In re Mindbody, Inc., Stockholder Litigation ( 2021 )


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  •                                        COURT OF CHANCERY
    OF THE
    STATE OF DELAWARE
    KATHALEEN ST. JUDE MCCORMICK                                            LEONARD L. WILLIAMS JUSTICE CENTER
    CHANCELLOR                                                           500 N. KING STREET, SUITE 11400
    WILMINGTON, DELAWARE 19801-3734
    December 9, 2021
    Joel Friedlander, Esquire                            Lisa A. Schmidt, Esquire
    Jeffrey M. Gorris, Esquire                           Robert L. Burns, Esquire
    Christopher M. Foulds, Esquire                       Matthew D. Perri, Esquire
    Friedlander & Gorris, P.A.                           John M. O’Toole, Esquire
    1201 North Market Street, Suite 2200                 Richards, Layton & Finger, P.A.
    Wilmington, DE 19801                                 920 North King Street
    Wilmington, Delaware 19801
    Gregory V. Varallo, Esquire
    Bernstein Litowitz Berger & Grossmann LLP            Ryan D. Stottmann, Esquire
    500 Delaware Avenue, Suite 901                       Alexandra Cumings, Esquire
    Wilmington, DE 19801                                 Morris, Nichols, Arsht & Tunnell LLP
    1201 North Market Street
    Wilmington, DE 19801
    Re:    In re Mindbody, Inc., Stockholder Litigation,
    Cons. C.A. No. 2019-0442-KSJM
    Dear Counsel:
    This letter resolves the motion to dismiss filed by three defendants.1 The first
    movant is Eric Liaw, a partner in venture capital fund Institutional Venture Partners.2 The
    other two movants are related entities, Institutional Venture Partners XIII, L.P. (“IVP 13”),
    and its general partner, Institutional Venture Management XIII LLC (together, “IVP”).3
    1
    See Cons. C.A. No. 2019-0442-KSJM, Dockets (“Dkt.”) 339 (“Defs.’ Opening Br.”), 362
    (“Pls.’ Ans. Br.”), 383 (“Defs.’ Reply Br.”). Defined terms used herein have the same
    meaning ascribed to them in the court’s October 2, 2020 Memorandum Opinion (the
    “October Opinion”). Dkt. 216.
    2
    Dkt. 336 (“Sec. Am. Compl.”) ¶ 26.
    3
    Sec. Am. Compl. ¶¶ 27, 28.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 2 of 12
    Liaw’s journey in this case has been circuitous. When named originally as a
    defendant, Liaw moved for dismissal.4 The plaintiffs argued in response that Liaw was
    conflicted because IVP was seeking to exit its Mindbody investment and that Liaw formed
    an alliance with Stollmeyer to bring about a near-term sale.5 In the October Opinion, I
    granted Liaw’s motion.6       While making the plaintiff-friendly assumption that Liaw
    suffered from a disabling conflict of interest, I held nevertheless that the plaintiffs had not
    alleged facts connecting Liaw to any of the alleged process deficiencies.7
    In a footnote in the October Opinion, I observed that dismissal of Liaw was an
    interlocutory order that could be reconsidered if discovery provided a compelling reason
    to do so.8
    4
    Dkt. 7.
    5
    In re Mindbody, Inc., S’holders Litig., 
    2020 WL 5870084
    , at *33–34 (Del. Ch. Oct. 2,
    2020).
    6
    
    Id.
    7
    Id. at *34.
    8
    Id. at *34 n.309. Admittedly, revisiting a pleading-stage dismissal can result in
    inefficiencies, but a court need not ignore evidence that discovery reveals and which was
    unavailable to a plaintiff at the pleading stage. There is a strong public policy that dictates
    that courts resolve cases on their merits. See, e.g., Keener v. Isken, 
    58 A.3d 407
    , 409 (Del.
    2013) (observing that Delaware has a strong policy in favor of deciding cases on the
    merits); Christian v. Counseling Res. Assocs., Inc., 
    60 A.3d 1083
    , 1085 (Del. 2013) (same);
    Dishmon v. Fucci, 
    32 A.3d 338
    , 346 (Del. 2011) (same); Beckett v. Beebe Med. Ctr., Inc.,
    
    897 A.2d 753
    , 757–58 (Del. 2006) (same); Apartment Cmtys. Corp. v. Martinelli, 
    859 A.2d 67
    , 69 (Del. 2004) (same); Battaglia v. Wilm. Sav. Fund Soc., 
    379 A.2d 1132
    , 1135 (Del.
