The Limits of Corwin in the Sale of a Company to a PE Buyer

Posted by Gail Weinstein, Steven J. Steinman, and Brian T. Mangino, Fried, Frank, Harris, Shriver & Jacobson LLP, on Saturday, November 14, 2020

Editor’s Note: Gail Weinstein is senior counsel, and Steven J. Steinman and Brian T. Mangino are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Mark H. Lucas, Andrea Gede-Lange, and Shant P. Manoukian. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In In re MINDBODY, Inc. Stockholders Litigation, the plaintiffs challenged the merger (the “Merger”) pursuant to which private equity firm Vista Equity Partners acquired MINDBODY, Inc. (the “Company”). The key allegations were that the Company’s CEO-founder-director (“RS”), due to his self-interest in obtaining liquidity and lucrative post-sale employment, “tilted” the sale process in favor of Vista rather than seeking to maximize the price on behalf of all the stockholders. The transaction was approved by a majority-independent board and the stockholders. However, the court ruled, at the pleading stage of litigation, that it was reasonably conceivable that RS may have breached his fiduciary duties to the stockholders; and, because his potential conflicts of interest were not disclosed, the alleged breaches were not “cleansed” under Corwin. The court also found it reasonably conceivable that the Company’s CFO (who was not a director) (“BW”) breached his fiduciary duties by following RS’s lead in the process.

We would observe that it is relatively common, especially when a sale process involves private equity bidders, for a CEO engaged in a sale process to want to obtain liquidity and post-closing employment. Mindbody underscores that the particular facts and circumstances will be critical to the court’s determination whether those desires constitute a disabling conflict of interest.

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