Patrick Tkacik
Articles Editor, Delaware Journal of Corporate Law, Volume 50
Introduction
Recently, the eyes of the legal world have been firmly fixed on the Delaware Judiciary. Notable decisions like Tornetta v. Musk and Tripadvisor have drawn national attention, and in many cases, intense scrutiny.[1] Additionally, the recent proposal of SB 21 has sparked heated discussion.[2] Throughout the noise, however, Delaware Courts have continued to push out landmark opinions that reinforce the knowledge, skill, and reasoning that sets the state apart. Amongst those is the Delaware Supreme Court’s recent decision in In re Mindbody, Inc.[3] Here, the Delaware Supreme Court decided an issue of first impression that limits third-party liability to potential acquirers during a sale process. The Mindbody opinion touches on many cornerstone tenants of Delaware corporate governance, but the one that deserves attention in this article is the Court’s decision to limit aiding and abetting liability imposed on arms-length third parties.
Background
The controversy in Mindbody arose out of the 2019 acquisition of Mindbody by Vista Equity Partners Management (“Vista”).[4] Mindbody’s founder, Richard Stollmeyer, decided that it was time to sell his company, and began the sales process mostly without the knowledge of Mindbody’s board of directors.[5] Stollmeyer was quickly introduced to Vista, a private equity firm who uses a strategy of speed in negotiation to reduce potential interference with the sales process.[6] Shortly after the meeting, it seemed that Stollmeyer was set on not just selling his company, but selling his company to Vista.
After weeks of private back and forth discussions between Stollmeyer and Vista, Stollmeyer finally began to inform his management team of a potential sale.[7] He waited eight days after Vista’s expression of interest to begin contacting his remaining board members. However, he omitted key elements of his discussion with Vista and key pieces of information that he had shared with his management team.[8] Now aware of a potential sale, the board appointed a transaction committee which developed guidelines requiring management to obtain “authorization for outbound communications to potential strategic parties or financial advisors, timely reporting of indications of interest or strategic inquires to the board or Strategic Transaction Committee and flagging any potential conflicts.”[9]
During Mindbody’s Q4 earnings call, the company lowered its guidance, something Stollmeyer acknowledged would affect a potential acquirer’s desire to purchase the company.[10] Mindbody missed its Q3 revenue goal, and its stock dropped 20%.[11] The stock drop reenergized Vista, now fully intent on acquiring Mindbody. Additionally, Stollmeyer’s investment banker Jeff Chang told a Vista representation that Stollmeyer wanted $40 per share at minimum.[12] Days later, Mindbody formally hired that investment banker and planned to solicit strategic bidders on a certain date.[13] Chang formally contacted Vista on November 30, but waited to contact other financial sponsors until December 3 and 4.[14] Because of this advantage, and the advantage of previous undisclosed communications, Vista was able to run market studies and submit formal offers much faster than other potential buyers. Vista submitted an offer to acquire Mindbody for $35 per share, just three days after Mindbody’s data room was opened to other bidders.[15]
Accordingly, Mindbody countered at $40 per share, a figure recommended Chang.[16] On December 20, Vista came back and offered $36.50 per share, its “best and final” offer.[17] During this period, no other bidders made offers. Mindbody’s entire board convened and directed management to accept the bid and negotiate a merger agreement.[18] The merger agreement notably gave Vista the contractual right to review Mindbody’s proxy materials. If Vista became aware of material facts omitted from the proxy information, Vista was obligated to inform Mindbody.[19]
In January 2019, while the merger was pending shareholder vote, Mindbody determined that its Q4 revenue reflected a “massive beat against [Wall Street’s] consensus midpoint.”[20] None of this information or the discussions related to it was included in its January preliminary proxy statement. After internal discussion on whether to disclose the Q4 earnings, the audit committee voted against disclosure.[21] Notably, before this vote occurred, a draft proxy was sent to Vista as required by the merger agreement, alerting them of the earnings beat.[22]
Shareholders for Mindbody filed suit. After trial, the Court of Chancery found that Stollmeyer breached his fiduciary duty of loyalty under Revlon.[23] Additionally, the court found that Vista aided and abetted Stollmeyer’s breach of the duty of disclosure. The court awarded damages of $1 per share.[24]
The Appeal
On appeal, the defendants challenged the Court of Chancery’s ruling, on the grounds: (1) that Stollmeyer breached his fiduciary duty of loyalty; (2) that Stollmeyer breached his fiduciary duty of disclosure; (3) that Vista aided and abetted Stollmeyer’s disclosure breach; (4) the award of $1 per share; and (5) the refusal to apply a settlement credit under the Delaware Uniform Contribution Among Tortfeasors Act. The Delaware Supreme Court affirmed the first two arguments, finding that both fiduciary duties were breached by Stollmeyer. The damages which stemmed from those breaches were also deemed proper.[25] The Court, however, ultimately reversed the holding that Vista aided and abetted Stollemeyer’s disclosure breach.[26]
Aiding and Abetting Liability
The final issue—whether a third-party buyer can be held liable for aiding and abetting fiduciary breaches—is a novel one to Delaware Courts. The Supreme Court first commented on “how thin the case law is on this issue.”[27] Additionally, the Court considered whether “a contractual obligation between a target corporation and a third-party buyer to notify the other of potential disclosure violations creates an independent duty of disclosure . . . that can form the basis for secondary aiding and abetting liability.”[28]
The Court first noted the basic four-part test for proving aiding and abetting, requiring: “(1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, . . . (3) knowing participation in that breach by the defendants, and (4) damages proximately caused by the breach.”[29] The first two elements were met when the Court affirmed Stollmeyer breached his fiduciary duties to Mindbody’s stockholders. The Court focused its analysis on the third element—knowing participation.
