 (2019) (collecting cases involving fraud-on-
the-board theories).
34
accompanied by significant equity-based incentives as a Vista CXO. Plaintiffs also
allege that Stollmeyer tilted the sale process by strategically driving down
Mindbody’s stock price and providing Vista with informational and timing
advantages during the due-diligence and go-shop periods. Plaintiffs further allege
that Stollmeyer withheld material information from the Board and that the Board
failed to adequately oversee Stollmeyer.
This section first addresses the allegations concerning Stollmeyer’s conflicts.
It then turns to the allegations concerning Stollmeyer’s efforts to tilt the sale process
in favor of Vista. It last evaluates the Board’s role in the process.
1. It is Reasonably Conceivable that Stollmeyer was
Conflicted.
It is a guiding principle of Delaware law that material amounts of stock
ownership can serve to align the interests of fiduciaries with the interests of other
stockholders.116 Defendants invoke this principle to argue that Stollmeyer’s interests
116
Chen v. Howard-Anderson, 87 A.3d 648, 670–71 (Del. Ch. 2014) (observing that
owning material amounts of stock “aligns [fiduciaries’] interests with other stockholders
by giving them a ‘motivation to seek the highest price’ and the ‘personal incentive as
stockholders to think about the trade off between selling now and the risks of not doing
so’” (quoting In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 600 (Del. Ch. 2010))); see
also Orman v. Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002) (“A director who is also a
shareholder of his corporation is more likely to have interests that are aligned with the other
shareholders of that corporation as it is in his best interest, as a shareholder, to negotiate a
transaction that will result in the largest return for all shareholders.”); In re Mobile
Commc’ns Corp. of Am., Inc. Consol. Litig., 1991 WL 1392, at *9 (Del. Ch. Jan. 7, 1991)
(observing that directors’ equity ownership created “powerful economic (and
psychological) incentives to get the best available deal”), aff’d, 608 A.2d 729 (Del. 1992).
35
aligned and did not conflict with the Mindbody stockholders’ interests in obtaining
the highest possible price. Stollmeyer owned significant amounts of Mindbody
stock, the value of his stock was directly tied to the Merger price, and he received
the same Merger consideration as every other stockholder. To Defendants, these
facts standing alone defeat any allegations that Stollmeyer’s interests conflicted with
those of the Mindbody stockholders.
Plaintiffs respond that, despite his significant stockholdings, it is reasonably
conceivable that Stollmeyer’s subjective desire for near-term liquidity and the
opportunity to continue as CEO of the post-Merger entity placed his interests in
conflict with the interests of the Mindbody stockholders.
Delaware law recognizes that “liquidity is one ‘benefit that may lead directors
to breach their fiduciary duties’” if a “‘desire to gain liquidity . . . caused them to
manipulate the sales process’ and subordinate the best interests of the corporation
and the stockholders as a whole.”117
117
In re PLX Tech. Inc. S’holders Litig., 2018 WL 5018535, at *41 (Del. Ch. Oct. 16, 2018)
(quoting In re Answers Corp. S’holder Litig., 2012 WL 1253072, at *7 (Del. Ch.
Apr. 11, 2012)); see also McMullin v. Beran, 765 A.2d 910, 922, 926 (Del. 2000)
(reversing the Court of Chancery’s grant of a motion to dismiss where it was alleged that
the company’s controller and its board designees “sacrifice[ed] some of the value of [the
target]” to accommodate the controller’s “immediate need for cash”); PLX, 2018 WL
5018535, at *42 (finding post-trial that two negotiators “had a divergent interest in
achieving quick profits by orchestrating a near-term sale at PLX”); Answers, 2012 WL
1253072, at *7, *9 (denying a motion to dismiss, observing that “[l]iquidity has been
recognized as a benefit that may lead directors to breach their fiduciary duties,” and
concluding that the complaint adequately alleged that a large stockholder’s liquidity needs
were a source of conflict for the stockholder’s two board appointees); N.J. Carpenters
36
Delaware law also recognizes that management’s prospect of future
employment can give rise to a disabling conflict in the sale context.118 This theory
is particularly viable where the future employment offers a marked increase in
compensation from the status quo.119
Regardless of the underlying theory, the key in evaluating whether financial
interests gave rise to a disabling conflict is to look to the subjective intent of the
Pension Fund v. infoGROUP, Inc., 2011 WL 4825888, at *9–10 (Del. Ch. Oct. 6, 2011)
(denying a motion to dismiss, observing that “[l]iquidity has been recognized as a benefit
that may lead directors to breach their fiduciary duties,” and finding that allegations of a
CEO’s “desperate[]” need for liquidity was a source of conflict for the CEO); In re Lear
Corp. S’holder Litig., 926 A.2d 94, 113 (Del. Ch. 2007) (granting a motion for a
preliminary injunction where the record supported a finding that the CEO, who was nearing
retirement, harbored liquidity driven conflicts that caused him to accept the suboptimal
merger price rather than hold out for a value maximizing transaction); In re Telecorp PCS,
Inc. S’holder Litig., C.A. No. 19260-VCS (Del. Ch. June 17, 2002) (TRANSCRIPT)
(denying a motion to dismiss and recognizing a large stockholder’s “desire[] to liquidate
its . . . holdings to meet increasingly pressing cash needs” as a source of conflict).
118
See, e.g., Xura, 2018 WL 6498677, at *13 (citing Beam ex rel. Martha Stewart Living
Omnimedia, Inc. v. Stewart, 833 A.2d 961, 977–78 (Del. Ch. 2003), aff’d, 845 A.2d 1040
(Del. 2004), which held in the demand futility context that the president, chief operating
officer, and director of the company “ha[d] a material interest in her own continued
employment”); Answers, 2012 WL 1253072, at *7 (denying a motion to dismiss where the
complaint alleged that the CEO’s desire to “keep his job [was] what caused him to seek a
sale”).
119
See, e.g., Haley, 2020 WL 3529586, at *12, *17 (reversing trial court’s decision to grant
a motion to dismiss where the plaintiffs had sufficiently alleged that the CEO’s interest “in
a compensation proposal having a potential upside of nearly five times his compensation
at [the target]” rendered him “materially interested in the transaction”); Xura, 2018 WL
6498677, at *13 (denying a motion to dismiss where the plaintiff alleged that the CEO’s
interests, which included “a $25 million payout and continued employment post-closing in
the face of his looming termination,” caused him to push for a near-term sale of the
company with little regard to value maximization).
37
fiduciary.120 At the pleading stage, the question is whether it is reasonably
conceivable that the fiduciary was subjectively affected by the conflict at issue.
In this case, Plaintiffs’ liquidity-driven and prospective-employment theories
of conflicts work in combination to land a powerful one-two punch on Stollmeyer,
rendering it reasonably conceivable that Stollmeyer subjectively harbored interests
in conflict with those of the Mindbody stockholders.
The court need not infer that Stollmeyer subjectively desired near-term
liquidity—he said as much himself. Almost all of Stollmeyer’s net worth pre-
Merger was, in his words, “locked inside” Mindbody stock, which he described as
“extremely volatile.”121 Because Mindbody was publicly traded, Stollmeyer could
only “sell tiny bits” of his Mindbody stock pursuant to a 10b5-1 plan—a process he
described as “kind of like sucking through a very small straw.”122 And Stollmeyer’s
personal financial situation was such that it required cash flow. After executing a
new 10b5-1 plan in February 2018, he explained to his financial advisor that the sale
of his Mindbody stock pursuant to that plan was “top of mind” for him because of
120
See Haley, 2020 WL 3529586, at *15 (observing, in analyzing whether an alleged
conflict was material, that the test is subjective and “not how or whether a reasonable
person in the same or similar circumstances would be affected by a financial interest of the
same sort as present in the case, but whether this director in fact was or would likely be
affected” (quoting Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1167 (Del. 1995)).
121
Am. Compl. ¶¶ 5, 40.
122
Id.
38
“greater than expected H1 cash outlays.”123 These cash outlays, the Amended
Complaint alleges, included a variety of significant personal expenses totaling
somewhere in the multi-millions.124 Indeed, Stollmeyer himself explained to his
financial advisors on the day the Merger was announced that he was “likely [to] sell
most or all of [his] stock.”125
Similarly, the court need not infer that Stollmeyer subjectively desired future
employment with and compensation from Vista—he said as much himself. The
Amended Complaint alleges that after Stollmeyer told Chang that he was motivated
to sell to a buyer who would retain his management team,126 Chang connected
Stollmeyer to Vista. Stollmeyer met with Vista to discuss his own “goals”127 and
then attended the CXO Summit, which he described as “mind-blowing” and
“inspiring.”128 There, Vista boasted that it had been able to generate $1.1 billion in
net realized wealth for its CXOs, that there still remained $5.3 billion in “potential
wealth creation,”129 and that Vista CXOs had earned $488.6 million in the past year
123
Id. ¶ 41.
124
Id. ¶ 42.
125
Id. ¶ 155.
126
Id. ¶ 45.
127
Id. ¶ 49.
128
Id. ¶¶ 9, 59.
129
Id. ¶ 57.
39
alone.130 Stollmeyer told Vista that the presentations were “very impressive.”131 He
told management: “I actually like them. . . . You would too.”132 Stollmeyer
communicated with Vista and Vista CXOs privately on numerous occasions before
and during the sale process.133 Moreover, Stollmeyer came to learn that management
would receive new options for 10% of the post-closing company, doubling
management’s pre-Merger equity stake in Mindbody.134 This was the cherry on top
for Stollmeyer, who on the day the Merger was announced stated to his financial
advisors in a text message: “Vista’s in love with me (and me with them). No
130
Id.
131
Id. ¶ 59.
132
Id.
133
See, e.g., id. ¶ 49 (“On August 23, 2018, Saroya and Vista Vice President, Nicholas
Stahl, met with Stollmeyer onsite at Mindbody to discuss Mindbody’s business and ‘Rick’s
goals.’”); id. ¶ 56 (“At the . . . CXO Summit, Stollmeyer continued his discussions with
Saroya and Vista co-founders Robert Smith and Brian Sheth.”); id. ¶ 59 (alleging that
Stollmeyer texted Saroya after attending the CXO Summit); id. ¶ 64 (“On
October 11, 2018, Chang asked Stollmeyer for more information . . . . Three days later,
Stollmeyer continued the discussion about a potential transaction with Saroya.”); id. ¶ 65
(explaining that Saroya provided Stollmeyer with a “direct expression of interest” to
acquire Mindbody at “a substantial premium to recent trading range” on October 16, 2018);
id. ¶ 101 (“On November 10, Stollmeyer texted Saroya, and asked to speak by phone.
Shortly thereafter, Stollmeyer and Saroya agreed to meet at Vista’s San Francisco
offices.”); id. ¶ 107 (“Stollmeyer continued his private conversations with Vista, including
on November 21, 2018.”); id. ¶ 113 (“Stollmeyer and Saroya continued text messaging and
speaking by phone throughout November and mid-December concerning Vista’s review of
the 1,000 documents in the data room to which Vista received access.”); id. ¶ 114 (“Saroya
and Stollmeyer spoke on the evening of December 17 to talk ‘about go to market and some
of [Vista’s] findings’ and they spoke again on December 18 . . . .”).
