Vista Wins Novel Ruling in $1.9 Billion Mindbody Buyout Case (1)

Vista Equity Partners Management LLC prevailed in court Monday against a challenge to its $1.9 billion take-private deal for Mindbody Inc., but the fitness app maker’s ex-CEO remains on the hook for about $48 million.

Delaware’s top court issued a novel decision for Vista, rejecting claims that the private equity giant assisted in former Mindbody CEO Richard Stollmeyer’s covert scheme to tilt the sales process toward a transaction that offered him fast liquidity and a host of post-deal perks. At the same time, the appellate court upheld most of a ruling last year that hit Stollmeyer with $1 per share in damages over the $36.50-per-share buyout. The deal closed in February 2019.

Justice Karen L. Valihura, writing in a 110-page opinion, acknowledged a contract provision requiring Vista to notify Mindbody if the latter’s disclosures were misleading or incomplete. But a Delaware Chancery Court judge still went too far when she ruled the investment firm “knowingly participated” in Stollmeyer’s breaches, Valihura said, confronting several issues of first impression.

Imposing aiding and abetting liability on an outside bidder that “passively stood by” could “collapse the arms’-length distance between the third-party buyer and the target, forcing the buyer to consider its duty to the target’s stockholders instead of to its own,” Valihura wrote. “Vista provided no affirmative assistance at all and took no action that actively furthered Stollmeyer’s disclosure breach.”

The decision largely affirmed a ruling for Delaware’s elite business court by its chief judge, Chancellor Kathaleen St. J. McCormick, who said Stollmeyer “greased the wheels for Vista"—where he wanted to work—by keeping Mindbody’s board in the dark long enough to foil competing suitors.

McCormick ruled against Stollmeyer on two legal theories in March 2023, finding that he breached his fiduciary duty to maximize the sale price and made misleading disclosures about the transaction that duped investors into approving it. Each set of violations provided an independent basis for assessing $1 a share in damages, she said.

The trial judge also held Vista jointly liable for aiding and abetting the misleading disclosures, though without blaming the investment firm for playing any direct role in the flaws that plagued the process. McCormick cited the merger agreement provision requiring Vista to notify Mindbody if it became aware of any disclosure defects.

‘Overt Participation’

That’s where the first-of-its-kind decision went astray, according to Monday’s ruling by the Delaware Supreme Court, which heard the appeal in September.

Valihura, writing for the unanimous five-member tribunal, stressed how “thin” the relevant legal precedents were. But there are powerful arguments against the broad view of aiding and abetting that McCormick took, she said.

To begin with, there’s a fine line for a bidder between hard bargaining and misusing connections to an insider at the company targeted for acquisition, which is why no buyer has ever faced aiding and abetting damages in that context, according to Valihura.

While liability may be theoretically possible, at the very least it would require “overt participation,” she said. “Vista’s inaction, absent a duty to Mindbody’s stockholders to act, does not constitute substantial assistance in Stollmeyer’s disclosure breach.”

The court also shot down the idea that Vista’s obligation to notify Mindbody of disclosure violations translated into a direct duty toward stockholders. The “exacting requirements” of an aiding and abetting claim “would be diluted by implying that contractual rights and obligations related to proxy disclosures between merger partners create an independent duty of disclosure” to the other side’s investors, Valihura said.

Mindbody, Vista, and Stollmeyer were represented by Quinn Emanuel Urquhart & Sullivan LLP; Richards Layton & Finger PA; and Kirkland & Ellis LLP. The investors were represented by Friedlander & Gorris PA and Bernstein Litowitz Berger & Grossmann LLP.

The case is In re Mindbody Inc. S’holder Litig., Del., No. 484,2023, opinion 12/2/24.

—With assistance from Jennifer Kay.