    1977) (same). This court’s willingness to revisit pleading-stage dismissals when discovery
    unearths new and compelling information is consistent with that policy. The strictures of
    the law-of-the-case doctrine, as well as practical considerations taken into account by the
    trial court, mitigate any prejudice arising from this practice.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 3 of 12
    Discovery strengthened the plaintiffs’ claims against Liaw and gave rise to claims
    against IVP, and the plaintiffs moved for leave to file a Second Amended Complaint to
    assert claims against them.9 I granted the motion for leave to amend and made the
    following observation about the discovery—text messages and deposition testimony—
    relied on in the Second Amended Complaint:
    On their face, [the text messages] . . . support Plaintiffs’ theory
    that Liaw formed an alliance with Stollmeyer to bring about a
    near-term sale within IVP’s desired timeframe. The texts and
    deposition testimony provide support for the contention that
    Liaw worked to lower the Company’s guidance to boost Q4
    numbers in preparation [for] a quick private equity sale and
    communicated with Stollmeyer in the process.10
    After I granted the plaintiffs’ motion to amend, Liaw and IVP moved to dismiss the
    Second Amended Complaint pursuant to Rule 12(b)(6).11 “[T]he governing pleading
    standard in Delaware to survive a motion to dismiss is reasonable ‘conceivability.’”12
    When considering such a motion, the court must “accept all well-pleaded factual
    allegations in the [c]omplaint as true . . . , draw all reasonable inferences in favor of the
    plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably
    conceivable set of circumstances susceptible of proof.”13 The court, however, need not
    9
    In re Mindbody, Inc., S’holders Litig., 
    2021 WL 3126762
    , at *1 (Del. Ch. July 23, 2021).
    10
    Id. at *3.
    11
    Dkt. 338.
    12
    Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 
    27 A.3d 531
    , 537 (Del.
    2011).
    13
    
    Id.
     at 536 (citing Savor, Inc. v. FMR Corp., 
    812 A.2d 894
    , 896–97 (Del. 2002)).
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 4 of 12
    “accept conclusory allegations unsupported by specific facts or . . . draw unreasonable
    inferences in favor of the non-moving party.”14
    Liaw relies on the exculpatory provision in Mindbody’s charter as a basis for
    dismissal. Under Cornerstone, a plaintiff seeking to assert a claim against a director
    protected by an exculpatory provision must plead “facts supporting a rational inference that
    the director harbored self-interest adverse to the stockholders’ interests . . . or acted in bad
    faith.”15 A plaintiff can satisfy this burden by “alleg[ing] facts that support a reasonable
    inference of a divergent interest, regardless of the source, that rises to the level of a
    disabling conflict.”16 “Delaware law recognizes that liquidity is one benefit that may lead
    directors to breach their fiduciary duties if a desire to gain liquidity caused them to
    manipulate the sales process and subordinate the best interests of the corporation and the
    stockholders as a whole.”17
    The Second Amended Complaint alleges facts from which it is reasonable to infer
    that Liaw both had interests that diverged from the stockholders and was neck-deep in the
    14
    Price v. E.I. DuPont de Nemours & Co., 
    26 A.3d 162
    , 166 (Del. 2011) (citing Clinton v.
    Enter. Rent-A-Car Co., 
    977 A.2d 892
    , 895 (Del. 2009)), overruled on other grounds by
    Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 
    189 A.3d 1255
    , 1277 (Del. 2018).
    15
    In re Cornerstone Therapeutics S’holder Litig., 
    115 A.3d 1173
    , 1179–80 (Del. 2015).
    16
    Firefighters’ Pension Sys. of City of Kan. City, Mo. Tr. v. Presidio, 
    251 A.3d 212
    , 256
    (Del. Ch. 2021); see also Mindbody, 
    2020 WL 5870084
    , at *16 (“At the pleading stage,
    the question is whether it is reasonably conceivable that the fiduciary was subjectively
    affected by the conflict at issue.”).
    17
    Mindbody, 
    2020 WL 5870084
    , at *15 (cleaned up) (collecting cases).