134
Id. ¶¶ 12, 62.
40
retirement in my headlights.”135
In briefing, Defendants ask the court to draw inferences directly contrary to
Stollmeyer’s own statements. They attack Plaintiffs’ combined theory in parts,
addressing the liquidity-driven and prospective-employment conflicts separately.
This approach not only fails to acknowledge the force of the combined argument,
but it also underestimates each theory in its own right.
As to the liquidity-driven theory, Defendants rely primarily on language from
In re Synthes, Inc. Shareholder Litigation136 for the proposition that liquidity needs
can give rise to a conflict only where there is a “crisis,” “fire sale,” or “exigent need”
for “immediate cash.”137 The court’s hyperbolic language in Synthes is best read in
the context in which it was issued, where then-Chancellor Strine was reacting to a
particularly poorly drafted complaint “strikingly devoid of pled facts to support” the
alleged liquidity-driven conflict.138
In Synthes, the plaintiffs alleged that a controlling stockholder breached his
fiduciary duties by refusing to consider an acquisition that would have cashed out
the minority stockholders but required the controller to remain as an investor.139
135
Id. ¶ 155 (emphasis added).
136
50 A.3d 1022 (Del. Ch. 2012).
137
Defs.’ Opening Br. at 30, 38–41, 56–60; Defs.’ Reply Br. at 13–16.
138
Synthes, 50 A.3d at 1037.
139
Id. at 1024.
41
Instead, the controller and the board negotiated an all-cash merger with a consortium
of private entities, where the controller and the minority stockholders received the
same consideration.140
In an effort to invoke the entire fairness standard, the plaintiffs alleged that
the controller had unique liquidity needs that infected the sale price.141 The
controller had retired from his management positions and stayed on as board
Chairman.142 He was 76 years old and was alleged to have a need to liquidate his
holdings to effectuate estate planning and tax goals.143 He directly owned around
38% and controlled 52% of the voting stock, and thus could not liquidate his stake
on the market without affecting the share price.144 The plaintiffs argued that, to
achieve his liquidity goals, the controller needed to sell to a single buyer promptly.145
The court summarized the plaintiffs’ theory as follows: “[The controller] was an
impatient capitalist looking to sell out fast and thus willing to take a less than fair
market value for [the company], if that got in the way of a hasty exit.”146
The court rejected the plaintiffs’ conflict theory at the pleading stage on the
140
Id.
141
Id. a 1025–26.
142
Id. at 1025.
143
Id.
144
Id.
145
Id. at 1025–36.
146
Id. at 1035.
42
ground that it was not reasonably conceivable. While recognizing that “[t]he world
is diverse enough” to make reasonably conceivable “narrow circumstances in which
a controlling stockholder’s immediate need for liquidity could constitute a disabling
conflict of interest irrespective of pro rata treatment,” the court further held that this
is an “uncommon scenario” that “ha[d] no application” in the case before it.147 The
court observed that the plaintiffs’ theory ran contrary to well-pleaded facts. The
plaintiffs admitted that the controller was a “loaded”148 “billionaire,”149 and pleaded
that the sale process was “a patient process reasonably calculated to generate the
highest value the market would pay for [the company].”150 Also, the plaintiffs pled
“no facts suggesting that [the controller] faced a solvency issue[] or even the need
to buy something other than a Ferrari or Lamborghini when he purchased his next
vehicle,” and made no allegations suggesting that the controller “was in any
particular rush to sell his . . . shares.”151 Indeed, by oral argument, the plaintiffs had
“retreated” from and “conceded that they did not plead facts supporting” aspects of
their liquidity-driven theory of conflict.152
147
Id. at 1036.
148
Id. at 1034.
149
Id. at 1025.
150
Id. at 1037.
151
Id. at 1036.
152
Id. at 1037.
43
The facts of Synthes stand in stark contrast to the facts of this case. The
Amended Complaint portrays Stollmeyer not as the “loaded” billionaire but, rather,
as an impatient capitalist sick of “sucking through a very small straw.”153 The
Amended Complaint adequately alleges that Stollmeyer was unable to access his
own wealth, was strapped for cash in light of significant personal expenses, and
made sure his financial advisors knew that the sales of what little he could sell were
“top of mind.”154 The allegations concerning Stollmeyer’s liquidity needs,
particularly when coupled with the allegations supporting Plaintiffs’ prospective-
employment theory, suffice to make it reasonably conceivable that Stollmeyer was
conflicted.155
153
Am. Compl. ¶¶ 5, 40.
154
Id. ¶ 41.
155
Policy considerations regarding controlling stockholders’ incentives also played a factor
in the court’s reticence to lend credence to the liquidity-driven conflict theory at issue in
Synthes. As the court observed, there are good policy reasons for incentivizing a controller
to agree to a transaction that treats all stockholders equally. “If one wishes to protect
minority stockholders, there is a good deal of utility to making sure that when controlling
stockholders afford the minority pro rata treatment, they know that they have docked within
the safe harbor created by the business judgment rule.” Synthes, 50 A.3d at 1035–36. By
contrast, if an inference that the controller desired liquidity—a desirable and frequent
byproduct of M&A transactions—standing alone could trigger the entire fairness standard
“even when [controlling stockholders] share the premium ratably with everyone else, they
might as well seek to obtain a differential premium for themselves or just sell their control
bloc, and leave the minority stuck.” Id. at 1035–36; see also Larkin v. Shah, 2016 WL
4485447, at *16 n.96 (Del. Ch. Aug. 25, 2016) (observing that the court in Synthes
recognized the “perverse incentives” for controlling stockholders that would result from a
contrary rule). These concerns are arguably less significant outside of the controlling
stockholder context, where the stockholder has less coercive leverage and no potential sale
of control threatens to leave minority stockholders “stuck.”
44
Of course, liquidity-driven theories of conflicts can be difficult to plead.156
This is because Delaware law presumes that investors are rational economic
156
Compare supra note 117 (collecting cases in which courts recognized liquidity-driven
theories of conflict), with In re Cyan, Inc. S’holders Litig., 2017 WL 1956955, at *10 (Del.
Ch. May 11, 2017) (recognizing liquidity as a potential source of conflict but granting a
motion to dismiss where the “bare allegation[s]” in the complaint were insufficient to
support the plaintiffs’ liquidity theory), In re Merge Healthcare Inc., 2017 WL 395981, at
*8 (Del. Ch. Jan. 30, 2017) (recognizing that circumstances in which an investor is required
“to dump stock, for liquidity purposes, at less than full value, create divergent interests”
but granting a motion to dismiss where the allegations were insufficient to support the
plaintiff’s liquidity theory), Gamco Asset Mgmt. Inc. v. iHeartMedia Inc., 2016 WL
6892802, at *16–17 (Del. Ch. Nov. 23, 2016) (recognizing that “a quick infusion of
cash . . . require[d] to satisfy [a] need for liquidity” is a “unique benefit” that can give rise
to a conflict, but granting a motion to dismiss where the allegations were insufficient to
support plaintiff’s liquidity theory), aff’d, 172 A.3d 884 (Del. 2017) (TABLE), Larkin,
2016 WL 4485447, at *16–17 (recognizing that liquidity-based conflict can exist in some
circumstances but granting a motion to dismiss where the complaint was “devoid of non-
conclusory allegations that would support a reasonable inference that the [relevant actors]
faced a unique liquidity need”), In re Zale Corp. S’holders Litig., 2015 WL 5853693, at *9
(Del. Ch. Oct. 1, 2015) (recognizing “cases in which a plaintiff’s allegations of a large
stockholder’s need for liquidity have been sufficient to defeat a motion to dismiss” but
granting a motion to dismiss the plaintiffs’ liquidity theory at the pleading stage because
they failed to allege more than “a simple desire to ‘sell quickly’”), In re Crimson Expl. Inc.
S’holder Litig., 2014 WL 5449419, at *14–15 (Del. Ch. Oct. 24, 2014) (recognizing
liquidity at the pleading stage as a “unique benefit” giving rise to conflict but granting a
motion to dismiss where the allegations were insufficient to support the plaintiff’s liquidity
theory), In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 661 (Del. Ch. 2013)
(recognizing liquidity as a potential source of conflict but granting a motion to dismiss
where the plaintiffs “ple[d] no facts supporting a rational inference” that such conflict
existed), Synthes, 50 A.3d at 1033–35 (recognizing at the pleading stage that an “immediate
need for liquidity could constitute a disabling conflict of interest” but granting a motion to
dismiss where the complaint was “strikingly devoid of pled facts” to support the plaintiffs’
liquidity theory), and Chen, 87 A.3d at 672 (recognizing that “liquidity is one benefit that
may lead directors to breach their fiduciary duties” but denying a motion for preliminary
injunction where the evidence did not support a liquidity-driven conflict).
45
actors,157 and it is often unreasonable to conclude that “rational economic actors have
chosen to short-change themselves” in favor of liquidity.158 Although it is a rare set
of facts that will support a liquidity-driven conflict theory, the reality is that rational
economic actors sometimes do place greater value on being able to access their
wealth than on accumulating their wealth, as this court has recognized.159
Stollmeyer’s self-professed fatigue of “sucking through a very small straw”160 makes
it reasonably conceivable that this case fits the rare fact pattern.
As to the prospective-employment theory, Defendants rely primarily on
English v. Narang161 and Toys “R” Us162 to argue that Plaintiffs’ allegations
concerning the interactions between Stollmeyer and Vista do not support an
inference that the prospect of future employment gave rise to a disabling conflict.163
In English, the plaintiffs argued in the context of a Corwin motion to dismiss
that the company’s disclosures omitted material information concerning discussions
157
Chen, 87 A.3d at 670 (“Delaware law presumes that investors act to maximize the value
of their own investments.” (quoting Katell v. Morgan Stanley Gp., Inc., 1995 WL 376952,
at *12 (Del. Ch. June 15, 1995)).
158
Larkin, 2016 WL 4485447, at *16 (recognizing that “[t]his court has, in the past,
evaluated liquidity theories . . . with marked skepticism, characterizing them as ‘unusual,’
‘counterintuitive,’ and ‘aggressive’” (quoting Synthes, 50 A.3d at 1034–35)).
159
See supra note 117.
160
Am. Compl. ¶¶ 5, 40.
161
2019 WL 1300855 (Del. Ch. Mar. 20, 2019).
162
877 A.2d 975 (Del. Ch. 2005).
163
Defs.’ Opening Br. at 33–38.
