Sandys Ex Rel. Zynga Inc. v. Pincus
2016 Del. LEXIS 627
| Del. | 2016Background
- Shareholder Sandys brought a derivative suit against Zynga insiders and directors alleging insiders sold 20.3 million shares in a secondary offering shortly before adverse, nonpublic earnings-related information, causing losses to Zynga and breaching fiduciary duties.
- Defendants moved to dismiss under Ct. Ch. R. 23.1 for failure to plead demand excusal; Court of Chancery applied the Rales standard and found a majority of the board independent, dismissing for failure to plead demand futility.
- At filing the nine-member board included controller/ex-CEO Mark Pincus and other directors; the trial court deemed Pincus and Reid Hoffman interested and found five other directors independent; it did not analyze two directors in depth.
- Sandys had pursued limited books-and-records (Section 220) requests focused on the transaction and did not seek information on board independence; he also made limited factual allegations drawn from public filings (e.g., proxy) and briefing.
- Key factual allegations that survived pleading-stage scrutiny: (1) director Ellen Siminoff co-owns a private airplane with Pincus (suggesting a close personal relationship); (2) directors William Gordon and John Doerr are partners at Kleiner Perkins, which owns ~9.2% of Zynga and has overlapping business ties with Pincus and Hoffman, and were designated non-independent in Zynga’s proxy.
- The Delaware Supreme Court majority held those particularized facts create a reasonable doubt that three directors (Siminoff, Gordon, Doerr) could impartially consider a demand, excusing demand and reversing dismissal; a dissent would have affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand was excused under Rales (board could not impartially consider demand) | Sandys: particularized facts (plane co‑ownership; Kleiner Perkins ties; proxy non‑independence designations) create reasonable doubt about independence of a majority | Defendants: board majority was independent; allegations are conclusory or lack materiality; plaintiff failed to pursue targeted Section 220 discovery | Held: Majority reverses—pleading-stage reasonable doubt as to Siminoff, Gordon, Doerr; demand excused; case remanded |
| Whether Siminoff’s co‑ownership of a private airplane with Pincus defeats independence | Sandys: uncommon, intimate asset co‑ownership implies very close personal/family friendship likely to bias Siminoff | Defendants: allegation framed as business relationship; facts are too sparse and speculative to show bias | Held: Majority finds airplane co‑ownership supports inference of close personal tie creating reasonable doubt; dissent disagrees |
| Whether Kleiner Perkins partners Gordon and Doerr are independent given business interlocks and proxy non‑independence | Sandys: Kleiner’s 9.2% stake, investments overlapping with Pincus/Hoffman, and Zynga board’s NASDAQ‑based non‑independent classification suggest ongoing reciprocal relationships that could impair impartiality | Defendants: allegations lack particularized facts on materiality, financial dependence, or why proxy labeled them non‑independent; presumption of director independence stands | Held: Majority gives weight to overlapping relationships and Zynga board’s non‑independence designation and finds reasonable doubt at pleading stage; dissent finds allegations insufficient |
| Standard and plaintiff’s pre‑suit diligence obligations | Sandys: pleaded particularized facts sufficient despite limited 220 requests; courts must draw inferences for plaintiff at pleading stage | Defendants: plaintiff’s failure to seek targeted books-and-records and more facts undermines his claims | Held: Court reiterates plaintiffs must diligently investigate pre‑suit but nonetheless finds the pleaded facts (especially the plane and Kleiner ties plus proxy) create reasonable doubt; admonishes counsel to use available investigative tools going forward |
Key Cases Cited
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (sets pleading‑stage standard for demand futility when board faces a business‑judgment decision)
- Beam v. Stewart, 845 A.2d 1040 (Del. 2004) (friendship allegations require particularized facts to infer lack of independence)
- Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) (discusses particularity and pre‑suit investigation in demand‑futility context)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (framework for director presumptions and demand futility principles)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (business judgment deference and standing for derivative suits)
- In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013) (relevance of exchange independence standards and contextual inquiry)
- In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) (use of fact‑specific inquiry in independence analysis)