Background
Neither party challenged the trial court’s factual findings. As a result, the Supreme Court adopted the posttrial opinion’s factual recitation practically verbatim.
In 2018, three years after going public, Mindbody, Inc. (“Mindbody” or “Company”) endured numerous failed initiatives, which, coupled with the need of Richard Stollmeyer (the CEO and founder of Mindbody) for liquidity and a board-represented venture capital (“VC”) firm’s desire for a near-term sale, caused Stollmeyer to shop the Company.
By August of 2018, Stollmeyer commenced an informal sale process without the board’s consent or knowledge, which the trial court found ultimately allowed Vista Equity Partners Management, LLC (“Vista”) to obtain a competitive advantage over other potential acquirers. For example, Stollmeyer engaged an investment banker to set up a meeting with a Vista principal and a senior vice president, where Stollmeyer informed the two of his desire to “find a good home for his company,” information that he did not have authorization to disclose. Shortly after that meeting, Stollmeyer advised the board of his conversation but failed to mention any discussion of a potential sale. At the request of the Vista representatives, Stollmeyer attended Vista’s CXO Summit. During a one-on-one meeting with Vista’s founder at the Summit, Stollmeyer stated his intent to explore a sale of Mindbody, something he admitted to not having board authorization to say and information that was not otherwise available to the market.
Based on Stollmeyer’s statements, Vista commenced its acquisition process, requesting a market study from Bain & Co. nearly one month before Mindbody contacted other potential acquirers. Ultimately, Vista provided an oral expression of intent to Stollmeyer by stating that it “would pay a substantial premium to Mindbody’s recent trading price.” Stollmeyer then waited two days before informing his management team and another eight days before notifying the entire board.
By the end of October, the board appointed a transaction committee—with the VC firm’s designee serving as chair—to interview financial advisers and to make a recommendation. Notably, the committee adopted guidelines that required management to obtain authorization before communicating with strategic partners or financial advisers.
In November, the Company lowered guidance for Q4 earnings during an earnings call, which Stollmeyer acknowledged would affect a potential acquirer’s desire to purchase the Company. Vista viewed the downgrade as an opportunity for a lower deal price and higher exit profit. After the earnings call, Stollmeyer’s investment banker told Vista’s representative that Stollmeyer wanted a $40 per share minimum. Vista was then able to run that number into its financial models. By mid-November, Stollmeyer informed Vista of the upcoming sales process. A few days later, Mindbody formally hired the investment banker that Stollmeyer had been using during the informal deal process. They planned to solicit strategic bidders on November 29 and financial sponsors on November 30. Yet, the investment banker “formally” contacted Vista on November 30 but waited until December 3 and 4 to contact other financial sponsors. With this leg up, Vista received its final market study two days before other financial sponsors had access to Mindbody’s data room. At this point, Stollmeyer still had not informed the board of key information regarding the process: the VC firm’s desire to sell, Vista viewing Mindbody’s stock downturn as a buying opportunity, Vista’s intent to make an offer on a premium over its trading price, the fact that Stollmeyer had already met with Vista more than once, Stollmeyer’s conversation with a Vista portfolio company CEO, and Stollmeyer’s plan to step down in two or three years.
Vista submitted an offer to acquire Mindbody for $35 per share, with a twenty-four-hour deadline, three days after the data room opened to the remaining bidders on December 18. However, the other bidders were further behind in diligence and unprepared to make an offer. Two days later, Mindbody made a counteroffer of $40 per share, and Vista countered with a $36.50 best and final. With all other bidders out, the entire board convened and directed management to accept the bid. Following the merger agreement, Stollmeyer bragged that Vista was “able to conduct all of our outside-in work before the process launched[.]”