46
about post-closing employment opportunities for management.164 The plaintiffs
based their argument on the generic proposition that the private equity buyer
routinely retained existing management teams and the fact that employment
agreements were disclosed on the date of the closing.165 In rejecting this argument,
Chancellor Bouchard found that allegations concerning the private equity buyer’s
“reputation for retaining management” and the timing of the announcement
regarding the employment agreements, standing alone, were insufficient to give rise
to the inference that discussions about post-closing employment occurred.166
In this case, unlike in English, Plaintiffs do not rely solely on Vista’s
reputation for retaining management or the timing of any post-closing employment
agreements. As discussed above, Plaintiffs rely on a plethora of facts, including
Stollmeyer’s own words, Stollmeyer’s numerous interactions with Vista, and Vista’s
direct representations to Stollmeyer and management. These circumstances
collectively make it reasonable to infer that post-closing employment and
compensation was a motivating factor for Stollmeyer.
In Toys “R” Us, then-Vice Chancellor Strine found that an acquirer’s direct
message that its bid was conditioned on the “retention of key (but unspecified)
164
2019 WL 1300855, at *1.
165
Id. at *12.
166
Id. at *13.
47
members of management” did not give rise to a disabling conflict.167 The court made
this finding when denying a motion for a preliminary injunction. The evidentiary
record reflected that the CEO “negotiated for the removal of provisions for the
retention of . . . management upon which [the acquirer] conditioned its bid,”
supported the “pursuit of strategic alternatives that put his job at risk,” and
“adamantly refused to create an appearance problem by talking with bidders about
his future.”168 The court refused to “infer that [the CEO’s] judgment was tainted by
a personal desire to advantage himself at the expense of the Company’s public
stockholders.”169 In light of the CEO’s commendable conduct, the court found that
the CEO took “value-maximizing steps without regard for his future
employment.”170
This case, unlike Toys “R” Us, is at the pleading stage, and the court does not
have an evidentiary record of dispositive facts revealing the CEO’s earnest efforts
to maximize stockholder value without regard for his future employment. Rather,
this decision is issued on a motion to dismiss where the court must accept as true all
facts set forth in the Amended Complaint and draw all reasonable inferences
therefrom.
167
877 A.2d at 1003; id. at 1003–06.
168
Id. at 1003–04.
169
Id. at 1005.
170
Id.
48
In sum, none of the cases on which Defendants rely undercut Plaintiffs’
liquidity-driven or prospective-employment theories of conflict. It is reasonably
conceivable that, in light of his self-professed desire for near-term liquidity and for
future employment with Vista, Stollmeyer harbored interests that conflicted with
those of the Mindbody stockholders.
2. It Is Reasonably Conceivable that Stollmeyer Tilted the Sale
Process in Vista’s Favor.
Plaintiffs assert that Stollmeyer tilted the sale process in Vista’s favor by:
(a) lowering guidance to depress Mindbody’s stock and make it a more attractive
target at the time Vista was looking to acquire Mindbody and (b) providing Vista
with timing and informational advantages over other bidders.
a. Lowered Guidance
As of September 2018, public statements and internal chatter presented a rosy
picture of Mindbody’s integration efforts. Stollmeyer assured stockholders and
management that the Company’s integration efforts would yield significant growth
49
in 2019.171 He provided the same assurance to his management team.172 At the
Company’s analyst day on September 18, 2018, Stollmeyer presented a slide deck
that bore the words “The Integration is Working” and set forth the Company’s
planned integration timeline.173 Mindbody stock closed at $43.85 per share one
week later—up nearly 7% from the previous week.
By October 2018, Mindbody’s management seemed to do an about-face. On
October 9, 2018, management decided to delay the upcoming Q3 earnings call from
October to November. In mid-October, management searched for a “creative way
to guide 2019.”174 In late October, Stollmeyer expressed that “a few hundred
thousand of Q4 revenue” would make a “huge difference” in the market.175 He then
lowered guidance by approximately $1 to $3 million, from the projected $68 million
171
See Am. Compl. ¶ 34 (alleging that, on a May 8, 2018 earnings call, Stollmeyer
explained that Mindbody was “significantly investing both in Booker and FitMetrix to set
the stage for a much greater growth to come”); id. ¶ 35–36 (alleging that, on a July 31, 2018
earnings call, Stollmeyer reported “solid progress” on the Company’s integration efforts,
explained that the Booker and FitMetrix acquisitions would “fuel strong growth in the
target market customer base in 2019,” and stated: “There’s no one in the world that has our
go-to-market capabilities now in any of our target markets and nobody has the strength of
our products . . . . [W]e’re very excited about our long-term growth prospects.”).
172
See id. ¶ 51 (alleging that on September 9, 2018, Stollmeyer expressed to management
that the Booker and FitMetrix acquisitions “improve[d] [Mindbody’s] market position
further”); id. (alleging that, in an email to “MB Leaders,” Stollmeyer “endorsed” an analyst
report that predicted significant annual revenue growth for Mindbody and laid out the
Company’s historical revenue increases).
173
Id. ¶ 52.
174
Id. ¶ 79.
175
Id. ¶ 83.
50
Mindbody disclosed in August 2018 to the projected $65 to $67 million he and White
disclosed on the Q3 earnings call. This was despite internal sentiment that
Mindbody was “on track to hit [its] forecast.”176 Later, Mindbody’s Q4 actuals—
$68.3 million—reflected both several hundred thousand dollars more than
Mindbody’s $68 million projection in August 2018 and, in Stollmeyer’s words, a
“massive beat against the Street’s consensus midpoint” of $66 million.177 These
facts make it reasonably conceivable that Stollmeyer provided lower guidance for
reasons unrelated to business expectations.
At least two of the pivotal moments in this narrative—the decision to delay
the Q3 earnings call and the decision to lower guidance—tie temporally to
Stollmeyer’s interactions with Vista. It was on day two of the “mind-blowing” and
“inspiring” CXO Summit178 that Mindbody decided to postpone its Q3 earnings call
from its regularly scheduled date in October to November.179 And it was on the day
after Vista provided Stollmeyer with a direct expression of interest that management
exchanged emails in search of a creative way to lower guidance on the Q3 earnings
call.180 This timing might prove to be coincidental. At this stage, Plaintiffs are
176
Id. ¶ 84 (emphasis removed).
177
Id. ¶ 139.
178
Id. ¶ 59.
179
Id. ¶ 63.
180
Id. ¶ 79.
51
entitled to the inference that the timing was no coincidence.
All told, the well-pleaded allegations concerning Stollmeyer’s personal
interests, the temporal connections between Stollmeyer’s interactions with Vista and
the decisions to delay the earnings call and deliver lowered guidance, and the
Company’s actual Q4 performance make it reasonably conceivable that Stollmeyer
strategically tanked Mindbody’s stock price so that Vista could, as Plaintiffs put it,
“buy the Company on the cheap.”181 This conduct is, of course, inconsistent with
value maximization.
Defendants raise factual points in response to Plaintiffs’ arguments.
Defendants rely on several internal emails and assert that the Audit Committee, not
Stollmeyer, oversaw the Company’s forward-looking guidance and made the call to
lower the Q4 guidance.182 Defendants further assert that the Q4 guidance “was based
on legitimate factors, not a nefarious plot to drive down the Company’s stock price
to somehow accommodate Vista’s bid.”183 They also argue that “[i]t is accepted,
and expected, practice for publicly traded companies to guide below actual
181
Pls.’ Answering Br. at 40.
182
Defs.’ Opening Br. at 3, 43–45; Defs.’ Reply Br. at 18–19. Even setting aside the factual
nature of this argument, Stollmeyer served on the Audit Committee, and the emails to
which Defendants point were authored by Stollmeyer himself, undercutting Defendants’
argument that the Audit Committee neutralized Stollmeyer’s influence or conflicts. See
Perri Aff. Exs. 6, 7.
183
Defs.’ Opening Br. at 43–44.
52
performance so that they can beat ‘the Street’ expectations given the market’s
proclivity to punish companies for near misses of prior guidance.”184 These fact-
based arguments run contrary to the plaintiff-friendly inferences required under Rule
12(b)(6) and fail for that reason.
b. Timing and Informational Advantages
Plaintiffs allege that Stollmeyer gave Vista informational and strategic
advantages over other potential bidders throughout the due diligence and go-shop
periods.185
Throughout due diligence, Stollmeyer eliminated one potential bidder from
the list and declined to share diligence with another after Vista made its initial bid
for $35 per share, admitting in both instances that he did not want to work for those
potential acquirers.186 Stollmeyer provided Saroya with real-time input on Vista’s
valuation model, but he did not provide the same input to other potential bidders.
Vista received access to more than a thousand documents in the data room
throughout the diligence phase; other potential bidders received temporarily limited
access to as few as thirty-five documents.
184
Id. at 44.
185
Pls.’ Answering Br. at 50.
186
Am. Compl. ¶ 105 (alleging that Stollmeyer removed Global Payments from outreach
because he “[didn’t] want to work for a Payments company” (alteration in original)
(emphasis removed)); id. ¶¶ 112, 119 (alleging that Stollmeyer refused to share requested
diligence with a Japanese company and that Stollmeyer later admitted that he “did not want
to work for a Japanese company”).
53
Throughout the go-shop, Mindbody provided less diligence to go-shop
participants than it had to Vista before Vista made its bid for $35 per share.187 The
go-shop data room did not include the additional diligence Vista received before
making its final bid of $36.50.188 And when the Company received its Q4 results,
they were provided in some form to Vista but not to any other potential bidder.189 In
light of these allegations, it is reasonably conceivable that Vista was given timing
and informational advantages that uniquely positioned it for success.190 It is also
reasonable to attribute responsibility for these decisions to Stollmeyer in view of the
facts alleged.191
Side-stepping the well-pleaded allegations concerning the sale process,
Defendants come to the defense of the go-shop. Defendants argue that the Company
had no obligation to offer a go-shop “‘in the first instance,’ much less to conduct one
187
Id. ¶ 137.
188
Id.
189
Id. ¶ 141.
190
See RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 854 (Del. 2015) (holding that the
solicitation process was structured and timed in a manner that “impeded interested bidders
from presenting potentially higher value alternatives”).
191
Am. Compl. ¶ 22 (“Stollmeyer kept Mindbody’s Q4 results from potential bidders,
except for Vista.”); id. ¶ 110 (alleging that Chang provided Stollmeyer with a list of Vista
diligence requests and that Stollmeyer, with White, “immediately used that list to populate
a dataroom for Vista”); id. ¶ 136 (alleging that Stollmeyer “made himself available to
Vista” throughout the go-shop period); id. ¶ 138 (alleging that Stollmeyer, with White,
delayed providing diligence to a potential bidder during the go-shop period).
54
with a minimum duration or involving a minimum number of potential bidders.”192
They cite two cases for the proposition that the go-shop was “well within the range
routinely approved” by the court.193 But neither case involved meaningful
challenges to the sale process itself, and so neither decision included an extensive
discussion of whether the go-shop cured process defects.194
Plaintiffs cite to one case concerning the go-shop that is more on point—
Blueblade Capital Opportunities LLC v. Norcraft Cos.195 There, in a post-trial
opinion resolving a petition for appraisal, the court concluded that the merger price
was not a reliable indicator of fair value because a conflicted fiduciary tainted the
sale process.196 In view of those issues, the court held that the target’s thirty-five
day go-shop fell short of providing a curative “meaningful market check.”197 The
192
Defs.’ Opening Br. at 52 (quoting Toys “R” Us, 877 A.2d at 1000).
