Del. Court Dismisses Suit Against Zynga Over Stock Offering

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By Che Odom

Feb. 29 — A derivative suit against Zynga Inc. directors and officers related to a secondary offering of the game company's stock was dismissed by the Delaware Chancery Court Feb. 29 because the shareholder plaintiff failed to show that making a pre-suit demand on the board would have been futile.

Chancellor Andre G. Bouchard said the critical deficiency was shareholder Thomas Sandys's failure to plead “particularized facts casting a reasonable doubt” on the board's ability to decide impartially whether to pursue the claims.

Significant is the fact that the composition of Zynga's board “underwent important changes between approval of the secondary offering and the filing of the complaint,” Bouchard said.

Board Changes

At least half of the directors who approved the challenged transaction sold some of their shares and “may have received an unfair personal benefit as a result,” Bouchard said.

However, by the time Sandys filed his complaint, two of those directors had left the board and were replaced by two outside directors with no involvement in the company's initial public offering or the secondary offering, the judge said.

A pre-suit demand on the board or a demonstration of why one would be futile is a threshold requirement for a derivative action.

Delaware law entrusts a board with an independent, disinterested majority with the power to decide whether pursuing claims is in the company's best interest, including claims against fellow directors and officers, Bouchard said.

Losses After Offering

Sandys said that he and other shareholders sustained significant losses when the stock value of Zynga, a gaming platform that operates primarily through Facebook, plummeted as a result of the secondary offering in April 2012, while certain directors and officers made tens of millions of dollars by selling shares.

Zynga chairman, chief executive and co-founder Mark Pincus, a defendant in the action, personally received $198 million in gross proceeds for shares he sold in the secondary offering, according to the opinion.

Zynga, which began selling shares publicly through Nasdaq in December 2011, recently reached a $23 million class-action settlement with investors who claimed the company misled them and committed inside trading .

Those plaintiffs said company insiders had data showing user numbers, spending and bookings were declining before Zynga's IPO and tried to conceal that negative information by shifting revenue losses to a later quarter.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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