Delaware Court of Chancery Finds Revlon Violation For Founder Who Favored Buyer And Failed To Disclose, And Aiding & Abetting Violation For Buyer
On March 15, 2022, Chancellor Kathaleen McCormick of the Delaware Court of Chancery ruled that the founder and former CEO of Mindbody Inc. (the “Company”) breached his fiduciary duties to stockholders in connection with the 2019 sale of the Company to private equity firm Vista Equity Partners Management, LLC (“Buyer”). In Re Mindbody, Inc., Stockholder Litigation, CA. No. 2019-0442-KSJM (Del. Ch. Mar. 15, 2023). The Court ruled that the founder breached his duty of loyalty by structuring the sale process to favor the Buyer for personal gain and breached his duty of disclosure by creating a “false narrative” in the proxy to obscure the truth about the flawed process. The Court also concluded that Buyer aided and abetted the founder’s disclosure breaches by failing to correct the inaccuracies in the proxy. The Court awarded $1 per share in damages for the fiduciary duty breach, based on the difference between the deal price and the price that the Court concluded Buyer would have paid in a fair process, and the same $1 per share as nominal damages for the disclosure breach and aiding and abetting.
The Court found that multiple aspects of the Mindbody sale process “fell outside of the range of reasonableness” and violated the founder’s Revlon duties to maximize shareholder value. The actions that the Court believed to be particularly troubling were that the founder: (i) sought an introduction to and began negotiations with the Buyer without telling the board; (ii) delayed informing the board of the Buyer’s inbound expression of interest so that Buyer could advance its diligence efforts and gain a significant competitive advantage over other potential bidders; and (iii) delayed Mindbody’s release of its Q4 financial results, which revealed stronger-than-expected performance, until after the merger closed. The Court found that these actions caused the sale of the company at $36.50, which was particularly egregious because the Buyer had the authority to pay up to $40 per share.
Defendants invoked Corwin, arguing that the business judgment rule should apply because the transaction was approved by stockholders, but the Court found that numerous proxy disclosure deficiencies defeated Corwin cleansing. Specifically, the Court noted that the proxy misleadingly omitted to disclose the founder’s personal motivations, unique interest in Buyer, and initial negotiations with the Buyer that were undertaken without board approval. Further, the Court held that Buyer knowingly aided and abetted the disclosure breaches by failing to correct the omissions because Buyer was contractually obligated under the Merger Agreement to correct any proxy materials’ material omissions.
In assessing damages, the Court held that the founder and Buyer were jointly and severally liable for $1 per Mindbody share because the factual record demonstrated that the buyer likely would have paid $37.50 per share if the sale process had been conducted properly. The Court rejected the $3.50 per share damages plaintiffs sought, which was based on the $40 per share price the buyer was authorized to offer, as the Court was skeptical that it could have actually been achieved.