Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...
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.
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.
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 email@example.com
To contact the editor responsible for this story: Yin Wilczek at firstname.lastname@example.org
The opinion is available at http://courts.delaware.gov/opinions/download.aspx?ID=237600.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)