193
Defs.’ Reply Br. at 23–24 (citing Miramar Firefighters Pension Fund v. AboveNet, Inc.,
2013 WL 4033905 (Del. Ch. July 31, 2013); In re Pennaco Energy, Inc. S’holders Litig.,
787 A.2d 691 (Del. Ch. 2001)).
194
See Miramar, 2013 WL 4033905, at *8 (rejecting the argument that “the thirty-day go-
shop was too short, and . . . destined to fail” where the plaintiff’s criticisms of the sale
process itself were conclusorily pled and the plaintiff could not “explain how the process
was not cured by the subsequent inclusion of strategic sponsors before the Merger
Agreement was executed and during the thirty-day go-shop”); Pennaco, 787 A.2d at 705–
706 (concluding on a preliminary injunction record that the plaintiffs lacked a probability
of success on their Revlon claim where the sale process could not “be characterized as
unreasonable”).
195
2018 WL 3602940 (Del. Ch. July 27, 2018).
196
Id. at *24–25.
197
Id. at *25–26.
55
go-shop at issue in Blueblade required that, “[i]n order to proceed with an alternate
transaction, [the target] had to receive a ‘Superior Proposal’ by the end of the Go-
Shop Period, essentially requir[ing] the bidder to get the whole shebang done within”
thirty-five days.198
Here, as in Blueblade, the go-shop required that a competing bidder make a
Superior Proposal within the go-shop period.199 It also required Mindbody to accept
the Superior Proposal within the go-shop period. And the timing of the go-shop was
more problematic than that in Blueblade—it ran for only 30 days, and it spanned
Christmas and New Year’s Eve. Two potential buyers “specifically communicated
that they could not compete for Mindbody because of the go-shop’s highly
compressed timeline.”200 Because the less preclusive go-shop at issue in Blueblade
was found insufficient to cure analogous process defects, it is reasonable to conclude
that the go-shop at issue in this case likewise failed in this regard.
3. Material Information Withheld from the Board
Even if Stollmeyer was conflicted and tilted the sale process toward Vista,
Defendants argue that dismissal is appropriate because Plaintiffs failed to allege that
a majority of the Board that approved the Merger was interested or lacked
198
Id. at *26 (internal quotation marks omitted).
199
Am. Compl. ¶ 134.
200
Id.
56
independence. It is true that, as a general rule, a plaintiff “can only sustain a claim
for . . . breach of the duty of loyalty by pleading facts showing that it is reasonably
conceivable that each of a majority of the board is conflicted.”201 Plaintiffs argue
that the court should invoke an exception to this general rule, which applies when it
is adequately alleged that (i) a conflicted fiduciary failed to disclose material
information to the board, a theory sometimes referred to as “fraud on the board,” a
phrase coined in MacMillan,202 or (ii) the board failed to adequately oversee the
conflicted fiduciary.203 Because Plaintiffs adequately alleged facts to support the
first theory, this decision does not address the second.
In Haley, the Delaware Supreme Court articulated the materiality standard
applicable in this context. The court explained that an omission is “material” to a
201
Nguyen v. Barrett, 2016 WL 5404095, at *5 (Del. Ch. Sept. 28, 2016) (emphasis
removed); In re NYMEX S’holder Litig., 2009 WL 3206051, at *6 (Del. Ch. Sept. 30, 2009)
(“Plaintiffs must plead sufficient facts to show that a majority of the Board of Directors
breached the fiduciary duty of loyalty . . . .” (emphasis removed)).
202
MacMillan, 559 A.2d at 1283; see also Kahn, 2018 WL 1341719, at *1 n.4 (citing
MacMillan, 559 A.2d at 1283); In re Rural/Metro Corp. S’holders Litig., 102 A.3d 205,
238 (Del. Ch. 2014) (“In colloquial terms, a fraud on the board has long been a fiduciary
violation under our law and typically involves the failure of insiders to come clean to the
independent directors about their own wrongdoing, the wrongdoing of other insiders, or
information that the insiders fear will be used by the independent directors to take actions
contrary to the insiders’ wishes.” (quoting In re Am. Int’l Gp., Inc. Consol. Deriv. Litig.,
965 A.2d 763, 806–07 (Del. Ch. 2009))).
203
Kahn, 2018 WL 1341719, at *1 n.4 (citing MacMillan, 559 A.2d at 1280; Toys “R” Us,
877 A.2d at 1002); MacMillan, 559 A.2d at 1280, 1283–84; Xura, 2018 WL 6498677, at
*13 n.131 (citing Kahn, 2018 WL 1341719, at *1 n.4, for the proposition that a plaintiff
can state a Revlon claim “where impartial board members did not oversee conflicted
members sufficiently”).
57
board if the undisclosed fact is “relevant and of a magnitude to be important to
directors in carrying out their fiduciary duty of care in decisionmaking.”204 The key
undisclosed fact driving the plaintiffs’ theory in Haley was that the target’s CEO and
204
Haley, 2020 WL 3529586, at *12. It is appropriate to apply the materiality standard set
forth in Haley to Plaintiffs’ theory, (i) although this case implicates Revlon and Haley did
not, and (ii) although the parties initially briefed this issue using the “critical information”
language of Kahn, 2018 WL 1341719, at *1 n.4. As background to the first point, it bears
noting that there are essentially two lines of cases addressing the fraud-on-the-board theory
advanced by Plaintiffs. In the first line of cases, the challenged transactions gave rise to
enhanced scrutiny under Revlon. That line of cases traces back to MacMillan, 559 A.2d at
1283, and was recently discussed with approval by the Delaware Supreme Court in Kahn,
2018 WL 1341719, at *1 n.4. In the second line of cases, the challenged transactions were
presumptively subject to the business judgment standard. That line of cases traces back to
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156 (Del. 1995), which established a three-
part materiality test specific to that context. See Haley, 2020 WL 3529586, at *11 (setting
forth the three-part Technicolor test). Although the presumptive standards of review
differed in MacMillan and Technicolor, the core concern was the same—the plaintiffs in
both cases argued that a conflicted minority tainted the board process as a whole in the
context of a negotiated transaction. In establishing the three-part test, Technicolor built on
the principles set forth in MacMillan, and, when applying the three-part Technicolor test,
Haley also drew support from MacMillan. Haley, 2020 WL 3529586, at *12. Thus,
although Haley falls in the second line of cases, and this action falls in the first, the
materiality standard applied in these contexts addresses the same concern and derives from
the same decisional authority. See also Pls.’ Suppl. Br. at 6 (agreeing that the materiality
standard of Haley governs this analysis); Defs.’ Suppl. Br. at 2–5 (same). As background
to the second point, then Chief Justice Strine wrote in Kahn that “there are iconic cases,
such as MacMillan, that are premised on independent board members not receiving critical
information from conflicted fiduciaries.” 2018 WL 1341719, at *1 n.4 (emphasis added).
Picking up on this language, the parties initially briefed the fraud-on-the-board theory using
the “critical information” nomenclature of Kahn. Pls.’ Answering Br. at 27; Defs.’ Reply
Br. at 28. There is no substantive difference between the materiality standard applied in
this decision and the “critical information” standard of Kahn (one of which comes from
MacMillan and the other of which refers to MacMillan), as the parties agree. Pls.’ Suppl.
Br. at 6 (“We believe the phrase ‘critical information’ in Kahn has the same meaning as
material information and that the ‘materiality’ standard in Haley is the best statement of
governing law.”); Defs.’ Suppl. Br. at 2 (stating that “Defendants do not believe there is
any meaningful difference between” the “materiality” standard of Haley and the “critical
information” standard of Kahn).
58
lead negotiator had been presented with a post-merger “compensation proposal
having a potential upside of nearly five times his compensation at [the target].”205
The court concluded that it was reasonably conceivable that the compensation
proposal subjectively affected the fiduciary in the course of negotiations and was
thus material to the target’s CEO.206 The court then concluded that “the Board would
have found it material” that the target’s CEO had been presented with the
compensation proposal “during an atmosphere of deal uncertainty and before [the
board] authorized him to renegotiate the merger consideration.”207
As Haley illustrates, fraud-on-the-board theories frequently involve two
materiality inquiries—the first is whether the key fiduciary’s alleged conflicts were
material to him, and the second is whether the board would have viewed information
concerning those alleged conflicts as material.208 Generally speaking, a strong
showing on the first materiality inquiry will drive the outcome. That is, if a key
fiduciary was affected by a material conflict, it is likely that the board members will
view that conflict as “relevant and of a magnitude to be important . . . in carrying out
205
Haley, 2020 WL 3529586, at *12.
206
Id. at *15 (“[T]he materiality inquiry is a subjective test, and ‘not how or whether a
reasonable person in the same or similar circumstances would be affected by a financial
interest of the same sort as present in the case, but whether this director in fact was or
would likely be affected’” (quoting Technicolor, 663 A.2d at 1167)).
207
Id. at *12.
208
Id. at *11.
59
their fiduciary duty of care in decisionmaking,” as the court held in Haley.209
This dual materiality inquiry operates the same way in this case. As discussed
above, it is reasonably conceivable that Stollmeyer suffered from material conflicts
in the sale process that he failed to disclose to the Board. Given the materiality of
those conflicts, it is reasonably conceivable that the Board would have viewed them
as relevant and of a magnitude to be important in carrying out their decisionmaking
process. The allegations concerning Stollmeyer’s undisclosed conflicts are
catalogued throughout this decision. To adumbrate:
Stollmeyer effectively kick-started the sale process by reaching out to
Qatalyst in August 2018 to “share[] his frustrations with running a
public company and his preference for selling Mindbody to a private
equity fund that would agree to employ Stollmeyer and his management
team in the post-merger entity.”210
After Stollmeyer told Qatalyst that he wanted to find a private equity
buyer that would retain his management team, Qatalyst reconnected
him with Vista.211
Stollmeyer then attended the CXO Summit, where he received “mind
blowing,” “inspiring,” and “impressive” presentations concerning
Vista’s ability to generate enormous wealth for its CXOs.212
After the “mind blowing,” “inspiring,” and “impressive” events of the
CXO Summit,213 Stollmeyer received an expression of interest from
209
Id. at *12.
210
Am. Compl. ¶ 45.
211
Id. ¶ 46.
212
Id. ¶¶ 9, 59.
213
Id.
60
Vista.214
During this time period, Vista and Qatalyst facilitated reference calls
between Stollmeyer and least two Vista CXOs who were retained by
Vista post-acquisition, effectively approximating an employee
recruitment process.215 Stollmeyer later admitted privately that his
conversations with these CXOs influenced his decision to sell to
Vista.216
Stollmeyer did not immediately disclose Vista’s expression of interest
to the Board,217 instructed members of management not to disclose
Vista’s expression of interest to the Board,218 and did not inform the
Board of his interactions with Vista leading up to and surrounding
Vista’s expression of interest.219
Stollmeyer did not inform the Board of his dealings and multiple
meetings with Qatalyst before the Transaction Committee retained
Qatalyst.220
214
Id. ¶ 65.
