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Sandys v. Pincus, No. 157, 2016 (Del. Dec. 5, 2016) (Strine, C.J.)

December 5, 2016

In this en banc majority opinion, the Delaware Supreme Court held that the Court of Chancery incorrectly determined that a majority of the board of directors of Zynga, Inc. (“Zynga”) could impartially consider a stockholder demand, and plaintiff had therefore failed to plead demand futility.  Justice Karen L. Valihura issued a dissenting opinion.

At issue in the Court of Chancery was the defendants’ motion to dismiss plaintiff’s derivative claims under Rule 23.1 for failure to make a pre-suit demand on the board.  The underlying breach of fiduciary duty claims involved allegations that certain managers and directors of Zynga, including its controlling stockholder, breached their fiduciary duties in connection with a sale of stock in a secondary offering before an earnings announcement. Applying the standard articulated in Rales v. Blasband, the Court of Chancery found that demand was not excused because five of Zynga’s nine directors were independent, and therefore granted defendants’ motion to dismiss.  On appeal, the Delaware Supreme Court reversed and determined that a majority of the Zynga board could not impartially consider the stockholder demand. 

Writing for the majority (the “Majority”), Chief Justice Leo E. Strine, Jr. first criticized the plaintiff for failing to make a pre-suit books and records demand to investigate the independence of the board.  The Majority similarly criticized the plaintiff for failing to use the internet as one of the “tools at hand” to discover information about director relationships.  Although cautioning that such a source should be used with care, the Majority nonetheless stated that “we can take judicial notice that internet searches can generate articles in reputable newspapers and journals, postings on official company web sites, and information on university websites that can be the source of reliable information.”

Turning to the independence of the Zynga board members, the Majority disagreed with the Court of Chancery’s findings of independence with respect to three of the directors.  The Majority found that Ellen Siminoff, who along with her husband co-owned a private plane with Mark J. Pincus (a Zynga director and its controlling stockholder), was not independent.  Despite deficiencies in plaintiff’s factual pleadings, which were exacerbated by plaintiff’s failures to use the “tools at hand,” the Majority held that a reasonable inference could be drawn that, among other things, co-ownership of a private plane “signaled an extremely close, personal bond between Pincus and Siminoff, and between their families” affecting Siminoff’s independence, and that Siminoff would not be able to act impartially when evaluating “a suit implicating a very close friend with whom she and her husband co-own a private plane.”

The Majority then found that two other Zynga directors, William Gordon and John Doerr, were not independent for pleading stage purposes.  The Majority reached this conclusion because Gordon and Doerr are partners at Kleiner Perkins Caufield & Byers (“Kleiner Perkins”), which controls approximately 9.2% of Zynga’s equity, and also holds investments both in a company co-founded by Pincus’ wife and a company whose board included a Zynga director and another partner at Kleiner Perkins.  The Majority also was persuaded by the Zynga board’s determination, as set forth in Zynga’s SEC filings, that Gordon and Doerr did not qualify as independent directors under the NASDAQ Listing Rules. Although the plaintiff failed to plead the reason why the board made this determination, the Majority determined that a reasonable doubt existed under Rales as to whether Gordon and Doerr were independent, and therefore concluded that a majority of the Zynga board was unable to consider impartially plaintiff’s demand.

Justice Valihura dissented from the Majority (the “Dissent”), finding that, while plaintiff pled facts affirming that certain business relationships existed between Gordon, Doerr and other members of the Zynga board, the plaintiff “failed to plead any facts about the size, profits, or materiality to Gordon or Doerr of these investments or interests.” The Dissent did not find Gordon’s and Doerr’s designation as “not independent” under the NASDAQ rules to be dispositive because there are several scenarios in which “a director might be deemed ‘not independent’ under the NASDAQ rules . . . yet deemed independent for demand futility purposes.”  Absent such a materiality showing, the Dissent deemed the evidence insufficient to raise a reasonable doubt as to Gordon and Doerr’s independence.

Turning to Siminoff, the Dissent observed that plaintiff failed to allege any particularized facts “as to the materiality of the co-owned asset (apparently a small plane, not a jet), whether there were other owners, or the nature of the Siminoff/Pincus relationship.” Citing existing case law for the proposition that “directors are presumed independent” under Delaware law, the Dissent determined that the Court of Chancery’s finding that plaintiff’s allegations were inadequate to “reveal a sufficiently deep personal connection to Pincus” was reasonable.

The full opinion is available here