Mindbody executives will get millions in buyout — but how fair is the deal to shareholders?

The $1.9 billion acquisition agreement between Mindbody and Vista Equity Partners is unfair to shareholders, claims a class action lawsuit recently filed in San Luis Obispo Superior Court.

The lawsuit was filed by Joseph Schmit — identified in the lawsuit as a Mindbody shareholder — on Jan. 24.

In the suit, Schmit claims that Mindbody and its board of directors “breached their fiduciary duties of loyalty, good faith, due care and disclosure” by agreeing to the deal in December 2018 without appropriate consideration to stockholders’ interest. He also claims the board engineered the deal to benefit itself and Vista Equity Partners.

“The process deployed by the individual defendants was flawed and inadequate, was conducted out of self-interest of the individual defendants and was designed with only one concern in mind — to effectuate a sale of the company to Vista,” read the suit.

Neither Schmit nor his legal representation could be reached for comment Monday evening.

Vista Equity Partners, a San Francisco-based private equity firm specializing in tech and software companies, is proposing to buy back all the company’s common stock for $36.50. This deal would take the company, which went public in 2015, private again.

The lawsuit was brought “on behalf of all holders of Mindbody common stock who are being and will be harmed by the individual defendants’ actions.” It asks for a jury trial to decide the issue.

A Mindbody representative said in an email to The Tribune on Monday that the company was unable to comment on the lawsuit at this time.

How much will Mindbody executives, board of directors make from deal?

In the suit, Schmit alludes to the substantial sums that Mindbody executives and its board of directors stand to make from the deal — pointing to that as a factor in the board’s approval of the acquisition.

“The breakdown of the benefits of the deal indicate that Mindbody insiders are the primary beneficiaries of the proposed transaction, not the company’s public stockholders,” the lawsuit read. “Certain insiders stand to receive massive financial benefits as a result of the proposed transaction.

In the company’s most recent filing to the federal Securities and Exchange Commission, a merger report for shareholders showed CEO Rick Stollmeyer will receive more than $58 million from sales of his shares of Mindbody stock once the deal is finalized.

Stollmeyer, the largest shareholder among the company’s top executives, held 529,251 common stock shares, more than 1.2 million vested and unvested options and more than 146,000 restricted stock units (RSUs) as of Jan. 18, according to the documents.

Stollmeyer is also likely to receive an additional $3.5 million from an annual equity award grant in February just before the deal closes, which would bring his grand total to more than $61 million.

Chief operating officer Brett White — the next largest executive shareholder — would receive $11.1 million from his shares, followed by president Michael Mansbach with $4.3 million, former counsel Kimberly Lytikainen with $2.6 million and chief revenue officer Mark Baker with $1.08 million. (Lytakainen has since resigned from the company.)

Mindbody’s board of directors also stands to make significant sums once their shares are sold as well. Of the seven non-employee directors, two will bring home more than $2 million a piece, two more than $1 million each, and the remaining three between $460,000 and $899,000 each, according to the documents.

Stollmeyer and other executives also have existing “golden parachute agreements” in their contracts that specify large payouts in the event they are terminated within a year of a merger.

Stollmeyer’s parachute agreement promises him approximately $41. 9 million, White’s $11.9 million, Mansbach’s $5.8 million and Baker’s $2.8 million.

Fair to shareholders or not?

Other national law firms have also begun soliciting shareholders saying the deal was unfair, and resulted in people losing thousands of dollars.

The Schall Law Firm, a national shareholder rights litigation firm, announced Jan. 15 that it is investigating Mindbody investor claims “for potential breaches of fiduciary duty by both officers and the company and potential violations of law.”

The firm is encouraging shareholders “with losses in excess of $100,000 to contact the firm.”

Other firms with investigations into potential class action lawsuits stemming from the deal include Johnson Fistel, LLP; Rigrodsky & Long, P.A., and Levi & Korsinky, LLP.

Those investigations all also question whether Vista’s proposed share buyout is fair.

Schmit’s lawsuit claims the $36.50 per share proposal is not a fair deal to Mindbody shareholders, given the previous success of the company on the market. (The company’s pre-deal share high was $43.85 in May 2018; since the acquisition announcement, shares have traded at or close to the $36.50 mark.)

He claims that the proposed amount is too low, and largely beneficial to Vista.

“Obviously the opportunity to invest in such a company on the rise is a great coup for Vista, however it undercuts the investment of Plaintiff (Schmit) and all other public stockholders,” read the lawsuit. “Moreover, post-closure, Mindbody stockholders will be frozen out of any ownership of the company, forever foreclosing them from reaping the likely future benefits of Mindbody’s continued success.”

In its proxy statement, filed with the federal Securities Exchange Commission on Jan. 23, Mindbody said it employed investment bank Qatalyst Partners LP to advise the company on the fairness of the acquisition deal.

After examining the merger agreement, Mindbody’s financial filings, its operations, historical market prices and trading activity, Qatalyst found that the deal was fair to shareholders from a financial perspective, according to the documents.

Qatalyst served as the financial adviser for another recent Vista buyout as well: the firm advised software company Apptio Inc. for its $1.94 billion acquisition agreement with Vista in November 2018.

Mindbody shareholders are expected to gather in San Luis Obispo on Feb. 14 to vote on the acquisition.

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Kaytlyn Leslie writes about business and development for The San Luis Obispo Tribune. Hailing from Nipomo, she also covers city governments and happenings in the South County region, including Arroyo Grande, Pismo Beach and Grover Beach. She joined The Tribune in 2013 after graduating from Cal Poly with her journalism degree.