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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Del. Supreme Court Finds Demand Excused and Revives 'Zynga' Derivative Claim
The derivative complaint alleged that Zynga's CEO, Chairman and controlling stockholder Mark Pincus, along with certain other top managers and directors were given an exception from the company's standing rule preventing insider sales until three days after an earnings announcement. The exception permitted the insiders to sell 20.3 million shares of stock for $236 million as part of a secondary offering. The insiders sold their shares for $12/share. Following the earnings announcement the market price dropped to $8.52 and following more negative news three months later dropped to $3.18, a 75 percent decrease from the offering price. The complaint alleged wrongdoing by the directors who approved the exception and those who participated in the sales. Of the company's nine directors, the Court of Chancery found that only the two directors who participated in the sale, Pincus & Hoffman, were interested and therefore could not impartially consider a demand. The Chancery Court rejected the argument that the facts alleged in the complaint were sufficient to create a reasonable doubt about the independence of director Siminoff because of an allegation that she was a "close family friend" of Pincus and had a business relationship with Pincus as co-owners of a private plane. The Chancery Court also rejected the argument that directors Doerr and Gordon lacked independence because of investment relationships they had with Zynga and Hoffman and Pincus.
The Supreme Court acknowledged this was a close case and that demand excusal determinations are fact-specific. Justice Karen Valihura's dissent from the opinion authored by the chief justice further evidences the closeness of the question. The opinion, however, reflects a willingness at the pleadings stage to consider how the real-life dynamics of human nature and human interaction operate and the constraint such relationships may impose on one's ability to act adversely toward another in the relationship. Moreover, the Supreme Court evidenced the importance of such relationships to its independence analysis even in the absence of any direct evidence of material financial coercion or advantage.
Finally, to the extent uncertainty has lingered in Delaware law about a stockholder's ability under 8 Del. C. Section 220 to seek books and records concerning director independence, the Supreme Court squarely removed any such doubt. The court admonished the plaintiff for lack of diligence in failing to request information in its books and records demand concerning the directors' independence.