Knowing participation involves two distinct concepts that are often analyzed separately: knowledge and participation. To meet the knowledge prong, the plaintiff must prove that the alleged aider and abettor knew “the primary party’s conduct constitute[d] a breach” and “that its own conduct regarding the breach was legally improper.”[30] The two kinds of knowledge are distinct, and both must be met to satisfy the knowledge prong. Notably, “[i]t is the aider and abettor that must act with scienter.”[31]
Participation, on the other hand, requires that the aider and abettor provide “substantial assistance” to the primary violator.[32] The substantial assistance requirement “protects arms’-length negotiations and ‘a bidders attempts to reduce the sale price through arms’-length negotiations cannot give rise to liability for aiding and abetting.’”[33]
Because of the sparse caselaw on the issue, the Supreme Court looked to and adopted the Restatement (Second) of Torts § 876(b) for its analysis. The restatement provides factors to determine whether conduct meets the “substantial assistance” threshold. Specifically, an aider and abettor must actively participate in the breach, not just have “mere passive awareness.”[34]
With the analytical framework set, the Court applied the tests to the facts. First, the Court affirmed the Chancery Court’s finding that Vista likely knew Stollmeyer’s conduct constituted a breach. The Court pointed to Stollmeyer’s private tips to Vista and Chang’s tip about the minimum price of $40 per share.[35] However, the Court then reversed the finding that Vista knew the wrongfulness of its own conduct. Specifically, the Court noted, “Vista provided no affirmative assistance at all and too no action that actively furthered Stollmeyer’s breach.”[36] While Vista had multiple opportunities to review the misleading Proxy Materials, their “passive awareness” of the breach did not amount to “substantial assistance.”[37] The Court concluded, “Vista took no action to facilitate or assist Stollmeyer in his breach, but rather passively stood by while Stollmeyer breached his disclosure duty. On these facts, Vista did not substantially assist Stollmeyer’s breach.”[38]
Lastly, the Court addressed the merger agreement provision that obligated Vista to inform Mindbody of material omissions. Here, the Court held that the merger agreement and contractual obligations within did not give rise to a separate duty of disclosure owed by Vista to Mindbody’s stockholders. The Court supported its finding with public policy concerns, holding that imposing such duties between third-party buyers and the target’s stockholders would “collapse the arms’-length distance between the third-party buyer and the target,” and “require a potential third-party bidder to second-guess the materiality determinations and legal judgement of the target’s board of directors, which already owes fiduciary duties to its stockholders.”[39]
Conclusion
The Delaware Supreme Court’s opinion in Mindbody breaks new ground, limiting aiding and abetting liability to third parties. In doing so, it provides a strong analytical framework for future claims. Additionally, it reinforces longstanding ideas of fiduciary duties and obligations during the sale process. Ultimately, the Court’s reluctance to impose aiding and abetting liability on potential acquirers will promote good faith negotiations and sales in Delaware.
About the Author
Patrick Tkacik is a third-year law student at Widener University Delaware Law School. In addition to his studies, he serves as an Articles Editor for the 50th Volume of the Delaware Journal of Corporate Law. He also serves as a Wolcott Fellow in the Delaware Supreme Court. Prior to law school, Patrick graduated from Temple University with a degree in criminal justice. After law school, Patrick plans on taking both the Delaware and Pennsylvania bar exams.
[1] Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024); Palkon v. Maffei, 311 A.3d 255 (Del. Ch. 2024), rev’d, 2025 WL 384054 (Del. Feb. 4, 2025).
[2] Sabrina Willmer, Musk’s War on Delaware Spurs Law Pushed by Private Equity, BL (Mar. 26, 2025), https://news.bloomberglaw.com/us-law-week/private-equity-joins-fight-to-overhaul-delaware-corporate-law?context=search&index=1.
[3] In re MindBody, Inc. S’holder Litig. (Mindbody II), No. 484, 2023, 2024 WL 4926910 (Del. Dec. 2, 2024).
[4] In re Mindbody, Inc., S’holder Litig. (Mindbody I), C.A. No. 2019-0442, 2023 WL 2518149 (Del. Ch. Mar. 15, 2023).
[5] Id. at *1.
[6] Id.
[7] Id. at *15.
[8] Mindbody I,2023 WL 2518149, at *15.
[9] Id. at *17.
[10] Id. at *19.
[11] Id. at *18–19.
[12] Mindbody I,2023 WL 2518149, at *20.
[13] Id. at *23.
[14] Id.
[15] Id. at *25.
[16] Mindbody I,2023 WL 2518149, at *26.
[17] Id.
[18] Id. at *27.
[19] Id.
[20] Mindbody I,2023 WL 2518149, at *28.
[21] Id. at *29.
[22] Id.
[23] Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc.,506 A.2d 173 (Del. 1986).
[24] Mindbody I,2023 WL 2518149, at *47.
[25] Mindbody II,No. 484, 2023, 2024 WL 4926910 (Del. Dec. 2, 2024).
[26] Id.
[27] Id. at *39.
[28] Id. at *38.
[29] Mindbody II, 2024 WL 4926910, at *31 (citing Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001)).
[30] Id. at *32 (emphasis in original).
[31] Id. (citing RBC Capital Markets, LLC v. Jervis, 128 A.3d 816, 862 (Del. 2015)).
[32] Id. at *33 (citing In re Dole Food Co. S’holder Litig., 2015 WL 5052214, at *41 (Del. Ch. Aug. 27, 2015)).
[33] Mindbody II, 2024 WL 4926910, at *32 (citing Malpiede, 780 A.2d at 1097).
[34] Id. at *39.
[35] Id. at *36.
[36] Id. at *37.
[37] Mindbody II, 2024 WL 4926910, at *40.
[38] Id. at *41.
[39] Id. at *43.
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