## Facts

- A Zynga, Inc. stockholder brought a derivative action on Zynga’s behalf against Zynga’s founder, Mark J. Pincus, and other directors and officers.
- The complaint challenged a 2012 secondary offering in which certain insiders allegedly received exemptions from trading restrictions and sold shares before negative earnings information became public.
- After the offering price of $12 per share, Zynga’s stock price declined following earnings and other adverse disclosures.
- The alleged insider sales totaled approximately $236.7 million, and the complaint asserted insider trading and fiduciary-duty breaches by transaction participants and those who approved the exemptions.
- The plaintiff did not make a pre-suit litigation demand on Zynga’s nine-member board and instead pled demand futility under Court of Chancery Rule 23.1.
- The Court of Chancery dismissed under Rule 23.1, applying the Rales standard and finding demand not excused because a majority of directors were deemed independent.
- On appeal, the Delaware Supreme Court evaluated whether particularized facts created reasonable doubt that a majority of the board could consider a demand impartially, focusing on relationships involving (i) co-ownership of a private airplane with Pincus, (ii) venture-capital firm ties and co-investments connected to Pincus and another insider, and (iii) the board’s election to be treated as a NASDAQ “controlled company.”

## Issues

1. Whether the complaint alleged particularized facts sufficient under Court of Chancery Rule 23.1, applying Rales, to create reasonable doubt that a majority of the board could exercise independent and disinterested judgment on a litigation demand.
2. Whether close personal ties (including co-ownership of a private aircraft) and interlocking venture-capital relationships can support a pleading-stage inference of non-independence for demand-futility purposes.
3. Whether a board’s self-classification as a NASDAQ “controlled company” may be considered as part of the independence analysis at the pleading stage.

## Decision

- The Delaware Supreme Court reversed the dismissal and held that demand was excused.
- The Court held the complaint pled sufficient particularized facts to raise reasonable doubt about the independence of at least three directors the lower court had treated as independent.
- As to one director, co-ownership of a private airplane with Pincus supported a reasonable inference of an unusually close personal relationship that could impair impartiality in deciding whether to sue Pincus.
- As to two directors affiliated with a venture-capital firm, alleged business ties and investment relationships connected to Pincus and another exempted insider supported a reasonable inference that authorizing litigation could threaten economically meaningful relationships.
- The Court treated the board’s NASDAQ “controlled company” election as a factor that could be weighed, together with other pleaded facts, in assessing independence under Rule 23.1.
- With those directors counted as not independent, a majority of the nine-member board was compromised for Rule 23.1 purposes, making demand futile.

## Legal Principles

- Under Court of Chancery Rule 23.1, a derivative plaintiff must plead particularized facts creating reasonable doubt that a board majority can consider a demand with independent and disinterested business judgment.
- Under Rales, the demand-futility inquiry asks whether directors can base their decision on the corporate merits rather than extraneous considerations or influences.
- Independence can be reasonably doubted based on qualitatively strong personal relationships or significant economic ties, even absent a director’s direct financial interest in the challenged transaction.
- Pleading-stage allegations may support non-independence where a web of business relationships makes it reasonably conceivable directors would be disinclined to authorize litigation against key counterparties or associates.
- Courts may consider reliable publicly available information, including reputable internet sources subject to judicial notice, when evaluating pleaded facts relevant to director independence.

## Conclusion

The Delaware Supreme Court held that the pleaded facts supported reasonable doubt that a majority of Zynga’s board could impartially evaluate a litigation demand because certain directors’ personal and venture-capital relationships with key insiders called their independence into question, so demand was futile and the derivative action could proceed.


Sandys v. Pincus, 152 A.3d 124 (Del. 2016)