On April 4, 2013, a class action complaint was filed in the Delaware Court of Chancery against Mark Pincus, Zynga’s CEO, and other members of Zynga’s board of directors (the “Board”), asserting a claim for breach of fiduciary duty on behalf of a class (“Class”) consisting of present and former employees and other shareholders of Zynga who were not permitted to sell shares in a secondary offering of Zynga stock due to certain lockup agreements. Additionally, a claim for aiding and abetting breach of fiduciary duty was asserted on behalf of the Class against Morgan Stanley and Goldman Sachs (“Underwriter Defendants”), as underwriters of Zynga’s initial public offering (“IPO”).
The action challenges the Defendants’ selective, discriminatory waiver of lockup agreements (the “Lockups”) that members of the Class were required to enter into in connection with Zynga’s IPO.
As disclosed in the registration statement on Form S-1/A filed by Zynga on December 15, 2011, the Lockups barred sales by substantially all of the Company’s shareholders, including all of its officers and directors, for 165 days following its December 16, 2011 IPO.
However, less than 90 days after the IPO, on March 14, 2012, Zynga announced that Defendant Mark Pincus, together with other members of the Board, and certain other senior executives and private equity investors, would sell over 40 million shares of stock in a secondary offering (the “Secondary Offering”), and that their Lockups would be waived to allow the sales to occur. In addition to selectively waiving the Lockups, the timing of the Secondary Offering required that Zynga waive its blackout policy (the “Blackout Policy”), which would have otherwise barred the sales by Pincus and other insiders. The Secondary Offering was completed two weeks later, yielding Pincus net proceeds of $192 million and paying three other directors – collectively comprising half of the Board – more than $17 million.
The Lockups had been imposed as a condition to underwriting the IPO by the Underwriter Defendants, and the Underwriter Defendants selectively waived the Lockups as to Pincus and other selling shareholders to permit the Secondary Offering to occur.
While the Secondary Offering allowed members of Zynga’s senior management and Board to cash out early, the Board and Underwriter Defendants did not extend the same opportunity to Zynga’s non-executive and former employees.
For non-executive employees, the Lockups were waived but the Blackout Policy barred them from selling for over a month. For former employees, the Lockups remained in effect until their scheduled expiration date, approximately two months after the sales by Pincus and others in the Secondary Offering.
Beginning immediately after the Secondary Offering, Zynga’s share price began a precipitous decline. It dropped 29.5% from the Secondary Offering price by the time non-executive employees were first permitted to sell, a month after the Secondary Offering occurred. By the time the Lockups expired and former employees were first allowed to dispose of their shares, Zynga’s share price had dropped 49.3% from the Secondary Offering price.
The Board members’ discriminatory waiver of the Lockups to profit personally constituted a breach of their fiduciary duties to other Zynga shareholders. The Underwriter Defendants’ agreement to waive the Lockups, thereby generating additional underwriting fees and commissions for themselves, aided and abetted the Board members’ breach of fiduciary duties.
The complaint seeks disgorgement of the amounts by which the Defendants were unjustly enriched on account of the breaches of fiduciary duty alleged therein, and to account to the Class for all damages suffered by them.
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