215
Id. ¶ 60.
216
Id.
217
Id. ¶ 69.
218
Id. (Stollmeyer stated: “I plan to socialize this possibility to the Board Directors
individually over the next week. Please do not hint or otherwise discuss with them or
anyone else until I have a chance to do so and give you the green light.” (emphasis
removed)).
219
See, e.g., id. ¶ 49 (“On August 23, 2018, Saroya and Vista Vice President, Nicholas
Stahl, met with Stollmeyer onsite at Mindbody to discuss Mindbody’s business and ‘Rick’s
goals.’”); id. ¶ 56 (“At the . . . CXO Summit, Stollmeyer continued his discussions with
Saroya and Vista co-founders Robert Smith and Brian Sheth.”); id. ¶ 59 (alleging that
Stollmeyer texted Saroya after attending the CXO Summit); id. ¶ 64 (“On
October 11, 2018, Chang asked Stollmeyer for more information . . . . Three days later,
Stollmeyer continued the discussion about a potential transaction with Saroya.”).
220
Id. ¶ 45 (August 7, 2018 meeting with Chang); id. ¶ 60 (alleging that Qatalyst helped
set up reference calls and meetings for Stollmeyer with Vista CXOs in early October 2018);
id. ¶ 64 (October 11, 2018 communication with Chang); id. ¶ 102 (explaining that, before
the Transaction Committee interviewed Qatalyst, “Stollmeyer had already met with
Qatalyst . . . and was already receiving advice from Qatalyst concerning a deal”).
61
Stollmeyer eliminated bidders for whom he did not wish to work from
the sales and go-shop process while simultaneously providing Vista
with timing and informational advantages.221
Viewed collectively, these allegations are degrees more troubling than the
compensation proposal that the court in Haley found sufficient to meet the
materiality inquiries. While it was alleged in Haley that the CEO received the
compensation proposal that gave rise to a pleading-stage inference of conflict, the
allegations in this case support an inference that Stollmeyer affirmatively courted
Vista. These allegations support the fraud-on-the-board theory advanced by
Plaintiffs in this case.
Defendants observe, and it is true, that the Transaction Committee’s formation
evidences some level of Board involvement and oversight that cuts against the notion
that the Board was the passive victim of a rogue fiduciary. Yet, the mere existence
of the Transaction Committee does not give rise to the countervailing inference
Defendants seek, particularly in view of the following allegations:
The date of the Transaction Committee’s formation is unclear based on
the absence of Board minutes memorializing it.222
The Transaction Committee was not initially created for the purpose of
“advis[ing], direct[ing], and oversee[ing] management of [Mindbody]
221
Id. ¶ 105 (alleging that Stollmeyer removed Global Payments from outreach because he
“[didn’t] want to work for a Payments company”); id. ¶¶ 112, 119 (alleging that Stollmeyer
refused to share requested diligence with a Japanese company and that Stollmeyer later
admitted that he “did not want to work for a Japanese company”).
222
Id. ¶ 71 (“The Proxy states that the Board established the Transaction Committee on
October 30. There are no Board minutes from October 30.”).
62
in the review and negotiation of strategic alternatives.”223 It was not
until November 26, 2018 that the Transaction Committee’s mandate
was officially expanded to encompass that purpose.
By the time the Transaction Committee’s mandate was expanded, the
Company had already retained Qatalyst at Stollmeyer’s urging,224 and
Stollmeyer and Qatalyst had already “selected potential bidders for
Qatalyst to contact.”225
The Transaction Committee never retained its own counsel or financial
advisor, instead relying entirely on Qatalyst.226
After the Transaction Committee’s mandate was expanded, Stollmeyer
continued having private conversations with Vista,227 and the
Transaction Committee took a back seat while Stollmeyer vetoed
outreach to certain potential bidders and controlled the level of
diligence provided to potential bidders.228
For these reasons, it is reasonably conceivable that the Board lacked material
information and failed to adequately oversee Stollmeyer. Therefore, at the pleading
stage, the presence of a disinterested and independent majority of the Board does not
defeat a claim for liability.229
223
Id. ¶ 108.
224
Id. ¶ 102.
225
Id. ¶ 104.
226
Id. ¶ 109.
227
See, e.g., id. ¶ 107 (alleging that Stollmeyer “continued his private conversations with
Vista, including on November 21, 2018”).
228
Id. ¶ 109.
229
As discussed above, the presumptive standard of review in MacMillan was Revlon and
the presumptive standard of review in Technicolor was the business judgment rule. See
note 204 supra. Yet, in both cases, the court elevated the standard of review to entire
fairness in view of the fraud-on-the-board theories advanced by the plaintiffs. See
MacMillan, 559 A.2d at 1264–65; Technicolor, 663 A.2d at 1162–63. This begs the
63
B. The Stockholder Vote Was Not Fully Informed.
Defendants argue that dismissal is appropriate under Corwin regardless of
Plaintiffs’ well-pleaded claim for breach of fiduciary duty.230 Corwin gives rise to
the irrebuttable presumption of the business judgment rule when a transaction “is
approved by a fully informed, uncoerced vote of the disinterested stockholders.”231
Plaintiffs do not argue that the stockholder vote was coerced. They contend that
Corwin does not apply because the vote was uninformed.
Under Delaware law, determining whether a vote was fully informed at the
pleading stage requires the court to consider whether the “complaint, when fairly
read, supports a rational inference that material facts were not disclosed or that the
disclosed information was otherwise materially misleading.”232
In Morrison, the Delaware Supreme Court articulated the materiality standard
applicable in this context as follows:
question in the instant action: Could this this “paradigmatic Revlon” case ultimately be an
entire fairness case? I posed a version of this question to the parties, and both sides
responded that Revlon is the appropriate standard to apply when evaluating the motion to
dismiss. Defs.’ Suppl. Br. at 11–12; Pls.’ Suppl. Br. at 3–4. It is an open issue, in my view,
whether entire fairness might ultimately apply, and I invite more detailed presentations
concerning the governing legal framework as the case progresses.
230
Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 308 (Del. 2015) (holding that an
“uncoerced, informed stockholder vote is outcome-determinative, even if Revlon applied
to the merger”).
231
Id. at 309.
232
Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018).
64
An omitted fact is material if there is a substantial
likelihood that a reasonable shareholder would consider it
important in deciding how to vote. Framed differently, an
omitted fact is material if there is a substantial likelihood
that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly
altered the total mix of information made available. But,
to be sure, this materiality test does not require proof of a
substantial likelihood that disclosure of the omitted fact
would have caused the reasonable investor to change his
vote.233
As the Delaware Supreme Court recently observed in Haley, it is not uncommon that
a court find “the same information to be material to both directors and
stockholders,”234 despite the fact that “the materiality inquiry is different in the two
contexts.”235
Although a defendant asserting a defense under Corwin bears the burden of
proving at trial that the stockholder vote was fully informed, a plaintiff bears the
burden to plead disclosure deficiencies.236 One sufficiently alleged disclosure
deficiency will defeat a motion to dismiss under Corwin.237
In view of the allegations as to Stollmeyer, it should be no surprise that
233
Id. at 282–83 (internal quotation marks and citations omitted).
234
2020 WL 3529586, at *13 & n.62 (collecting cases).
235
Id. at *13–14.
236
In re Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *7–8 (Del. Ch.
Jan. 5, 2017).
237
Xura, 2018 WL 6498677, at *12; van der Fluit v. Yates, 2017 WL 5953514, at *8 n.115
(Del. Ch. Nov. 30, 2017).
65
Defendants’ Corwin arguments fail at this stage. Generally, 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.238 This
generalization plays out when applied to the specific disclosure deficiencies
identified by Plaintiffs. Plaintiffs point to two categories of specific disclosure
deficiencies: (1) Stollmeyer’s conflicts and dealings with Vista; and (2) the Q4
guidance versus the Q4 actuals. Collectively, they are more than sufficient to defeat
a Corwin defense at the pleading stage.
1. Stollmeyer’s Conflicts and Dealings with Vista
The first category of disclosure deficiencies involves the same facts that
support Plaintiffs’ fiduciary duty claims against Stollmeyer—his conflicts of interest
and his efforts to tilt the sale process in Vista’s favor.
a. Stollmeyer’s Interactions with Vista Concerning Post-
Closing Employment
Plaintiffs argue that the disclosures concerning Stollmeyer’s interactions with
Vista are materially misleading and only true in the literal sense.239
The Definitive Proxy disclosed that “[a]t the time of the signing of the Merger
238
See, e.g., Xura, 2018 WL 6498677, at *12–13; Lear, 926 A.2d at 114–15.
239
Pls.’ Answering Br. at 57–59 (quoting In re Topps Co. S’holders Litig., 926 A.2d 58,
74 (Del. Ch. 2007)); see also Lynch v. Vickers Energy Corp., 383 A.2d 278, 281
(Del. 1977) (“Technically speaking, the language [in the Proxy] may be accurate; but that
kind of generality is hardly a substitute for hard facts when the law requires complete
candor.”).
66
Agreement, Vista and [Mindbody] had not engaged in any employment or retention-
related discussions with regard to [Mindbody] management.”240 The Supplemental
Proxy corrected this disclosure to state that: “Vista and [Mindbody] had not
discussed the terms of post-closing employment or equity participation for
Mindbody management.”241
Facts that shed light on the depth of a lead negotiator’s commitment to the
acquirer and personal economic incentives are generally deemed material to a
reasonable stockholder. Two cases are instructive.
In Morrison, a Corwin dismissal was reversed because the company failed to
disclose facts that “would have shed light on the depth of the [chairman’s]
commitment to [the acquirer], the extent of [the chairman’s] and [the acquirer’s]
pressure on the Board, and the degree that this influence may have impacted the
structure of [the] sale process.”242 The company did not disclose, for example, that
the chairman had agreed early on in the sale process to “roll over his equity interest”
if the acquirer reached a deal with the target’s board.243 Nor did the company
disclose the chairman’s “clear preference” for the ultimate acquirer and “reluctance
240
Definitive Proxy at 32.
241
Supplemental Proxy at 5 (emphasis added).
242
191 A.3d at 275.
243
Id. at 277.
67
to consider bids from other prospective purchasers.”244 The Delaware Supreme
Court observed that the former was material because “a reasonable stockholder
would want to know about [that] level of commitment to a potential purchaser.”245
The court further observed that the latter was also material because, “if disclosed, a
reasonable stockholder might infer that [the chairman’s] expression of a clear
preference for [the acquirer] and reluctance to engage with other bidders hindered
the openness of the sale process.”246
In Xura, this court held that Corwin cleansing did not apply because the
company failed to disclose, among other things, that the acquirer “made clear its
intention to work with management (including [the CEO]) after consummation of
the [t]ransaction” and that the CEO had received word that “his position at [the
target] was in jeopardy if the [c]ompany was not sold.”247 This court observed:
“Plaintiff alleges that stockholders were entirely ignorant of the extent to which [the
CEO] influenced the negotiations and ultimate terms of the [t]ransaction, not to
mention his possible self-interested motivation for pushing an allegedly undervalued
[t]ransaction on the [c]ompany and its stockholders.”248
244
Id. at 280.
