On March 15, 2023, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued a rare post-trial decision finding a CEO personally liable for millions of dollars in damages for breaching his fiduciary duties by tilting his company’s sale process in favor of his preferred acquiror and failing to disclose material facts about the sale process. Equally unusual, the Court of Chancery found the acquiror liable for monetary damages, on a joint basis with the CEO, for aiding and abetting the CEO’s breaches of fiduciary duty in providing inadequate disclosures to stockholders. The decision provides valuable insight into what Delaware courts expect of management and a board when selling a company, as well as the risks that can arise when a court determines that a sale process and related disclosures were improper.
The Court of Chancery’s decision resolved a challenge to the 2019 $1.9 billion take-private sale of Mindbody, Inc. (MindBody or the company) to Vista Equity Partners Management, LLC for $36.50 per share, which represented a premium of approximately 68 percent. Earlier in the case, two other defendants—a member of the MindBody board who chaired the Transaction Committee that oversaw the company’s sale process and the venture firm with which he was affiliated—settled claims against them for $27 million.
The Court’s Factual Determinations
The Court of Chancery’s central finding in the case was that the CEO, desirous of a liquidity event due to his own personal circumstances and fatigued with public company life after 15 years of running the company, launched a sale process without the board’s knowledge and steered the process in favor of his own preferred buyer. The court detailed its specific findings in a 119-page decision, and all factual characterizations stated below are the court’s.
The court found that in the early months of the sale process, the CEO took a number of actions without the board’s full knowledge or involvement, including actions that led him to favor the eventual acquiror. This included meeting with a banker, which would ultimately become the company’s financial adviser, that had done a number of deals selling companies to the acquiror. The CEO also met several times with the acquiror, including at an annual gathering for executives sponsored by the acquiror that the court viewed as a mechanism to get executives comfortable with selling to the acquiror. In addition, he had a call with an executive of another portfolio company of the acquiror to learn more about what life could look like post-acquisition as the CEO of an acquiror-sponsored portfolio company.
In the meantime, as the CEO’s enthusiasm for the acquiror grew, he put meetings with other potential buyers on the back burner. The acquiror ultimately expressed interest in acquiring the company, but the CEO took eight days to inform the board, which gave the acquiror time to sprint ahead with its own preparations to make an offer before other potential bidders could be ready. At the same time, the CEO secretly informed members of management and allied himself with one board member who was a partner of a venture firm that, according to the court, also wanted near-term liquidity.
The court found that even after the CEO took the deal to the board, a number of process flaws continued. The CEO did not fully inform the board of the extent of his conversations to date, the desire for liquidity that he and the other board member had, or that, while he was willing to continue his position as CEO for two to three years, he hoped to sell the company before that time. Unaware of those facts, the board formed a Transaction Committee, but did not do so until two weeks later, and at the CEO’s urging, installed that other board member as its chair. The court found that only one member of the board (who also served on the Transaction Committee) had experience selling a public company. The Transaction Committee established guidelines to manage communications with bidders, but the CEO communicated with the acquiror in violation of the guidelines. The CEO also led an earnings call in which, according to the court, the CEO unduly depressed expectations for the company, causing the stock price to fall 20 percent and a sale of the company to appear more attractive. The banker tipped off the acquiror about the CEO’s preferred sale price, and the CEO tipped off the acquiror about other bidders.
In the end, the acquiror used its early timing advantage and its propensity for speed to submit a “best and final offer” at $36.50 per share, when another bidder was still in the early stages of diligence and could not catch up. The court determined that without the CEO’s help, the acquiror “would not have gotten the Company for $36.50 per share” and that based on the evidence in the case, the acquiror would have paid $37.50 per share had a more competitive bidding dynamic existed.
The Court’s Conclusions About the Conduct at Issue
In assessing whether the CEO breached his fiduciary duties, the court applied Delaware’s Revlon doctrine, which provides that when selling a company for cash, the board and management must act reasonably in designing a process to maximize short-term stockholder value.1 The court concluded that the plaintiffs had stated a paradigmatic Revlon claim, under which the CEO tilted the process toward a particular buyer for personal reasons and in a manner inconsistent with maximizing stockholder value. Because the CEO kept the board “in the dark” in various ways, the court found that the board’s effort to implement process protections could not support the reasonableness of that process or its outcome—or shield the CEO’s behavior.
