Chancery Revived a Dismissed Claim after Discovery Revealed a Desire for Liquidity that Resulted in a Divergent Interest in M&A Sale Process
In re Mindbody, Inc., S’holder Litig., Cons. C.A. No. 2019-0442-KSJM (Del. Ch. Dec. 9, 2021)
A desire for liquidity can result in a divergent interest sufficient to plead fiduciary duty claims against a defendant protected by an exculpatory charter provision.
Plaintiffs named a partner in a venture capital fund as one of the defendants in an action arising from a portfolio company sale that facilitated the fund’s exit from its investment. Plaintiffs alleged the partner suffered a disabling conflict of interest and had breached his fiduciary duties. The Court of Chancery granted the partner’s motion to dismiss after finding that the plaintiffs had no alleged facts connecting him to any of the alleged deficiencies in the sale process. The Court noted, however, that it would reconsider its decision if discovery provided a compelling reason to do so.
Discovery revealed text messages and deposition testimony that led the Court to grant the plaintiffs’ motion to amend their complaint to reinstate the partner as a defendant, and to add two new entities as defendants for aiding and abetting his alleged breach of fiduciary duties. The partner and entities moved to dismiss the amended complaint based on an exculpatory provision in the company’s charter.
The Court held that these new allegations made it reasonably conceivable to infer that the partner had interests that diverged from the stockholders. As chair of the company’s transaction committee, the partner was involved in the alleged sale process deficiencies. While rarely sufficient under Delaware law, the partner’s heightened desire for liquidity might have trumped his incentive for value-maximization and resulted in a divergent interest that spurred a quick exit from his investment. The process deficiencies were his retention of a financial advisor eager to finalize a deal with a preferred acquirer and that he lowered quarterly forecasts to reduce the risk that the company would miss targets and invite potential buyers to slow the acquisition process. Based on these allegations, the Court found that the partner may not be able to rely on the charter provision to exculpate the plaintiffs’ claims for breach of fiduciary duties. Thus, the Court concluded that these new allegations provided a compelling change in circumstances necessary to satisfy the law-of-the-case doctrine and revive the dismissed fiduciary duty claim against the partner, and to sustain the aiding and abetting claims against the new entities based on the predicate breach of fiduciary duties.Share