245
Id. at 284.
246
Id. at 286.
247
Xura, 2018 WL 6498677, at *12.
248
Id. at *13; see also Lear, 926 A.2d at 114 (“Put simply, a reasonable stockholder would
want to know an important economic motivation of the negotiator singularly employed by
68
At this stage, it is reasonably conceivable that Stollmeyer’s discussions with
Vista concerning the prospect of his future employment would rise to the level of
material in the eyes of a stockholder.249 Like the company in Morrison, Mindbody
did not disclose facts that would have “shed light on the depth of [Stollmeyer’s]
commitment to [Vista]”250 or “reluctance to consider bids from other prospective
purchasers.”251 And like the company in Xura, Mindbody did not disclose facts
speaking to “the extent to which [Stollmeyer] influenced the negotiations and
a board to obtain the best price for the stockholders, when that motivation could rationally
lead that negotiator to favor a deal at a less than optimal price, because the procession of a
deal was more important to him, given his overall economic interest, than only doing a deal
at the right price.”).
249
See In re Fam. Dollar Stores, Inc. S’holder Litig., 2014 WL 7246436, at *20 (Del. Ch.
Dec. 19, 2014) (“[S]tockholders should receive full and fair disclosures about whether a
negotiator for the target had, by virtue of an expectation of post-closing employment with
the acquirer, incentives that might conflict with those of the target’s stockholders.”); see,
e.g., Maric Capital Master Fund, Ltd. v. Plato Learning, Inc., 11 A.3d 1175, 1179 (Del.
Ch. 2010) (concluding that the proxy statement “create[d] the materially misleading
impression that management was given no expectations regarding the treatment they could
receive from [the acquirer]” despite the reality that the acquirer and the CEO had
discussions concerning the nature of a typical executive equity incentive package and that
the CEO was led to believe that “top management would likely be retained”); Topps, 926
A.2d at 74 (finding that the proxy was materially misleading because it failed to disclose
that the acquirer’s proposal “was designed to retain substantially all of [the target’s]
existing senior management and key employees” and that the acquirer “had continually
communicated that intention and his high regard for [the target’s] management” (internal
quotation marks omitted)); cf. Morrison, 191 A.3d at 275 (finding that the fact and timing
of a CEO’s agreement with a bidder that contemplated an equity roll-over was material
because it “would have shed light on the depth of [the CEO’s] commitment to [the bidder],
the extent of [the CEO’s] . . . pressure on the Board, and the degree that this influence may
have impacted the structure of the sale process”).
250
Morrison, 191 A.3d at 275.
251
Id. at 280.
69
ultimate terms” of the Merger and Stollmeyer’s “self-interested motivation for
pushing an allegedly undervalued [t]ransaction.”252
Mindbody did not disclose, for example, that Stollmeyer pursued discussions
with Vista only after expressing “his frustrations with running a public company and
his preference for selling Mindbody to a private equity fund that would agree to
employ Stollmeyer and his management team in the post-merger entity.” 253 Nor did
Mindbody disclose that Stollmeyer met with Vista in late August 2018 to discuss his
own “goals” and thereafter attended two days’ worth of presentations highlighting
the wealth of Vista CXOs.”254 Perhaps most critically, stockholders were not made
aware that Stollmeyer had interacted privately on numerous occasions with Vista
and Vista CXOs before and during the sale process255 or that Vista’s offer letter
252
Xura, 2018 WL 6498677, at *13.
253
Am. Compl. ¶ 45.
254
Id. ¶ 49.
255
See, e.g., id. ¶ 49 (“On August 23, 2018, Saroya and Vista Vice President, Nicholas
Stahl, met with Stollmeyer onsite at Mindbody to discuss Mindbody’s business and ‘Rick’s
goals.’”); id. ¶ 56 (“At the . . . CXO Summit, Stollmeyer continued his discussions with
Saroya and Vista co-founders Robert Smith and Brian Sheth.”); id. ¶ 59 (alleging that
Stollmeyer texted Saroya after attending the CXO Summit); id. ¶ 64 (“On
October 11, 2018, Chang asked Stollmeyer for more information . . . . Three days later,
Stollmeyer continued the discussion about a potential transaction with Saroya.”); id. ¶ 65
(explaining that Saroya provided Stollmeyer with a “direct expression of interest” to
acquire Mindbody at “a substantial premium to recent trading range” on October 16, 2018);
id. ¶ 101 (“On November 10, Stollmeyer texted Saroya, and asked to speak by phone.
Shortly thereafter, Stollmeyer and Saroya agreed to meet at Vista’s San Francisco
offices.”); id. ¶ 107 (“Stollmeyer continued his private conversations with Vista, including
on November 21, 2018.”); id. ¶ 113 (“Stollmeyer and Saroya continued text messaging and
speaking by phone throughout November and mid-December concerning Vista’s review of
70
contained strong signals about post-closing employment for management.256 While
these events transpired, Stollmeyer nixed other potential bidders throughout the sale
process257–yet another fact Mindbody did not disclose to its stockholders.
In light of Morrison and Xura, it is at least reasonably conceivable that a
reasonable stockholder would consider Stollmeyer’s discussions with Vista
concerning the prospect of his future employment material.
b. Vista’s Expression of Interest
Plaintiffs allege that the substance of Vista’s October 16, 2018 expression of
interest was material and should have been disclosed.
The Definitive Proxy disclosed that “the $36.50 per share price was the
highest price Vista would be willing to offer.”258 The Supplemental Proxy disclosed
that, on October 16, 2018, “Vista indicated to Mr. Stollmeyer that it was interested
the 1,000 documents in the data room to which Vista received access.”); id. ¶ 114 (“Saroya
and Stollmeyer spoke on the evening of December 17 to talk ‘about go to market and some
of [Vista’s] findings’ and they spoke again on December 18 . . . .” (alteration in original)).
256
Id. ¶ 118 (“Vista said it was ‘thoroughly impressed with Mindbody’s executive
management team,’ and ‘look[ed] forward to forming a successful and productive
partnership with them going forward.’” (alteration in original)); id. (alleging that Vista’s
offer letter “made clear that Vista ‘seeks to invest in and partner with superior management
teams,’ and that ‘through equity participation programs and incentive structures, Vista
seeks to align management’s incentives with its own in any potential transaction’”
(emphasis removed)).
257
Am. Compl. ¶ 105 (alleging that Stollmeyer removed Global Payments from outreach
because he “[didn’t] want to work for a Payments company”); id. ¶¶ 112, 119 (alleging
that Stollmeyer refused to share requested diligence with a company for which he did not
want to work).
258
Definitive Proxy at 31.
71
in pursuing strategic transaction discussions with [Mindbody].”259 The Proxy did
not disclose that Vista’s indication was to acquire Mindbody at “a substantial
premium to recent trading range.”260
At the time Vista’s expression of interest was made, Mindbody’s thirty-day
volume weighted average price was $38.40, and Mindbody stock traded as high as
$41.25 per share in October. Thus, it is reasonably conceivable that Vista’s
statement on October 16, 2018 that it was willing to pay “a substantial premium to
recent trading range”261 signaled Vista’s willingness to pay a price per share much
higher than the ultimate Merger price. If proven, that fact would be material to a
reasonable stockholder.
Defendants argue that Mindbody was not required to disclose Vista’s
expression of interest because “preliminary discussions that do not reach the level
of serious negotiations are not material—and their existence need not be disclosed
at all.”262 As a generalization, this statement is accurate. Applied to the specifics of
this case, it does not help Defendants. None of the cases upon which Defendants
rely involved a situation like that alleged here, where the ultimate acquirer, after
259
Supplemental Proxy at 4.
260
Am. Compl. ¶ 65 (emphasis removed).
261
Id. (emphasis removed).
262
Defs.’ Opening Br. at 76–77 (citing In re MONY Gp. Inc. S’holder Litig., 852 A.2d 9,
29 (Del. Ch. 2004); Shamrock Hldgs., Inc. v. Polaroid Corp., 559 A.2d 257 (Del. Ch.
1989)).
72
weeks of discussions and interactions with the target’s CEO and Chairman, made a
“direct expression of interest” to acquire the target at “a substantial premium to
recent trading range” at a time when the target’s stock was trading at a price higher
than the ultimate per-share merger price.263 These allegations make it reasonably
conceivable that the omitted information would have been viewed as material by a
reasonable stockholder.
c. Vista’s Timing and Informational Advantages
Plaintiffs argue that the Proxy materially misled stockholders when it failed
to disclose facts concerning the advantages provided to Vista throughout the sale
process and go-shop phases.
As to the sale process, the Proxy did not disclose that Stollmeyer removed a
payments company from outreach because he did not want to work for a payments
company.264 It did not disclose that Stollmeyer provided Saroya with real-time input
263
See MONY, 852 A.2d at 29–30 (holding that there was no obligation to disclose an
expression of interest made by an entity other than the ultimate acquirer that “did not
provide price or structure” and was contingent on the pending deal’s failure); Shamrock,
559 A.2d at 261–62, 274–75 (involving the adoption of an employee stock ownership plan,
not a merger, and holding that there was no obligation to disclose that an entity had
“expressed its interest in a ‘friendly’ meeting” with management because “[i]ts only
significance [was] as a possible forerunner to an acquisition proposal” that ultimately did
not materialize); see also Alessi v. Beracha, 849 A.2d 939, 945–46 (Del. Ch. 2004)
(distinguishing MONY and Shamrock on similar bases and holding that the challenged
information was material because “[the company] was for sale, the discussions were
substantive and advanced, an offer was made, and the sale was actually consummated”).
264
Am. Compl. ¶ 105 (emphasis removed).
73
on Vista’s valuation model, let alone that he did not provide the same to other
potential bidders. It did not disclose that Vista received access to more than a
thousand documents in the data room throughout the diligence phase while other
potential acquirers received access to as little as thirty-five. It did not mention that
Stollmeyer, after Vista made its initial bid of $35 per share, declined to share
additional diligence with a company that Stollmeyer eventually admitted that he did
not want to work for.265
As to the go-shop phase, the Proxy disclosed that the 30-day go-shop period
was “customary”266 and that certain parties were “granted access to the same
electronic data room populated by [Mindbody] with the same documents to which
Vista was provided access.”267 It does not disclose that Mindbody, when populating
the go-shop data room, made “some subtractions” to the diligence Vista received
before making its initial bid268 and did not include all of the information Vista
received before making its final bid.
Taken together, these facts make it reasonably conceivable that the Proxy
omitted material facts or otherwise materially misled stockholders concerning
Vista’s advantages throughout the sale process and go-shop phase. When corporate
265
Id. ¶ 163.
266
Definitive Proxy at 34.
267
Id. at 32.
268
Am. Compl. ¶ 137.
