Stocks

Supreme Court Reopens Pincus’ Zynga Inc Stock Sale Case

Zynga’s controlling shareholder Mark Pincus could get in trouble again. The Delaware Supreme Court revived a lawsuit against Pincus and Zynga’s board members for allegedly enabling leaders of the gaming company to act on inside information and dump their stock before it crashed in 2012, according to Reuters.

Zynga
Image: Flickr

What’s this Zynga case about?

Delaware’s high court ruled that the Court of Chancery made an error when it dismissed the lawsuit against Pincus and board of Zynga for procedural reasons in February. The latest ruling paves the way for new motions to dismiss or for the 2014 lawsuit filed by shareholder Thomas Sandys to proceed to discovery and trial, notes Reuters.

Sandys’ lawsuit alleged that Zynga’s board exempted top directors and managers, including former CEO Mark Pincus, from a rule prohibiting stock sales until three days after an earnings announcement.

According to court records, the fellow board members in a secondary offering sold 20.3 million shares for $236.7 million at $12 per share, with the former CEO selling $192 million of stock. Zynga announced its earnings three weeks later, after which the stock dropped to $8.52, and three months later, it dropped to $3.18.

Sandys sued the former CEO and fellow board members on behalf of Zynga in what is called a derivative action. Any judgment or settlement in the case will not be paid to shareholders but to Zynga. The case was dismissed by the lower court because it discovered that Sandys failed to show that most of the board was too conflicted to consider bringing a lawsuit that would clear the way for a shareholder to pursue the case.

Lower court got it wrong

The Supreme Court, however, found that the lower court should have determined that there were not three, but six of the board’s directors that were impartial, notes Reuters.

The high court focused on John Doerr and William Gordon, partners at venture capital firm Kleiner Perkins Caufield & Byers, and Ellen Siminoff, whose husband co-owned an aircraft with Pincus. The venture capital firm is a major investor in Zynga and in One Kings Lane as well. One Kings Lane was co-founded by Pincus’s wife.

Supreme Court Chief Justice Leo Strine said these types of relationships made it impossible for those directors to consider suing Pincus impartially.

Strine said, “Causing a lawsuit to be brought against another person is no small matter, and is the sort of thing that might plausibly endanger a relationship.”