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 5 of 12
    process deficiencies identified in the October Opinion. The following facts are alleged in
    or reasonably inferable from the Second Amended Complaint:
    •     In 2018, IVP decided to liquidate $200 million of its IVP 13 fund by the end
    of the year.18
    •     To achieve the $200 million goal, Liaw needed to liquidate at least a portion
    of IVP’s position in Mindbody.19
    •     Selling a large block of Mindbody shares on the market could depress the
    trading price of Mindbody’s public stock because of the Company’s limited
    public float.20
    •     Taking action that would depress the trading price of Mindbody’s public
    stock was an unattractive proposition for Mindbody’s remaining
    stockholders, including IVP.21
    •     IVP therefore had an incentive to push for a sale of Mindbody as a whole
    instead of selling only a portion of its position.22
    18
    Sec. Am. Compl. ¶ 51 (“On March 9, 2018, Liaw wrote to Stollmeyer to advise him that
    IVP was ‘contemplating a disposition . . . . Again, no decisions have been made but I just
    wanted to let you know that there was some of this swirling around in our firm.’”); id. ¶ 52
    (“On August 13, 2018, the partners of IVP met and ‘agreed to target at least $200M in
    additional liquidity by year end’ for IVP 13.”).
    19
    See id. ¶ 52 (alleging that at least $160 million of the targeted amount of additional
    liquidity was slated to come from IVP’s holdings in four particular public companies,
    which included Mindbody, that as of August 3, 2018, the total value of IVP 13’s positions
    in those four companies was approximately $244 million, that IVP 13 valued its position
    in Mindbody at approximately $93 million, and that doing the math, it was obvious that
    IVP 13 would have to sell at least a portion of its Mindbody position in order to reach the
    $200 million goal).
    20
    Id. ¶ 56.
    21
    Id.
    22
    Id. ¶ 57.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 6 of 12
    •      In August 2018, Stollmeyer told the lead independent board member that he
    was ready to cease being Mindbody’s CEO.23
    •      Through a Qatalyst financial advisor, Jeff Chang, Stollmeyer was introduced
    to and became somewhat enamored with Vista.24
    •      On October 16, Vista expressed to Stollmeyer an interest in acquiring
    Mindbody.25
    •      On October 18, Stollmeyer spoke to Liaw and told him, among other things,
    about Vista’s expression of interest.26
    •      Stollmeyer did not inform the Board of Vista’s expression of interest until
    October 24.27
    •      In response to the expression of interest, on October 26, the Company
    discussed forming a Transaction Committee.28
    •      Before the Company formed the Transaction Committee, Stollmeyer and
    Liaw had decided that Liaw would chair the committee.29
    •      In a text message sent during the October 26 board meeting to another
    Mindbody director, Adam Miller, Liaw wrote that he was now willing to
    support a sale of Mindbody for approximately $33.50 per share, a price he
    would not have supported previously.30
    •      The Board made Liaw chair of the Transaction Committee.31
    23
    Id. ¶ 63.
    24
    Id. ¶¶ 65, 71–72.
    25
    Id. ¶¶ 81–82; see also Mindbody, 
    2020 WL 5870084
    , at *4.
    26
    Sec. Am. Compl. ¶ 84.
    27
    Id. ¶ 85.
    28
    Id. ¶ 92.
    29
    Id. ¶ 93.
    30
    Id. ¶ 95.
    31
    See id. ¶ 26.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 7 of 12
    •       The Company’s outside counsel advised that the Transaction Committee
    should be independent and free of any influence from members of
    management or other directors with conflicts.32
    •       Liaw permitted Stollmeyer to attend every meeting of the Transaction
    Committee although Stollmeyer was not on the committee.33
    •       The Transaction Committee interviewed two financial advisers: Centerview,
    which had a long-standing relationship with the Company, and Qatalyst,
    which had a relationship with Vista.34
    •       In his October 18 conversation with Liaw, Stollmeyer stated that he preferred
    Qatalyst over Centerview because Centerview thought the timing was wrong
    to explore a potential transaction. Liaw asked to be informed of subsequent
    discussions with other directors and Stollmeyer replied, “I appreciate your
    perspective and our alignment on the key elements.”35
    •       On October 25, Chang texted a Qatalyst senior banker stating that he had
    spoken to Liaw and that Liaw and Stollmeyer would make the decision about
    which banker to hire. Chang also stated that he felt good about Qatalyst
    being selected.36
    •       Qatalyst’s proposed fees were higher than Centerview’s proposed fees.37
    •       In its pitchbook, Qatalyst touted its relationship with Vista and included
    significant detail about Vista, but not other bidders.38
    •       In its pitchbook, Qatalyst warned that Vista, “engages in significant
    background work, underwrites the purchase price, moves quickly in due
    diligence, and will provide a final proposal with a short expiration window
    32
    Id. ¶ 99.