74
leadership “treat[s] a serious bidder in a materially different way and that approach
might have deprived shareholders of the best offer reasonably attainable,”269 a
reasonable investor might view information concerning such disparate treatment as
altering the total mix of information made available.270 A reasonable stockholder
would find this information important “because it would have helped the stockholder
to reach a materially more accurate assessment of the probative value of the sale
process.”271
Defendants assert that all relevant material facts were disclosed to
Mindbody’s stockholders because the Definitive Proxy attached the Merger
Agreement and because the Supplemental Proxy attached Plaintiffs’ briefing in the
Section 220 Action.272 Attaching the Merger Agreement to the Definitive Proxy
makes no difference, as the text of the Merger Agreement does not disclose the facts
269
In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *9 (Del. Ch. Jan. 3, 2013).
270
See In re El Paso Corp. S’holder Litig., 41 A.3d 432, 451 (Del. Ch. 2012) (observing
that the actions of “conflicted CEOs in baking up deals with their favorite private equity
sponsors before any market check (or often even board knowledge) likely dampen[s] the
competition among private equity firms that could have generated the highest price if
proper conduct occurred and the right process had been used”); see also In re Fort Howard
Corp. S’holders Litig., 1988 WL 83147, at *14 (Del. Ch. Aug. 8, 1988) (observing that
corporate leadership “may never appropriately favor one buyer over another for a selfish
or inappropriate reason”).
271
Morrison, 191 A.3d at 284.
272
Defs.’ Opening Br. at 84–85. Plaintiffs’ briefing in the Section 220 Action explained
in a footnote that Stollmeyer was on vacation during the go-shop period. Supplemental
Proxy at 44 n.3.
75
addressed above. And attaching Plaintiffs’ briefing in the Section 220 Action to the
Supplemental Proxy while simultaneously proclaiming that the claims were
“without merit”273 did little to fully and fairly inform Mindbody stockholders of
material information.274
273
Supplemental Proxy at 4.
274
See In re Staples, Inc. S’holders Litig., 792 A.2d 934, 960 n.47 (Del. Ch. June 5, 2001)
(“I give no weight to the defendants’ decision to attach the plaintiffs’ entire complaint to
the proxy. . . . The proxy . . . does not embrace [the contested point] or any other feature
of the complaint, which is described as being ‘without merit.’”). Defendants argue that the
court’s observation in Staples was mere dictum and that the court later declined to endorse
that view in another case. Defs.’ Reply Br. at 36–37 (citing Brinckerhoff v. Tex. E. Prods
Pipeline Co., 2008 WL 4991281, at *5 (Del. Ch. Nov. 25, 2008)). In Brinckerhoff, the
court found that sufficient disclosures were made where the company (1) attached the
plaintiffs’ original complaint to a proxy statement filed more than two months before the
final vote on the challenged proposals; (2) posted the complaint on its website; and
(3) issued supplemental proxy materials that summarized the complaint and referred
unitholders to the two locations where the entire complaint could be found. Id. at *5.
Defendants represent in briefing that the Supplemental Proxy “disclosed [Plaintiffs’]
complaint in the [Section 220 Action] and documents filed in connection therewith.”
Defs.’ Opening Br. at 24. The text of Plaintiffs’ complaint in the Section 220 Action,
though, is nowhere to be found in the Supplemental Proxy. Rather, the Supplemental Proxy
attaches only the briefing submitted in connection with Plaintiffs’ motion to expedite
proceedings. See Supplemental Proxy at 9–49; cf. Michelson v. Duncan, 386 A.2d 1144,
1154 (Del. Ch. 1978) (observing that stockholders were informed of the essential facts
because “[t]hey were provided with the complete text of plaintiff’s complaint, and, all
alleged wrongs for which ratification was sought were enumerated in detail”), aff’d, 407
A.2d 211 (Del. 1979); Michelson v. Duncan, 407 A.2d 211, 221 (Del. 1979) (affirming the
Court of Chancery’s holding only because “it would have been wholly . . . unreasonable
for management to be required to have made” the challenged non-disclosures, since they
“(a) were not factual assertions; (b) in some respects were not factually correct; (c) were
inconsistent with management’s position; and (d) called for legal conclusions”). Further,
unlike the proxy in Brinckerhoff, the Supplemental Proxy does not refer stockholders to
any location in which the text of Plaintiffs’ Section 220 complaint can be found. And
perhaps most importantly, the proxy in Brinckerhoff did not describe the complaint as
meritless, as the Proxy did here. Brinckerhoff is therefore distinguishable in multiple
respects.
76
2. Q4 Guidance and Q4 Actuals
The second category of disclosure deficiencies identified by Plaintiffs is the
description of the Merger consideration as a premium. The Proxy disclosed that the
per share merger Consideration constituted a premium of approximately 68% to the
then-current trading price of Mindbody stock.275 It is true that the Merger price was
68% higher than the stock price immediately prior to the Merger’s announcement.
Plaintiffs argue that gauging value against the then-current trading price is materially
misleading because Defendants drove down that price by lowering Q4 guidance and
then failed to disclose Q4 actuals reflecting that the Company substantially beat both
the original and lowered guidance.276
Defendants focus their arguments on disclosure of the Q4 actuals, arguing that
such information was immaterial because the SEC rules do not require disclosing
unaudited, intra-quarter revenue,277 the summary of Qatalyst’s fairness opinion and
underlying discounted cash flow analysis was sufficiently disclosed to
stockholders,278 and the Q4 actuals were irrelevant to Qatalyst’s opinion.279
Defendants further contend that disclosure of the unaudited financials without the
275
Definitive Proxy at 3, 33.
276
Pls.’ Answering Br. at 65–71.
277
Defs.’ Opening Br. at 68–69.
278
Id. at 70–71.
279
Id. at 71.
77
full set of earnings information required by the SEC “would have risked presenting
stockholders with partial information that would have been potentially
misleading.”280
Defendants’ arguments do not work, mostly because they ignore Plaintiffs’
well-pleaded allegations that Stollmeyer drove down the stock price by lowering Q4
guidance, rendering it reasonably conceivable that the Q4 actuals would correct the
misleading impression created by the deflated stock price and the 68% premium
based thereon. Defendants’ arguments are misplaced in other ways, as this court has
found information material that the SEC does not require to be disclosed,281 and as
Qatalyst’s fairness opinion did not occupy the field of information material to the
stockholder vote or render other information immaterial. The cases Defendants cite
are not to the contrary.282
280
Id. at 72–74.
281
Compare Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir. 1980) (holding that
the SEC “does not require a company to disclose financial projections”), with Maric, 11
A.3d at 1178 (holding that “management’s best estimate of the future cash flow of a
corporation that is proposed to be sold in a cash merger is clearly material information”).
282
Red Oak Fund, L.P. v. Digirad Corp., 2013 WL 5740103 (Del. Ch. Oct. 23, 2013), on
which Defendants rely, does not excuse a failure to disclose the Q4 actuals. There, the
plaintiff sued the company after losing a contested direct election to replace the board. The
plaintiff sought to put aside the results of the election based in part on the allegation that
the company decided to conceal its quarterly results until after the election. This court
recognized that “a company intentionally delay[ing] releasing financial results until after a
stockholder vote” could “warrant serious judicial scrutiny,” but rejected the plaintiffs’
contention in a post-trial decision only because the plaintiffs failed to prove it. Id. at *16
& n.187. Red Oak does not counsel in favor of rejecting Plaintiffs’ disclosure claims at the
pleading stage. The other cases Defendants rely on are similarly inapposite. See Frank v.
78
In the end, it is reasonably conceivable that Plaintiffs will prove at trial that,
as White put it, the “right thin[g] to do [was] to publicly release [the Q4 actuals to
stockholders] before they vote.”283
C. The Complaint Fails to State a Claim Against White and Liaw.
Plaintiffs allege that White and Liaw breached their fiduciary duties in
connection with the Merger. Plaintiffs primarily pursue claims for breach of the
duty of loyalty as to each, but White is an officer and is thus not protected by the
Arnelle, 1998 WL 668649, at *8–9 (Del. Ch. Sept. 16, 1998) (rejecting argument that
defendants were required to extend close of auction to issue supplemental disclosure where
federal law did not require extension and where the court was “not convinced that this
information was material or significant to a reasonable stockholder”), aff’d, 725 A.2d 441
(Del. 1999) (TABLE); Lewis v. Vogelstein, 699 A.2d 327, 332 (Del. Ch. 1997) (rejecting
argument that a stockholder-approved compensation plan must state the value of options
because the Financial Accounting Standards Board requires financial statements to state “a
value of options granted to directors according to a stock-option pricing model” on grounds
that mandated “corporate disclosure concerning prospective options grants
involves . . . technical judgments concerning what is feasible and helpful in varying
circumstances” that should be made by “an agency with finance expertise”).
283
Am. Compl. ¶ 142. The Amended Complaint also pleads a non-exculpated disclosure
claim against Stollmeyer. “[W]here a complaint alleges or pleads facts sufficient to support
the inference that the disclosure violation was made in bad faith, knowingly or
intentionally, the alleged violation implicates the duty of loyalty” and exculpatory
provisions cannot provide a basis for dismissal. O’Reilly v. Transworld Healthcare, Inc.,
745 A.2d 902, 915 (Del. Ch. 1999). Here, it is at least reasonably conceivable that
Stollmeyer made the disclosure violations described in this Section knowingly. Stollmeyer
signed the Definitive Proxy. See Definitive Proxy at 4. And most of the alleged disclosure
deficiencies involve actions taken by Stollmeyer. See Chen, 87 A.3d at 692 (observing
that disclosure deficiencies “include[d] actions taken by particular directors” and holding
that one such director “should have recognized and corrected [the disclosure deficiency]
before signing off on the Proxy Statement”); Orman, 794 A.2d at 41 (finding that, because
the plaintiff pled facts making it reasonable to infer that the actors “decid[ing] what
information to include” in the proxy were conflicted, it was improper to “say, as a matter
of law, that the complaint unambiguously state[d] only a duty of care claim”).
79
exculpatory charter provision. This decision addresses the allegations concerning
White before turning to the allegations concerning Liaw.
1. White
White was Mindbody’s CFO and COO. He did not serve on the Board. “As
an officer of [Mindbody], [White] is not exculpated by the Company’s 102(b)(7)
provision.”284 As a result, Plaintiffs “may plead either a breach of the duty of care
or loyalty” to defeat White’s motion to dismiss.285
A breach of the duty of care exists where the fiduciary acted with gross
negligence.286 “Gross negligence involves more than simple carelessness. To plead
gross negligence, a plaintiff must allege ‘conduct that constitutes reckless
indifference or actions that are without the bounds of reason.’”287
284
Morrison, 2019 WL 7369431, at *22.
285
Id.
286
Id.
