Delaware Supreme Court Affirms Breach of Fiduciary Duty Judgment Against CEO but Reverses Bidder’s Aiding and Abetting Liability

In a recent decision by the Delaware Supreme Court sitting en banc in In re Mindbody, Inc., Stockholder Litigation,^[1] the court affirmed the Court of Chancery’s determination that Mindbody’s CEO had breached his duties of loyalty and disclosure in connection with the firm’s sale, but reversed the Court of Chancery’s holding that the successful bidder was liable for aiding and abetting the CEO’s disclosure breaches. At the same time, the court also affirmed the Court of Chancery’s holding that the defendants had waived their right to obtain a judgment credit based on other defendants’ pretrial settlement.

Facts of the case

The Delaware Supreme Court’s 110-page decision contains a detailed recitation of the facts, based on the Court of Chancery’s findings after trial. In brief, the Court of Chancery found that, beginning in 2018, Richard Stollmeyer, Mindbody Inc.’s CEO, effectively “greased the wheels” for Vista Equity Partners Management LLC (Vista) to acquire Mindbody.^[2] The opinion details multiple meetings between Stollmeyer and Vista representatives where Stollmeyer “did not adequately involve the [b]oard or erect, much less adhere to, speed bumps to ensure a value-maximizing process.”^[3] The board was unaware of the full extent of Stollmeyer’s involvement with Vista, including the fact that Stollmeyer had tipped off Vista that a formal sales process was beginning.

The Court of Chancery held that Stollmeyer had breached his fiduciary duties of loyalty and disclosure. Under Revlon,^[4] in an all-cash merger, directors and officers should exercise their fiduciary duties to maximize the company’s value for the stockholders’ benefit. The Court of Chancery held that the plaintiffs had proved a “paradigmatic” Revlon claim, where a conflicted fiduciary is insufficiently checked by the board and tilts the sale process toward his own personal interest.

The Court of Chancery also concluded that the proxy and supplemental disclosures omitted material facts showing Stollmeyer had favored Vista and given it an inside track throughout the bidding process. The Court of Chancery thus concluded that Stollmeyer had breached his duty of disclosure by not describing these pre-acquisition interactions. For its part, under the merger agreement, Vista had a contractual obligation to review the proxy and supplemental disclosures and to promptly notify Mindbody if it discovered any material omissions. The Court of Chancery determined that Vista had failed to correct the material omissions, making it liable for aiding and abetting Stollmeyer’s disclosure violations. The Court of Chancery assessed damages of $1 per share on both claims against Stollmeyer and against Vista on the aiding and abetting claim.

The Supreme Court’s decision

The court upheld the Court of Chancery’s holding that Stollmeyer had breached his fiduciary duties of loyalty and disclosure. The court agreed that Stollmeyer’s conduct called into question “the reasonableness of the decision-making process and the directors’ action in light of the circumstances then existing.”^[5]

However, for Vista, the Supreme Court reversed the Court of Chancery’s holding that Vista had aided and abetted Stollmeyer’s disclosure breaches. According to the court, the appeal raised several novel issues, including “the issue of when third-party buyers can be held liable for aiding and abetting fiduciary breaches, whether contractual undertakings in merger agreements can create fiduciary duties for third parties to the target’s stockholders, and whether a passive failure to act rather than active participation or ‘substantial assistance’ can give rise to liability.”^[6]

The Supreme Court focused on the third prong of the four-part test for proving an aiding and abetting claim under Delaware law — “knowing participation” in another’s breach of a fiduciary duty. The court divided this prong into two parts: knowledge (or scienter) and participation. The Court of Chancery had concluded that Vista acted with scienter and had participated in the breach because Vista had participated in the drafting of the proxy materials and had a contractual obligation in the merger agreement to review the proxy materials and rectify Mindbody’s omissions or misstatements yet had failed to do so. Thus, the Court of Chancery concluded that Vista had effectively withheld information from Mindbody’s stockholders.

The Supreme Court disagreed. On appeal, Vista argued that any such failure by the company to correct the proxy materials constituted “only a passive awareness” of Stollmeyer’s breach of disclosure and that third parties have no duty to ensure that all material facts are disclosed. The Supreme Court agreed with Vista and held that the contract “did not transform Vista’s inaction into ‘knowing participation’ in Stollmeyer’s disclosure breach.”^[7] Additionally, regarding the scienter requirement, the court found that the record fell short in proving Vista’s knowledge of the wrongfulness of its own conduct.

Applicable standard for ‘knowing participation’

According to the Supreme Court, to prove scienter by an aider and abettor a plaintiff must prove two types of knowledge: knowledge that the primary party’s conduct constituted a breach and knowledge that their own conduct was legally improper.^[8]  To demonstrate participation, a plaintiff needs to show that the aider and abettor provided “substantial assistance” to the primary violator. The court cited various Delaware cases that define “substantial assistance,” but noted that there was no Delaware case that found a third-party bidder liable for aiding and abetting a breach of fiduciary duty.

