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Ryan v. Mindbody, Inc.

Court of Chancery of Delaware

October 1, 2019

PHILIP RYAN, JR. and DONALD FRIEDMAN, on behalf of themselves and all other similarly situated stockholders of MINDBODY, Inc., Plaintiffs,
v.
MINDBODY, INC., RICHARD L. STOLLMEYER, KATHERTNE BLAIR CHRISTIE, COURT CUNNINGHAM, GAIL GOODMAN, CIPORA HERMAN, ERIC LIAW, ADAM MILLER, GRAHAM SMITH, VISTA EQUITY PARTNERS MANAGEMENT, LLC, TORREYS PARENT, LLC, TORREYS MERGER SUB, INC., and INSTITUTIONAL VENTURE PARTNERS XIII, L.P., MINDBODY, INC., et al., Defendants. LUXOR CAPITAL PARTNERS, LP, LUXOR CAPITAL PARTNERS OFFSHORE MASTER FUND, LP, LUXOR WAVEFRONT, LP, and LUGARD ROAD CAPITAL MASTER FUND, LP, on behalf of themselves and all other similarly situated former stockholders of MINDBODY, INC., Plaintiffs,
v.
RICHARD L. STOLLMEYER, BRETT WHITE, and ERIC LIAW, Defendants.

          ORDER CONSOLIDATING RELATED ACTIONS, SEVERING CLAIM, AND ESTABLISHING A LEADERSHIP STRUCTURE

          Kathaleen St. J. McCormick, Vice Chancellor

         1. Pending before this Court are three lawsuits challenging the acquisition of MINDBODY, Inc. by Vista Equity Partners Management, LLC ("Vista"): Ryan v. Mindbody, Inc., C.A. No. 2019-0061-KSJM (the "Ryan Action"); Luxor Capital Partners, LP v. Stollmeyer, C.A. No. 2019-0442-KSJM (the "Luxor Action"); and Luxor Capital Partners, LP v. Stollmeyer, C.A. No. 2019-0293-KSJM (the "Appraisal Action"). These actions are related in that they arise from common questions of law and fact. This decision refers to them as the "Related Actions."

         2. The Related Actions are consolidated for all purposes-except those identified in ¶ 4 below-and are referred to as the "Consolidated Action." Going forward, all papers in the Consolidated Action shall be filed in C.A. No. 2019-0442-KSJM. All papers and documents previously served and filed in any of the Related Actions are deemed a part of the record in the Consolidated Action. The Consolidated Action shall bear the caption below:

IN RE MINDBODY, INC., STOCKHOLDERS LITIGATION
Consolidated
C.A. No. 2019-0442-KSJM

         3. Two groups of stockholder plaintiffs and counsel seek to be appointed to leadership roles in the Consolidated Action.

a. Plaintiff in the Ryan Action, Philip Ryan, Jr., [1] proposes that his claims brought pursuant to 8 Del C. § 225 (the "Section 225 Claims"), as well as disclosure issues addressed in the trial briefs filed at C.A. No. 2019-0061-KSJM, Docket Nos. 79, 87, and 91 (the "Ryan Disclosure Issues"), be severed from the Consolidated Action and remain in the Ryan Action. Ryan also seeks to be appointed lead plaintiff and to have his counsel, Prickett, Jones & Elliott, P.A. and Kessler Topaz Meltzer & Check, LLP, appointed as co-lead counsel in the Consolidated Action. This Order refers to Ryan and his counsel as "Team Ryan."
b. Plaintiffs in the Luxor Action, Luxor Capital Partners, LP, Luxor Capital Partners Offshore Master Fund, LP, Luxor Wavefront, LP, and Lugard Road Capital Master Fund, LP (collectively, the "Luxor Plaintiffs"), do not oppose severing the Section 225 Claims from the Consolidated Action, but they argue that certain of the Ryan Disclosure Issues should be litigated as part of the Consolidated Action. The Luxor Plaintiffs propose that they each be appointed as lead plaintiffs and have their counsel, Friedlander & Gorris, P.A., and Bernstein Litowitz Berger & Grossman LLP, appointed as co-lead counsel in the Consolidated Action. This Order refers to the Luxor Plaintiffs and their counsel as "Team Luxor."

         4. As a threshold matter, Team Ryan's request to sever the Section 225 Claims is granted and Team Ryan may continue to pursue those claims. The Section 225 Claims have been fully litigated and briefed, there is no reason to delay their resolution, and it would be inefficient to switch teams for the purpose of prosecuting those claims at this stage. The parties in the Ryan Action shall contact Chambers to reschedule oral argument on the Section 225 Claims. Following oral argument, the Court will determine whether the Ryan Disclosure Issues should be resolved as part of the Section 225 Claims or as part of the Consolidated Action. The record on the Section 225 Claims shall be considered part of the record in the Consolidated Action, such that the class may benefit from the record created on the Section 225 Claims to date.

         5. Turning now to the leadership dispute, the Court applies the six "Hirt factors"[2] when designating a lead plaintiff and lead counsel in a representative action. The Court has organized those factors into three categories: (a) factors relating to the lead plaintiffs; (b) factors relating to counsel's performance in the litigation to date; and (c) factors relating to counsel's track record and ability to litigate going forward.[3]

         6. The first category of Hirt factors relating to the lead plaintiffs considers the relative economic stakes of the competing litigants and the absence of any conflict between larger stockholders and smaller stockholders.[4] When evaluating this category of factors, relative ownership is "to be accorded great weight, "[5] as a relatively small ownership stake may reduce a stockholder's incentive to monitor counsel, leading to greater agency costs.[6] Contrawise, a "sufficient stake" can provide a plaintiff with an incentive "monitor counsel and play a meaningful role in conducting the case."[7]

a. Prior to the challenged transaction, Ryan held only 202 shares of MINDBODY Class A common stock.
b. In contrast, the Luxor Plaintiffs held 9, 074, 929 shares of MINDBODY Class A common stock. The Luxor Plaintiffs demanded appraisal with respect to 3, 738, 935 of these shares, but they accepted the merger consideration for 5, 335, 994 of these shares to retain their standing to pursue any potential fiduciary claims. The Luxor Plaintiffs' interest qualifies as a "sufficient stake to provide an economic incentive to monitor counsel and play a meaningful role in conducting the case."[8]
c. Ryan questions whether the Luxor Plaintiffs' simultaneous prosecution of the Appraisal Action might raise conflicts. Ryan argues that at the settlement phase, the Luxor Plaintiffs will be incentivized to divert as much as possible to the Appraisal Action without consideration for the fiduciary claims since "an appraisal proceeding benefits only those ...

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