287
Id. (quoting Zucker v. Hassell, 2016 WL 7011351, at *7 (Del. Ch. Nov. 30, 2016)); see
id. at *25 (sustaining a fiduciary duty claim against a company’s general counsel on gross
negligence theory). It is an open issue of Delaware law as to whether Revlon applies to an
officer’s actions. See Lyman Johnson, Delaware’s Long Silence on Corporate Officers,
Columbia Law School’s Blog on Corporations and the Capital Markets (May 23, 2017),
https://clsbluesky.law.columbia.edu/2017/05/23/delawares-long-silence-on-corporate-
officers/ (“Several other issues pertaining to officer duties also remain unclear under
Delaware law, even though these matters have repeatedly been addressed with respect to
directors. These include: . . . whether officers qua officers might have their conduct
reviewed under the Unocal or Revlon standards.”). Ultimately, though, “Revlon neither
creates a new type of fiduciary duty in the sale-of-control context nor alters the nature of
the fiduciary duties that generally apply.” Malpiede, 780 A.2d at 1083.
80
It is reasonably conceivable that White acted with gross negligence
throughout the sale process. On October 16, 2018, Stollmeyer informed White of
Vista’s expression of interest. Thereafter, White obeyed Stollmeyer’s instructions
not to disclose Vista’s expression of interest to the Board. On October 17, 2018—
one day after White was made aware of Vista’s expression of interest—White
himself began to search for “a creative way to guide 2019.”288 In response,
Mindbody’s senior director of investor relations explained to White that the
Company stood to “realize the monetization” of its newly implemented payment
platform but that Stollmeyer wanted to throw the Booker acquisition “under the bus”
and “guide below the Wall Street expectations” regardless.289 Stollmeyer himself
told White that “a few hundred thousand Q4 revenue” would make a “huge
difference” on the upcoming earnings call.290 Nonetheless, on November 6, 2018,
White himself delivered the lowered guidance on the Q3 earnings call.
White was also involved in providing timing and informational advantages to
Vista throughout the sale process. Plaintiffs allege that White, with Stollmeyer,
populated Vista’s substantial data room. They also allege that during the go-shop,
White “delayed for days” in approving a potential bidder’s diligence requests,
288
Id. ¶ 79.
289
Id.
290
Id. ¶ 83.
81
thereby preventing that potential bidder from receiving certain diligence before the
go-shop expired.291 Also during the go-shop, White asked Stollmeyer, who was on
vacation at the time: “I assume that we will be declining any go shop management
discussion until you return, correct?”292 And finally, once Mindbody received its
actual Q4 results (before the end of the go-shop period), White immediately
provided them to Vista. He did not provide them to other potential bidders.293
In view of these facts, it is reasonably conceivable that White was at least
recklessly indifferent to the steps Stollmeyer took to tilt the sale process in Vista’s
favor.
Plaintiffs also argue that White was conflicted with respect to the transaction
by the prospect of future compensation. Plaintiffs allege that “Qatalyst informed
White that Mindbody management could expect to double its equity stake post-
Merger”294 and that “Vista’s offer letter advertised Vista’s support for the
management team.”295 Plaintiffs further allege that “Stollmeyer told White that
[Stollmeyer] would only support a sale of Mindbody to ‘an acquirer who sees our
291
Id. ¶ 138.
292
Id. ¶ 135.
293
It is true that White proposed that the Q4 actuals be disclosed to stockholders in advance
of the stockholder vote on the Merger. But the fact of this ultimately unimplemented
proposal is insufficient to undermine the reasonable conceivability that White acted with
gross negligence (at a minimum) throughout the sale process.
294
Pls.’ Answering Br. at 44 (citing Am. Compl. ¶ 62).
295
Id. (citing Am. Compl. ¶ 118).
82
current capabilities.’”296 In the end, allegations as to White’s conflicts lack the heft
of the allegations leveled against Stollmeyer and present a closer call. Because a
breach of the duty of care has been adequately alleged as to White, this court need
not resolve whether a breach of the duty of loyalty has been adequately alleged as to
White.
2. Liaw
As to Liaw, Plaintiffs advance a version of a liquidity-driven conflict based
on IVP’s investment in the Company, arguing that Liaw was conflicted because IVP
was seeking to exit its investment in Mindbody. 297
As previously discussed, liquidity-driven conflicts can be difficult to plead.298
This court routinely rejects such theories when based on a fund’s expiring
investment horizon.299
296
Id. (quoting Am. Compl. ¶ 68).
297
Pls.’ Answering Br. at 45.
298
See supra Section II.A.1.
299
Gamco, 2016 WL 6892802, at *17 (rejecting liquidity theory despite allegations that
stockholder forced “needless” transactions “at suboptimal prices” in order to meet its own
“timetable”); Crimson, 2014 WL 5449419, at *19 (dismissing complaint alleging liquidity-
driven conflict theory where it was alleged that the defendant investment management firm
“usually holds its assets for five years, but has held its interest [the relevant company] for
eight,” and that the firm’s “longer-than-normal investment in [the company] reflected the
illiquid size of its control block”); Chen, 87 A.3d at 671–72 (rejecting liquidity-driven
conflict theory on a summary judgment record where it was alleged that that the
institutional investor desired to wind down the fund throughout which it owned the target’s
stock); Morton’s, 74 A.3d at 667 (rejecting liquidity-driven conflict theory based on
allegation that the private equity fund urgently needed cash to raise a new fund and to free
up investors to participate in that fund).
83
Unlike Stollmeyer, the allegations against Liaw do not fall into the rare fact
pattern. Plaintiffs allege that IVP began investing in Mindbody in 2012 and had
invested over $20 million in Mindbody prior to the Company’s initial public offering
in 2015. IVP’s investment in Mindbody was held in a fixed-life investment fund
that sought to exit its investments between three to five years. The Amended
Complaint alleges that “IVP had a 2018 target date to liquidate its Mindbody
investment” and that “Liaw was planning to step down from the Board in 2019.”300
And IVP’s super-voting Class B stock was subject “to a time-based sunset provision,
which would automatically convert the Class B super-voting stock to common stock
by 2021.”301 Together, Plaintiffs allege, these facts indicate that “a near-term sale
allowed Liaw to use his directorship and IVP’s clout to obtain IVP’s desired
objective.”302
Even assuming that Liaw was conflicted by virtue of IVP’s expiring
investment horizon, the Amended Complaint does not support a reasonable
inference that Liaw took any action to tilt the process toward his personal interest.
Amid an otherwise comprehensive and compelling brief, Plaintiffs fail to make
arguments specific to Liaw. He is not alleged to have been involved with the
300
Am. Compl. ¶ 26.
301
Id. ¶ 38.
302
Pls.’ Answering Br. at 45.
84
lowered guidance issued on November 6, 2018.303 He is not alleged to have been
meaningfully involved in the diligence phase, throughout which Plaintiffs allege that
Stollmeyer treated potential bidders differently than Vista.304 In fact, the Amended
Complaint contains no allegation that Liaw interacted or communicated with any
potential bidder, let alone Vista. The Amended Complaint similarly contains no
mention of Liaw playing any sort of role throughout the go-shop period.305 When
White suggested to Liaw that the Q4 actuals be disclosed to stockholders ahead of
the stockholder vote, Liaw actually agreed.306 The dearth of compelling allegations
as to Liaw is not surprising, given that one of Plaintiffs’ reasonably conceivable
303
See, e.g., Am. Compl. ¶ 77 (“Meanwhile, Stollmeyer and White plotted to drive down
Mindbody’s stock price.” (emphasis added)); id. ¶ 79 (alleging that White asked whether
there was a “creative way to guide 2019” and that Stollmeyer “wanted to guide below the
Wall Street expectations”); id. ¶ 83 (alleging that “Stollmeyer told White . . . that ‘a few
hundred thousand of Q4 revenue makes a huge difference Tuesday’” (emphasis added));
id. ¶ 87 (alleging that Stollmeyer revised the Company’s press release for the November 6,
2018 earnings call); id. ¶ 89 (“Stollmeyer and White led the Q3 analyst call on November
6.” (emphasis added)).
304
See, e.g., id. ¶ 110 (alleging that Stollmeyer and White used a list of Vista’s diligence
requests to populate a data room for Vista); id. ¶¶ 113–114, 116 (alleging that Stollmeyer
remained in contact with Vista throughout the diligence phase); id. ¶ 119 (alleging that,
after Vista made its original bid of $35 per share, “Stollmeyer continued to run interference
with other bidders” (emphasis added)).
305
Id. ¶ 21 (“Stollmeyer and White sabotaged the go-shop by disappearing on vacations,
during which time they made themselves available to Vista but refused to schedule any
meetings with prospective bidders.” (emphasis added)); id. ¶ 135 (“Stollmeyer and White
also went on vacation during the go-shop.” (emphasis added)); id. ¶ 138 (“Stollmeyer and
White delayed providing diligence to [a potential bidder], effectively running the clock on
the go-shop.” (emphasis added)).
306
Id. ¶ 142.
85
theories is that the Board failed to oversee Stollmeyer sufficiently.
Plaintiffs argue that “Liaw formed an alliance with Stollmeyer in which they
used their board positions and super-voting Class B stock to bring about a near-term
sale within IVP’s desired investment horizon,”307 but their position finds no support
in the Amended Complaint. Lacking concrete allegations of involvement in the sale
process like those described in the preceding paragraph, the Amended Complaint
fails to create a reasonable conceivability that Liaw was “operating in league with
Stollmeyer.”308 The motion to dismiss is therefore granted as to Liaw.309
307
Pls.’ Answering Br. at 47.
308
Id. at 54.
309
The dismissal of Liaw is a pre-judgment order. “Prejudgment orders remain
interlocutory and can be reconsidered at any time, but efficient disposition of the case
demands that each stage of the litigation build on the last, and not afford an opportunity to
reargue every previous ruling.” Siegman ex rel. Siegman v. Columbia Pictures Entm’t,
Inc., 1993 WL 10969, at *3 (Del. Ch. Jan. 15, 1983) (internal quotation marks omitted).
“If discovery shows that [Liaw] had a more significant and compromising role, then subject
to the law of the case doctrine, [the plaintiff] can seek to revisit [Liaw’s] dismissal, should
future developments provide a compelling reason for doing so.” In re Dell Techs. Inc.
Class V S’holders Litig., 2020 WL 3096748, at *43 (Del. Ch. June 11, 2020) (citing Zirn
v. VLI Corp., 1994 WL 548938, at *2 (Del. Ch. Sept. 23, 1994)); see id. (dismissing a
director from the case because “it [was] not reasonably conceivable that [the director] could
be held liable based on the events described in the complaint” but holding that the plaintiffs
could “seek to revisit her dismissal[] should future developments provide a compelling
reason for doing so”); see also Bamford v. Penfold, L.P., 2020 WL 967942, at *31 n.24
(Del. Ch. Feb. 28, 2020) (allowing the plaintiffs to revisit dismissal of a fraud claim “[i]f
discovery suggest[ed] a role for th[at] claim”).
86
III. CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is DENIED as to
Stollmeyer and White. Defendants’ motion to dismiss is GRANTED as to Liaw.
87
In Re: Mindbody, Inc. Stockholders Litigation
Combined Opinion