Mindbody Urges Del. Justices To Nix Sale Price Hike
An attorney for Mindbody Inc. and its private equity buyer said Wednesday that Delaware’s chancellor “simply rewrote the deal terms” in awarding an extra $1 per share to stockholders who accused the company’s CEO of tilting an allegedly lowball $1.9 billion sale to his preferred buyer.
Andrew J. Rossman of Quinn Emanuel Urquhart & Sullivan LLP, counsel to those named, told the full five-member court that Chancellor Kathaleen St. J. McCormick’s decision in March 2023 sided with stockholder arguments that “invaded the business judgment of an independent board.”
At issue was an appeal by Richard Stollmeyer, founder and CEO of Mindbody, and buyer Vista Equity Partners from a Court of Chancery finding in favor of a class challenge to the company’s $36.50 per share agreement of sale, announced in late 2018.
Mindbody, a services technology supplier to the fitness, beauty and wellness services industries, and Vista were sued in 2019 by one of the company’s largest shareholders in what became a consolidated class suit and appraisal action.
In their suit, shareholders initially led by affiliates of Luxor Capital Partners LP accused Stollmeyer and Vista in 2019 of breaching or aiding in breaches of fiduciary duty and disclosure obligations by failing to seek a better price and deal.
“The Chancellor’s decision was not rooted in any expert testimony. It wasn’t rooted in the intrinsic value of the company,” Rossman said. “It was based purely on the question ‘Should the board have countered,” the $36.50 per share offer’ and ‘Would Vista have gone up to $37.50.’”
The arguments Wednesday focused on amounts still owed to holders of nearly 35.6 million Mindbody shares under an order issued by Chancellor McCormick in November 2023.
Some 8 million shares also remain the focus of a stock appraisal suit, for which Mindbody made a $40.98 million prepayment based on a lower, $31.96 per share valuation, plus $9.02 per share accrued interest.
Rossman argued that the chancellor's decision relied heavily on a “Post-It” note contest regarding the price, with Vista employees making “water-cooler” guesses about the final deal price. More than half went above $37.50.
The bets, the chancellor wrote in a 120-page finding, “provide the most compelling evidence” as to what Vista would have paid.
Justice Karen L. Valihura asked Rossman if his client was challenging any of Chancellor McCormick’s findings of fact as being “clearly erroneous,” noting the Chancellor concluded after trial that Mindbody would have gone for $37.50 had Stollmeyer not “corrupted the process” through informal communications with Vista and Mindbody directors.
Stollmeyer, who founded Mindbody in 2001, set the sale process in motion in 2018 and started communicating with Vista Equity Partners about a possible deal but did not involve the board at the beginning of the process, the Chancellor found. Stollmeyer and Vista also failed to disclose the extent of their interactions in proxy statements leading up to the deal.
“So you’re on the buy side and become aware of breaches of fiduciary duty by one of the principals on the sell side,” Chief Justice Seitz asked. “What’s your duty” on the buy side?
“There’s no finding that Vista had a reason to know that Stollmeyer was hiding anything from the board about their interactions,” Rossman said.
Joel Friedlander of Friedlander & Gorris PA, counsel to the stockholders, told the justices that Stollmeyer tipped Vista to the fact that Mindbody was about to be in play, with Vista already given an advantage by advance preparations.
Vista was described as keeping a contemporaneous record of all their communications with Stollmeyer, but later deleting the references and prohibiting via a secure message similar, future references.
Friedlander said the case was fundamentally “about a CEO and founder who flouted his fiduciary duties” in pursuit of a sale of the business in ways “focused on the best deal for him, not for the stockholders generally.”
In November, Chancellor McCormick refused to offset the decision by $27 million paid to Luxor and two other stockholder investors that settled early.
The shareholders are represented by Jeroen van Kwawegen, Gregory V. Varallo and Andrew E. Blumberg of Bernstein Litowitz Berger & Grossmann LLP and Joel Friedlander, Jeffrey M. Gorris and Christopher M. Foulds of Friedlander & Gorris PA.
Mindbody Inc. and defendants Richard L. Stollmeyer, Vista Equity Partners Management LLC, Torreys Parent LLC and Torreys Merger Sub Inc. are represented by Matthew Solum PC, John Del Monaco, Jeffrey R. Goldfine and Jacob M. Rae of Kirkland & Ellis LLP and Lisa A. Schmidt, Robert L. Burns, Matthew D. Perri and John M. O'Toole of Richards Layton & Finger PA.
The case is In re Mindbody Inc. Stockholders Litigation, case number 484, 2023, in the Supreme Court of the State of Delaware. The case below is In re Mindbody Inc. Stockholders Litigation, case number 2019-0442, in the Court of Chancery of the State of Delaware.
—Editing by Neil Cohen and Alyssa Miller.
