Abraham, Fruchter & Twersky, LLP represents the plaintiff in Sandys v. Pincus, et al., C.A. No. 9512-CB (Del. Ch.), an action brought derivatively on behalf of Zynga, Inc. This case arises out of insider selling by certain members of Zynga’s Board of Directors in Zynga’s April 2012 secondary offering. Zynga became a publicly traded company in December 2011 when it sold 100 million shares of common stock in an initial public offering at $10.00 per share. At the same time, Zynga insiders also entered into lock-up agreements with IPO underwriters which prohibited those insiders from selling Zynga stock for 165 days following the IPO. Less than three months later, in March 2012, Zynga’s Board approved the secondary offering. That same month, Zynga’s audit committee met and approved exceptions to the Company’s 10b5-1 trading plans and exempted certain insiders from their trading restrictions, including the prohibition from selling stock until three days after earnings were released. At the same time, however, Zynga’s key metrics were declining. Zynga insiders sold over 20 million shares in the secondary offering netting proceeds of over $236 million. Just weeks following the secondary offering, the Company began to publicly release information concerning its declining metrics, causing Zynga’s stock price to plunge well below the IPO price.
Plaintiff brought this derivative suit against Zynga’s officers and directors for breaches of fiduciary duties, including Brophy claims against certain defendants for selling Company stock while in receipt of material non-public information. Plaintiff also alleged that it would have been futile to make the required demand on Zynga’s Board to consider his claim, as a majority of the Board could not exercise independent and disinterested judgment in considering that demand. The Chancery Court held that Plaintiff had not properly pled that demand was futile and dismissed the action. Plaintiff appealed this dismissal to the Delaware Supreme Court. In December 2016, the Supreme Court issued a 4-1 decision reversing the dismissal of the action and finding that a majority of the Zynga Board was incapable of impartially considering a demand. Notably, the Supreme Court found that the fact a director and her husband co-owned a private airplane with Zynga’s Board Chairman and controlling shareholder (who sold over $192 million of stock in the secondary offering) constituted “an extremely intimate personal friendship between their families” which meant that director could not impartially consider a demand. The Supreme Court also held that two additional directors were not independent because Zynga’s Board had determined that those two directors did not qualify as independent directors under NASDAQ’s Listing Rules and that the criteria NASDAQ has articulated as bearing on independence are relevant under Delaware law and were likely influenced by Delaware law. The Firm is continuing in the prosecution of this action.