Delaware Litigation Update - February 2025

Mindbody Decision: Delaware Court Preserves Traditional Boundaries of M&A Buyer Liability

            The Delaware Supreme Court has decisively blocked what could have been a dramatic expansion of acquirer liability in M&A transactions.  In In re Mindbody, Inc. Stockholder Litigation, C.A. No. 484, 2023 (Del. Dec. 2, 2024), the Court rejected an argument that would have exposed buyers to post-closing litigation based on standard merger agreement provisions that create duties to a seller’s shareholders.

            Vista, a private equity buyer, became interested in an opportunity to purchase software company Mindbody.  Mindbody management had conversations with Vista regarding Mindbody’s transaction process, transaction timeline, its likely acceptable offer price, and a potential post-transaction position for Mindbody’s CEO at Vista.  The Delaware Chancery court held that Mindbody’s CEO breached his duty to shareholders by withholding information about these meetings from the board in Mindbody’s proxy statement.  Because the merger agreement provision required Vista to correct errors in proxy disclosures, the Delaware Court of Chancery also found that Vista was liable to seller’s shareholders for aiding and abetting management’s disclosure violations.

            Had this theory stood, it would have significantly expanded potential buyer liability in fiduciary duty cases. In its 1986 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. decision, the Delaware Supreme Court held that boards of directors must face an enhanced level of scrutiny when attempting to sell their companies.  This decision was narrowed in the Court’s 2015 decision in Corwin v. KKR Financial Holdings LLC, which held that, so long as the transaction was approved by a “fully informed, uncoerced majority of the disinterested stockholders,” Revlon scrutiny would not apply.

            On appeal, the Delaware Supreme Court emphatically rejected this potential expansion of fiduciary duty liability, reaffirming that arm’s length buyers enjoy protection from aiding and abetting claims. In re Mindbody, Inc. Stockholder Litigation, C.A. No. 484, 2023 (Del. Dec. 2, 2024).  The court emphasized that, unlike financial advisors or other transaction intermediaries, buyers are expected to negotiate aggressively in their own interests.  Converting standard contractual obligations into fiduciary duties to a seller's stockholders would fundamentally alter the dynamics of M&A negotiations.

            Instead, the court held that buyers can only held be liable if they “attempt to create or exploit conflicts of interest” through active steps.  Mere knowledge of or silence regarding seller misconduct—even when combined with a contractual duty to speak up—cannot support liability.  This holding preserves a buyer’s ability to pursue advantageous deals without fear of routine post-closing exposure.

            The impact of this decision should be immediate and significant.  The trial court’s approach would have made many more buyers potential defendants in take-private litigation, based on provisions that are standard in merger agreements.  The Delaware Supreme Court’s reversal maintains important boundaries between arm’s length negotiation and improper participation in fiduciary breaches.

            Importantly, although this opinion related to disclosure obligations, plaintiffs did not plead abettor liability for process violations.  Both the trial and appellate courts noted that they were not weighing in on whether Vista’s conversations with Mindbody’s CEO rose to “active participation.”             The decision reaffirms that Delaware law scrutinizes the conduct of a selling company’s fiduciaries while protecting arm’s'-length buyers acting in their own interests - even when those interests lead them to remain silent about seller misconduct they observe.