The merger agreement provided for a thirty-day go-shop and gave Vista the contractual right to review Mindbody’s proxy materials. Under the merger agreement, if Vista became aware of material facts that were omitted from the proxy information, Vista had an obligation to inform Mindbody. That obligation was a key component of the Court of Chancery’s conclusion that Vista provided substantial assistance and thus aided and abetted the CEO’s disclosure breaches.
On January 4, 2019, Mindbody determined it had beaten Wall Street consensus estimates for Q4 revenue. It did not include that information in its January 9 preliminary proxy related to the deal. After discussing whether to disclose the Q4 earnings while stockholders deliberated over approving the deal, Mindbody’s audit committee voted against disclosure. Mindbody’s initial proxy also omitted references to some of Stollmeyer’s meetings with Vista and Vista’s expression of interest in mid-October. The definitive proxy and supplemental disclosures told stockholders about Stollmeyer’s additional meetings with Vista representatives and attendance at the summit but failed to include the substance of his conversations.
Litigation ensued. After trial, the Court of Chancery found Stollmeyer liable for damages of $1 per share for breaching his duty of loyalty under Revlon. Also, it awarded damages of $1 per share against Vista and Stollmeyer jointly and severally for the disclosure violations.
Defendants’ Appeal
On appeal, the defendants challenged the Court of Chancery’s (1) holding that Stollmeyer breached his fiduciary duty of loyalty under Revlon, (2) holding that Stollmeyer breached his fiduciary duty of disclosure, (3) holding that Vista aided and abetted Stollmeyer’s disclosure breach, (4) award of $1 per share in damages for Stollmeyer’s Revlon breach, and (5) refusal to apply a settlement credit under the Delaware Uniform Contribution Among Tortfeasors Act (“DUCATA”).
Duties of Loyalty and Disclosure
Regarding the first and second arguments concerning Stollmeyer’s liability, and the resulting damages, the Supreme Court affirmed the chancellor’s holdings that he breached his duties of loyalty and disclosure and owed $1 per share in damages. As to loyalty, the “paradigmatic” Revlon claim entails 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.” The trial court’s factual findings supported that Stollmeyer’s subjective intent surrounding his financial position, favoritism for Vista, and desire to sell fast resulted in disabling conflicts. The same was true as to the disclosure violations, with the Supreme Court agreeing that his omissions, in aggregate, were material, with the strongest claims concerning his tips to Vista regarding pricing and process timing that violated transaction committee guidelines. The Supreme Court believed any reasonable stockholder would find those tips favoring one potential acquirer “indicative of a potentially flawed sale process” and “important in considering whether to vote to approve the merger.” Because such material information was withheld, the Supreme Court agreed with the chancellor that the Corwin cleansing defense was unavailable. The evidence also supported the $1 per share in damages for Stollmeyer’s duty of loyalty breach. And the Supreme Court agreed that the defendants waived their right to seek settlement credit under DUCATA by failing to adequately apprise the plaintiffs pretrial that they intended to pursue a settlement credit.
Aiding and Abetting
The Supreme Court then analyzed the various novel issues implicated by the chancellor’s holding that Vista aided and abetted Stollmeyer’s disclosure breach, noting “how thin the case law” was on the issues. That included when the Supreme Court can hold third-party buyers liable for aiding and abetting fiduciary breaches (which the Supreme Court explained it had never done), whether contractual duties in a merger agreement could create for third parties fiduciary duties to the target’s stockholders, and whether a passive failure to act may give rise to liability. In total, for the reasons discussed below, the Supreme Court concluded that Vista had not substantially assisted the disclosure breaches to warrant aiding and abetting liability.
Focusing on the disputed “knowing participation” element, the Supreme Court reaffirmed that the knowledge (scienter) prong contains two distinct concepts: the plaintiff must prove that the aider and abettor knew that “the primary party’s conduct constitute[d] a breach” and “that its own conduct regarding the breach was legally improper,” which is distinct from knowledge of the primary party’s conduct.