    33
    Id. ¶ 96.
    34
    See id. ¶¶ 96, 103, 106.
    35
    Id. ¶ 84.
    36
    Id. ¶ 89; Dkt. 311 Ex. 10 (Chang texting that “I’ve had a lot of convos w the lead investor
    at IVP [Liaw]. He [Liaw] and Rick [Stollmeyer] will make the decision. I feel good about
    where we are.”).
    37
    Sec. Am. Compl. ¶ 108.
    38
    Id. ¶ 107.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 8 of 12
    in order to ‘truncate processes and reduce the ability for other potential
    acquirers to be able to complete diligence and provide certainty at the finish
    line.’”39
    •       Liaw was heavily involved in the selection of a financial advisor.40
    •       During the October 26 meeting, Miller texted Liaw regarding deal likelihood,
    stating: “If we have Qatalyst, a deal can get done.”41
    •       The Transaction Committee hired Qatalyst.42
    •       During the October 26 board meeting, Miller texted Liaw that “the PE guys
    will drag it out if they think we will miss numbers.” Translated, Miller
    warned that if Mindbody seemed likely to miss Q4 guidance, then potential
    private equity buyers would drag out due diligence and bidding until
    February, when Mindbody’s stock price would be expected to decline. By
    contrast, if Mindbody issued lower guidance for Q4, then potential private
    equity buyers would be less likely to drag out the process.43
    •       Liaw served on the Audit Committee.44
    •       On October 26, 2018, White provided the Audit Committee with a first pass
    at guidance providing a range of $65–$67 million, which was $1 million less
    than Mindbody’s head of financial planning and analysis had sent to White
    the prior evening. At that time, the Q4 revenue forecast was $67.9 million.45
    •       The head of financial planning and analysis advised, on November 2, 2018,
    that the Company’s “flash report” did not support lowering the Q4 forecast
    39
    Id. ¶ 133.
    40
    Id. ¶ 109.
    41
    Id. ¶ 94.
    42
    Id. ¶ 109.
    43
    Id. ¶ 114.
    44
    Id. ¶ 113.
    45
    Id. ¶ 117.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 9 of 12
    and indeed supported increasing the forecast by a few hundred thousand
    dollars.46
    •      On the morning of November 5, 2018, Stollmeyer was sufficiently confident
    in the Q4 forecast that he wanted to provide guidance of $67–$69 million.
    Stollmeyer stated in an email to other members of management:
    I’ve never played a game of lowered expectations. Not for
    myself, not for our team, not for our customers and certainly
    not for investors. This is how we got here. If I change my tune
    now, that would be inauthentic and disheartening. It would
    also sound weird to those who know me.47
    •      During the November 5 Audit Committee meeting, Stollmeyer and White
    provided the Audit Committee with a revised weight-adjusted forecast of
    $68.05 million and a revised range for proposed guidance of $66–$68
    million, for which “the mid point would give us $1.1M in cushion.”48
    •      Stollmeyer and Liaw spoke immediately after the Audit Committee
    meeting.49
    •      Stollmeyer then texted White that he was “adding a new second paragraph in
    my script noting our challenges.” Stollmeyer deleted a portion of his script
    that noted Mindbody’s substantial progress in various areas and replaced it
    with language consistent with the substantial lowering of guidance.50
    •      After the earnings call, every analyst but one downgraded or reduced its price
    target for Mindbody.51
    46
    Id. ¶ 118.
    47
    Id. ¶ 119.
    48
    Id. ¶ 120.
    49
    Id. ¶ 123.
    50
    Id.