As the court noted, many Delaware courts cite to factors from the Restatement (Second) of Torts Section 876(b) as persuasive authority for the knowing participation element. The factors include (1) the severity and clarity of the violation, (2) the duration of the assistance and whether there was direct involvement, (3) the nature of the relationship between the primary and secondary actors, and (4) the secondary actor’s state of mind (which goes to the scienter element). Using these four factors, the court analyzed Vista’s behavior.

For the court, the clearest disclosure violation was the failure to describe Stollmeyer’s tips to Vista representatives regarding the sale process. The court found that the record supported the conclusion that Vista likely knew that the conduct of the primary party — Stollmeyer — constituted a breach, based on the “nature of the disclosure violation and its materiality to the target stockholders.”^[9] What was less clear was whether Vista knew its behavior was improper regarding the disclosures.

Regarding the duration of the assistance and whether there was direct involvement, the court wrestled with the novel issue of whether Vista’s contractual obligation to correct the proxy materials created an independent duty of disclosure to Mindbody’s stockholders. The court concluded it did not. In fact, there was no finding that Vista actively contributed to the drafting or editing of the proxy materials. The court emphasized that the law “requires more than the passive awareness of a fiduciary’s disclosure breach that would come from simply reviewing draft [] materials.”^[10]

On the third factor — the nature of the relationship between Vista and Stollmeyer — the court found that Vista’s status as a third-party buyer “affords it some protection” and that there are compelling policy reasons to not read a contractual disclosure-based obligation to imply independent fiduciary duties between third-party buyers and the target company’s stockholders.^[11]

On the fourth factor — Vista’s state of mind — the court found that the record did not support a finding that Vista knew its own conduct wrongfully assisted Stollmeyer in his disclosure breach. According to the court, there was no finding that Vista knew that its failure to abide by its contractual obligations to notify Mindbody of potential material omissions in the proxy materials was wrongful and that failure to act could subject it to liability to Mindbody’s stockholders.

Waiver of settlement credit affirmed

Finally, the court also affirmed the Court of Chancery’s holding that the defendants had waived their right to seek a settlement credit under the Delaware Uniform Contribution Among Tortfeasors Act.

Prior to trial, the plaintiffs had settled claims against two prior defendants for $27 million. After the trial, Stollmeyer and Vista, in the final footnote of their post-trial answering brief, asserted that any compensatory damages should account for the earlier settlement. After issuing its opinion, the Court of Chancery directed the parties to confer on a form of final order, but the parties disagreed over whether the Court of Chancery should apply a settlement credit of $27 million toward the $1-per-share damages award. In a November opinion, the Court of Chancery found that Stollmeyer and Vista had waived their right to seek this credit by not preserving the issue as to whether the settling defendants were “joint tortfeasors” with them and not raising the issue until the last footnote on the last page of their post-trial brief.^[12]The Supreme Court agreed, concluding that their decision to not raise the issue until late in the process conflicted with fundamental fairness in that the plaintiffs would have pursued a different strategy at trial.

Key takeaways

As we have previously indicated, while fact-specific, the case is a clear reminder of a board’s need to oversee a careful and diligent process that demonstrates the full board’s good faith. In a public company merger, the target’s proxy statement will generally include a detailed description of any of the contacts between the bidder and the target or its representatives. The proxy needs to accurately describe any relevant contacts, including events that may seem less important in isolation but whose omission may render other statements misleading. To the extent that management has conflicts, those conflicts should be openly identified and appropriately dealt with.

In reversing the bidder’s aiding and abetting liability, the court underscored its discomfort with holding a third-party bidder, which stands ordinarily at arm’s length from the target and its stockholders, tortiously liable for disclosure violations relating to the target’s own conduct. Nevertheless, given that a bidder may inherit the target’s liabilities if it succeeds in the acquisition, the bidder still has a plain interest in ensuring that the target board’s process is reasonable and diligent and accurately described.

^[1]_{No. 484, 2023, 2024 WL 4926910 (Del. Supr. Dec. 2, 2024).}

^[2]_{Id. at *1.}

^[3]_Id.

^[4]_{Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. Supr. 1986).}

^[5]_{Mindbody, 2024 WL 4926910, at *55.}

^[6]Id. at *68.

^[7]_{Id. at *69 – 70.}

^[8]_{Id. at *71 (citing Malpiede v. Townson, 780 A.2d 1075, 1097 (Del. Supr. 2001); RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 861 – 62 (Del. Supr. 2015)).}

^[9]_{Id. at *82 – 83.}

^[10]_{Id. at *89.}

^[11]_{The court noted that the contractual obligation, which was relied on by the Court of Chancery, received little attention from the parties at trial and on appeal. Thus, the court addressed the contractual obligation issue in a narrow fashion, partly because there is another case pending before the court that addresses similar issues but different facts. See In re Columbia Pipeline Group, Inc., Merger Litig., 299 A.3d 393 (Del. Ch. 2023).}

^[12]_{In re Mindbody, Inc., S’holder Litig., No. 2019-0442-KSJM, 2023 WL 7704774, at *5 (Del. Ch. Nov. 15, 2023), aff’d sub nom. In re Mindbody, Inc., No. 484, 2023, 2024 WL 4926910 (Del. Supr. Dec. 2, 2024).}