Zynga Inc Founder, Directors Face Lawsuit Over Stock Sale

Zynga Inc (NASDAQ:ZNGA) founder Mark Pincus must face a lawsuit that accuses him of unlawful benefits from selling $192 million of the company’s stock in 2012 at a time when other investors were not allowed to sell owing to the lockup agreement, according to a court ruling.

Zynga requests for dismissal of the lawsuit

According to a report from Reuters, Zynga had urged Delaware court of Chancery to dismiss the lawsuit that accuses Pincus along with other Zynga directors of breaching their fiduciary duty towards shareholders by removing the lockup option for selected investors.

The social game maker said that the lawsuit should be dismissed as Pincus and other defendants offloaded only 20% of their holdings, and their remaining holdings were put under an extended staggered lockup through July and August of 2012. Moreover, the defendants claim that waiving the lockup did no harm to Lee or other shareholders as the lockup expiration remained the same for them.

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In a 35-page ruling published Friday, Judge Andre Bouchard wrote, “It is reasonably conceivable that the benefit the director defendants received in the lockup restructuring was not entirely fair.”

No comments from either party

Installing a lockup period helps in controlling the amount of stock available for sale after an IPO. Zynga did not allow investors who bought their stock before the company’s initial public offering in December 2011 to sell until May 28, 2012.

But in March 2012, the board of Zynga removed the restriction for Pincus and for four other directors, letting them unload their stock around two months earlier than originally expected, which according to the lawsuit totaled to proceeds of around $100 million.

Apart from Pincus, four other directors sold stock in Zynga’s April 2012 secondary stock offering at $12 per share, and the price surged almost two times after the lockup expired, according to Bouchard’s 35-page opinion. Bouchard ruled out the claims that Goldman Sachs & Co and Morgan Stanley supported the lockup waiver and collected $10 million in fees from the secondary offering.

There was no comment from Zynga Inc (NASDAQ:ZNGA) spokeswoman Michelle Kramer and Lee’s attorney, Evan Wohl of Wohl & Fruchter, according to Reuters. The case is Wendy Lee v Mark Pincus et al, Delaware Court of Chancery, No. 8458.

On Monday, Zynga shares closed down 0.72% at $2.75, and year to date stock is down over 27%.