The court also concluded that the CEO could not rely on the defense, established under the case law,2 that a fully informed stockholder vote “cleansed” any deficiencies in the sale process or price because the disclosures to stockholders in the sale were inadequate. Among other things, the plaintiffs proved at trial that the CEO knowingly breached his disclosure obligations by omitting material information regarding the extent of his conflicts, his early dealings with the acquiror, and the content of those dealings, and that the stockholder vote was infected as a result.
As to the plaintiffs’ claims that the acquiror aided and abetted breaches of the CEO’s fiduciary duties over the process itself, the court found that for procedural reasons in the litigation, the plaintiffs had waived those claims. The court nonetheless concluded that the acquiror aided and abetted the CEO’s disclosure breaches. A predicate for the court’s conclusion was that the merger agreement obligated the acquiror to review and notify the company of material deficiencies in the company’s proxy disclosures. The court reasoned that because the acquiror had this obligation; reviewed and commented on the proxy before it was issued; and was the counterparty to the CEO’s conduct and knew about the process flaws that were not fully disclosed to stockholders, the acquiror aided and abetted the CEO’s disclosure breaches.
As a remedy for the CEO’s misconduct in the process, the court awarded damages of $1 per share against the CEO, given the evidence that the acquiror would have paid $37.50 per share instead of the deal price of $36.50. The court also awarded nominal damages of $1 per share against the CEO and the acquiror for the disclosure breaches. However, because the plaintiffs “are only entitled to one recovery,” the court concluded that the defendants were jointly and severally liable for a single damages award, and as a result, stockholders would receive only $1 per share, regardless of the source. At the time of the sale, public stockholders held millions of shares, which would indicate that the damages award will total many millions of dollars, and the court also determined that the stockholders would be entitled to costs and interest on the award from the time of the wrongdoing. It is unclear from the opinion whether the defendants will get credit for the amounts already paid by the settling defendants.
Key Takeaways
The case offers a number of insights for deals going forward.
Under Delaware law, when directors and officers sell a company for cash, they must act for the single-minded purpose of achieving the best short-term value for stockholders as a whole. The case involves exactly the type of facts that Revlon was designed to prevent: the undue favoring of one bidder to the disadvantage of short-term stockholder value.
The case confirms that the Revlon doctrine can and will be used by courts after the closing of a deal to find misconduct on the part of fiduciaries and to award damages.3 Fortunately for directors, officers, and buyers, such damages are rare. But the case is a reminder that Revlon is not a doctrine whose only vitality exists in the early stages of litigation when a court determines whether to enjoin a transaction.
Disclosures can be crafted in a way to ensure that stockholders are fully informed and that their approval will cleanse Revlon claims. Flawed disclosures can also lead to their own claims—including against buyers who have the sorts of disclosure-related obligations the acquiror had here.
The case is also another reminder that text messages and other forms of informal communication can play an outsize role in a judge’s fact-finding. For example, the court reviewed such communications from the CEO, and also relied on internal messages at the acquiror in evaluating the ultimate price it was willing to pay. It is important to be mindful of casual communications in the deal context.
Finally, and perhaps most importantly, the case reflects the court’s expectation that when management and directors embark on a sale process, directors will be given full information and will be allowed to lead the process in a way that ensures independence, addresses conflicts of interest, and advances the best interests of stockholders. Even if directors are inexperienced in a sale, they can be given the tools and advice required to lead the process properly. A proper board process ultimately protects management—and large stockholders and buyers—as well. The court’s award of monetary damages against the CEO and acquiror underscores the stakes.
[1] Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
[2] Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015).
[3] The utility of damages as a remedy in post-closing Revlon cases has been questioned by Delaware courts in prior rulings. See e.g., C&J Energ. Serv., Inc. v. City of Miami Gen. Empl. Ret. Trust, 107 A.3d 1069, 1073 (Del. 2014) (noting that “an after-the-fact monetary damages” award under Revlon was an “imperfect tool” for remedying breaches of fiduciary duty in connection with a sale process).