The Supreme Court began its discussion by acknowledging that “participation should be the most difficult to prove” against a potential acquirer who negotiated at arm’s length. Such an acquirer is protected in its attempt to reduce the sale price through arm’s-length negotiations as long as it is not exploiting conflicts, and the court noted that a different rule might deter third parties from deals altogether.
Turning to the aiding and abetting analysis, the Supreme Court adopted the Restatement § 876(b) factors to determine whether conduct amounts to “substantial assistance.” Under those factors, one must actively participate in the breach, rather than have “mere passive awareness.” In reviewing the Restatement factors, the Supreme Court held that Stollmeyer’s November tips supported the trial court’s conclusion that Vista likely knew that Stollmeyer’s conduct constituted a breach but reversed the chancellor’s finding that Vista knew of the wrongfulness of its own conduct. Considering Vista’s awareness of its own misconduct, the Supreme Court stated that the chancellor’s finding that Vista participated in the drafting of the proxy materials was not supported by the record evidence, and the trial court did not find that Vista actively contributed to drafting or editing the proxy materials. The Supreme Court held that passive awareness of a fiduciary’s disclosure breach that would come from reviewing draft proxy materials did not amount to taking actions to facilitate or assist Stollmeyer’s breach. Rather, Vista stood by passively while Stollmeyer breached his own duty of disclosure.
As part of this analysis, the Supreme Court took on perhaps the most interesting portion of the Court of Chancery’s ruling: what obligations did Vista undertake by negotiating for a contractual obligation in the merger agreement to review and comment on public disclosures for the deal? It was here that the Supreme Court parted company with the Court of Chancery on both a factual issue and a legal conclusion. Factually, the Supreme Court concluded the finding that Vista had participated in drafting the proxy was not supported by record evidence. Legally, the contractual obligation in the merger agreement did not impose on Vista an independent duty of disclosure to Mindbody’s stockholders. That meant there was no basis for the trial court’s ruling that Vista had “withheld information from the stockholders.” One of the bases for this conclusion was “compelling public policy reasons” of not collapsing the arm’s-length distance between the third-party buyer and target to make the buyer consider duties to target stockholders, meaning that the third-party buyer could potentially have to “second-guess the materiality determinations and legal judgment of the target’s board, which already owes fiduciary duties to its stockholders.”
Finally, the Supreme Court analyzed the Restatement’s “state of mind” factor and the evidence that the Court of Chancery had evaluated below. To the Supreme Court, the evidence pointed to below—scrubbing of “incriminating” information from investment committee materials that related to communications with the CEO—was insufficient given the timing of when it occurred (almost a month before the drafting of the proxy); and it pointed to the fact that the primary violator may have violated his Revlon duties, not his disclosure duties. Given that the aiding and abetting claim focused on the disclosure breaches, the plaintiffs needed to show that Vista knew its own conduct was wrongfully assisting the CEO in those specific breaches, and the evidence did not do so.
Together, the record analyzed through the Restatement’s factor did “not sufficiently support a determination that Vista’s conduct [rose] to the level of ‘substantial assistance’ or ‘participation’ in” the CEO’s breach. That warranted reversing the holding below that Vista aided and abetted Stollmeyer’s disclosure violation. Because the plaintiffs were only entitled to one recovery of $1 per share, and with the Revlon damages award affirmed, the ruling also meant that the Supreme Court did not need to analyze damages for the disclosure violation.
Conclusion
The Supreme Court’s opinion covers both old and new ground. It reminds sell-side fiduciaries and advisers about the importance of both disclosing and aligning the interests of executives/founders under Revlon in change-of-control situations, and the pitfalls associated with failing to do so. And it provides fresh guidance concerning (1) how Delaware courts should evaluate the Restatement factors in an aiding and abetting analysis, and (2) the scope of an acquirer’s obligations under contractual provisions to review deal-related disclosures—all of which indicates a reluctance to impose aiding and abetting liability on a third-party acquirer negotiating at arm’s length.
