Delaware District Court Denies Defendants' Motion to Dismiss State Law Claims Against Zynga Board

January 17, 2014

As previously announced, on April 4, 2013, a class action complaint was filed in the Delaware Court of Chancery asserting a claim for breach of fiduciary duty against Mark Pincus, Zynga's former CEO, and other members of Zynga's board of directors, and a claim for aiding and abetting that breach of fiduciary duty against the lead underwriters of Zynga’s IPO, on account of the discriminatory waiver of lockup agreements post-IPO for the benefit of certain Zynga senior executives, board members and private equity investors.

After the class action complaint described above was filed in the Court of Chancery, defendants removed the action to federal district court, and filed a motion to dismiss under the Securities Litigation Uniform Standards Act (SLUSA). Plaintiff opposed the dismissal and sought remand of the case to the Court of Chancery.

On December 23, 2013, the district court denied defendants’ motion to dismiss, and granted plaintiff’s motion for a remand.

The district court observed that “SLUSA was not intended to bar traditional state law causes of action.” The district court held that SLUSA precludes state law claims only where misrepresentations are “a factual predicate” of the claim, rather than “merely an extraneous detail.”

Here, defendants had argued that plaintiff’s complaint alleged misrepresentations of fact in connection with the purchase and sale of a covered security, thereby warranting dismissal under SLUSA. The district court disagreed, finding that plaintiff’s complaint did not allege any misrepresentations. To the contrary, as the district court observed, “defendants told plaintiff and the world exactly what they were doing;” i.e., selectively waiving the lockup agreements post-IPO for the benefit of the defendants and other parties. Such full disclosure did not constitute a deception, manipulation or misrepresentation. Instead, the key claim in the case is for breach of the fiduciary duty of loyalty, which focuses on “whether defendants were in fact entitled to favor their own interests . . . under Delaware law.”

Click here to read more about this litigation, and to download a copy of the district court’s December 23, 2013 decision and order.