    51
    Id. ¶ 125.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 10 of 12
    •        In a text to a director on November 14, Liaw wrote “If we are missing
    [guidance] they [potential bidders] will slow roll us. Hence good to guide
    down as far as we did.52
    •        Liaw advised his partners at IVP of the market’s reaction to the lowered
    guidance and he wrote to one partner, “I think / hope the weaker guide
    provides appropriate cushion as well.”53
    The above is not an exhaustive list of the plaintiffs’ relevant allegations. The
    allegations in the plaintiffs’ Second Amended Complaint make it reasonably conceivable
    that Liaw had a divergent interest in obtaining liquidity for IVP and took action to ensure
    that IVP would obtain a quick exit from its investment in Mindbody. It is also reasonable
    to infer that Stollmeyer harbored disabling conflicts and that Liaw was aware of those
    conflicts.54 The upshot is that plaintiffs’ newly discovered evidence, combined with the
    existing allegations, provide a compelling change in circumstance necessary to satisfy the
    law-of-the-case doctrine and revive the dismissed claim.55
    As the movants argue, the plaintiffs must allege not only that Liaw was involved in
    the faulty process, but also that IVP harbored a liquidity-driven conflict on which Liaw
    acted. Quoting many decisions of this court, including my October Opinion, the movants
    emphasize how counter-intuitive it would be to infer that Liaw and IVP would leave money
    on the table in the sale process.56 It is true that “liquidity-driven theories of conflicts can
    52
    Id. ¶ 115.
    53
    Id. ¶ 128.
    54
    Id. ¶¶ 86, 96; Mindbody, 
    2020 WL 5870084
    , at *18.
    55
    See Sciabacucchi v. Malone, 
    2021 WL 3662394
    , at *4 (Del. Ch. Aug. 18, 2021).
    56
    See Defs.’ Opening Br. at 15; Defs.’ Reply Br. at 8.
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 11 of 12
    be difficult to plead.”57 It is also true that “Delaware courts have been reluctant to find that
    a liquidity-based conflict rises to the level of a disabling conflict of interest when a large
    blockholder receives pro rata consideration.”58 Yet, in this case, the factual allegations
    listed above concerning Liaw’s actions to secure a quick exit make it reasonably
    conceivable that IVP valued immediacy above value-maximization. In short, the plaintiffs
    have once again alleged facts that fit the very rare fact pattern of a liquidity-driven conflict.
    To state a claim for aiding and abetting against IVP, the plaintiffs must allege that
    IVP knowingly participated in Liaw’s breach of fiduciary duty.59 In briefing, IVP argued
    for dismissal of the aiding and abetting claim based on the lack of a predicate breach by
    Liaw.60 They did not contest the issue of knowing participation, and they waived the issue
    by not briefing it.61 Having already found that it is reasonably conceivable that Liaw
    breached his fiduciary duty, IVP’s sole argument for dismissal fails.
    57
    Mindbody, 
    2020 WL 5870084
    , at *18.
    58
    Presidio, 251 A.3d at 256 (cleaned up) (citing Larkin v. Shah, 
    2016 WL 4485447
    , at *16
    (Del. Ch. Aug. 25, 2016)).
    59
    In re Santa Fe Pac. Corp. S’holder Litig., 
    669 A.2d 59
    , 72 (Del. 1995) (“A claim for
    aiding and abetting requires the following three elements: (1) the existence of a fiduciary
    relationship, (2) a breach of the fiduciary's duty, and (3) a knowing participation in that
    breach by [the non-fiduciary].”); In re Rural Metro S’holders Litig., 
    88 A.3d 54
    , 97 (Del.
    Ch. 2014), aff’d RBC Capt. Mkts., LLC v. Jervis, 
    129 A.3d 816
     (Del. 2015).
    60
    See Defs.’ Opening Br. at 25.
    Emerald P’rs v. Berlin, 
    726 A.2d 1215
    , 1224 (Del. 1999) (“Issues not briefed are deemed
    61
    waived.”) (citing Murphy v. State, 
    632 A.2d 1150
    , 1152 (Del. 1993)).
    Cons. C.A. No. 2019-0442-KSJM
    December 9, 2021
    Page 12 of 12
    The motion to dismiss is DENIED. IT IS SO ORDERED.
    Sincerely,
    /s/ Kathaleen St. Jude McCormick
    Kathaleen St. Jude McCormick
    Chancellor
    cc:   All counsel of record (by File & ServeXpress)