Zynga Shareholder Suit Gets New Life After Del. Ruling

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By Michael Greene

Dec. 6 — A Zynga Inc. shareholder can proceed with a derivative lawsuit alleging that the gaming company’s directors and officers breached their legal duties in connection with a secondary stock offering ( Sandys v. Pincus , 2016 BL 404720, Del., No. 157, 2016, 12/5/16 ).

Thomas Sandys alleged in his lawsuit 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 2012 secondary offering. He alleged that Zynga’s former chief executive officer and controlling stockholder, Mark Pincus, and other corporate insiders misused confidential information when they sold their stock for hundreds of millions of dollars, and the board improperly approved the sale.

The Delaware Supreme Court, in a 4-1 decision, Dec. 5 reversed a lower court and concluded that a majority of the San-Francisco-based company’s nine-member board lacked independence for the purpose of considering Sandys’ pre-suit demand to take legal action.

Under Delaware law, a pre-suit demand on the board or a demonstration of why such a demand would be futile is a threshold requirement for a derivative action.

Personal Jet

Chief Justice Leo E. Strine Jr., writing for the state high court majority, said director Ellen Siminoff’s co-ownership of a private airplane with Pincus suggests “the type of very close personal relationship that, like family ties, one would expect to heavily influence a human‘s ability to exercise impartial judgment.”

Strine further explained that a plaintiff isn’t required to plead “a detailed calendar of social interaction to prove that directors have a very substantial personal relationship rendering them unable to act independently of each other.” Instead, it must provide facts that create a reasonable doubt that a director cannot act impartially, he said.

The court majority also determined that the shareholder adequately alleged that two other directors—William Gordon and John Doerr—weren’t independent.

According to the court’s decision, Gordon and Doerr are partners at venture capital firm Kleiner Perkins Caufield & Byers, which has a 9.2 percent equity stake in Zynga.

Venture capitalist relationships “can generate ongoing economic opportunities,” Strine said. The relationships also “can give rise to human motivations compromising the participants' ability to act impartially toward each other on a matter of material importance.”

Dissent

In dissent, Justice Karen Valihura said it was a “close case” and that Sandys didn’t help his own cause when he failed to ask for books and records regarding the board’s independence.

She also agreed with the chancery court that there wasn’t enough to show that Gordon and Doerr’s relationships and overlapping investments raised doubts as to their independence.

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

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

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