Court Opinion

ID: 3181107
Source: CourtListenerOpinion
Date Created: 2016-02-29 19:13:56.223828+00
Date Added: 2024-06-11T14:29:37.091819
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

THOMAS SANDYS, Derivatively on Behalf of         )
ZYNGA INC.,                                      )
                                                 )
                  Plaintiff,                     )
                                                 )
            v.                                   )   C.A. No. 9512-CB
                                                 )
MARK J. PINCUS, REGINALD D. DAVIS,               )
CADIR B. LEE, JOHN SCHAPPERT, DAVID M.           )
WEHNER, MARK VRANESH, WILLIAM                    )
GORDON, REID HOFFMAN, JEFFREY                    )
KATZENBERG, STANLEY J. MERESMAN,                 )
SUNIL PAUL and OWEN VAN NATTA,                   )
                                                 )
                  Defendants,                    )
                                                 )
            and                                  )
                                                 )
ZYNGA INC., a Delaware Corporation,              )
                                                 )
                  Nominal Defendant.             )

                           MEMORANDUM OPINION

                        Date Submitted: November 17, 2015
                         Date Decided: February 29, 2016

Norman M. Monhait and P. Bradford deLeeuw, ROSENTHAL, MONHAIT &
GODDESS, P.A., Wilmington, Delaware; Jeffrey S. Abraham and Philip T. Taylor,
ABRAHAM, FRUCHTER & TWERSKY, LLP, New York, New York; Attorneys for
Plaintiff.

Elena C. Norman, Nicholas J. Rohrer and Paul J. Loughman, YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; Jordan Eth, Anna Erickson
White and Kevin A. Calia, MORRISON & FOERSTER LLP, San Francisco, California;
Attorneys for Defendants Mark J. Pincus, Reginald D. Davis, Cadir B. Lee, John
Schappert, David M. Wehner, Mark Vranesh, Owen Van Natta, and Nominal Defendant
Zynga Inc.
Bradley D. Sorrels and Jessica A. Montellese, WILSON SONSINI GOODRICH &
ROSATI, P.C., Wilmington, Delaware; Steven M. Schatz, Nina Locker and Benjamin M.
Crosson, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California;
Attorneys for Defendants William Gordon, Reid Hoffman, Jeffrey Katzenberg, Stanley J.
Meresman and Sunil Paul.

BOUCHARD, C.
          A stockholder of Zynga Inc. brings this derivative suit to recover damages the

company allegedly suffered because the Zynga board approved exceptions to lockup

agreements and other trading restrictions that allowed certain directors and officers to sell

some of their Zynga shares in an April 2012 secondary offering. Shortly after the

secondary offering, Zynga’s share price fell dramatically. Plaintiff’s central grievance is

that fiduciaries of the company sold shares in the secondary offering when they knew the

company’s performance was suffering and decided to cash out before the market was

made aware.

          Plaintiff filed this suit in April 2014 asserting three claims. Count I asserts that

certain directors and officers who sold shares in the secondary offering misused

confidential internal information concerning the company’s deteriorating performance.

Count II asserts that the board breached its duty of loyalty by approving the secondary

offering, causing the company to suffer reputational harm and exposing it to liability in

other lawsuits arising out of these events. Count III asserts that the board and certain

officers injured the company by failing to implement controls to ensure that Zynga would

timely report material changes to its financial condition and by failing to disclose such

information.

          Defendants moved to stay this case in favor of other then-pending actions, or to

dismiss it due to plaintiff’s failure to make a pre-suit litigation demand and for failure to

state a claim for relief. For the reasons explained below, the action will be dismissed

because of plaintiff’s failure to demonstrate that making a demand would have been

futile.

                                               1
         Significant to the demand futility analysis here, the composition of Zynga’s board

underwent important changes between approval of the secondary offering and the filing

of the complaint. As I explained in a related case, at least half of the Zynga directors who

approved the challenged transaction sold some of their Zynga shares in the secondary

offering and may have received an unfair personal benefit as a result.1 But by the time

this action was filed, two of the directors who sold shares in the secondary offering had

left the board and had been replaced by two outside directors who had no involvement in

the underlying events.

         Delaware law entrusts a board comprised of an independent, disinterested majority

of directors with the power to decide whether it is in the corporation’s best interests to

pursue claims on its behalf, including claims against fellow directors and officers. Thus,

before a stockholder may assert such claims derivatively on the corporation’s behalf, the

stockholder either must make a pre-suit demand on the board or demonstrate why it

would be futile to do so.       To demonstrate demand futility, a plaintiff must plead

particularized facts demonstrating that the board in place when suit was filed could not

have made an impartial decision about whether or not to pursue the corporation’s claims.

Focusing on that time frame, plaintiff’s complaint fails to plead particularized facts

casting reasonable doubt on that board’s ability to decide impartially whether it would be

in Zynga’s best interests to pursue the claims asserted in this case. Thus, plaintiff has

failed to establish demand futility, and this action will be dismissed.

1
    See Lee v. Pincus, 2014 WL 6066108 (Del. Ch. Nov. 14, 2014).

                                              2
I.       BACKGROUND

         Unless noted otherwise, the facts recited in this opinion come from the allegations

in plaintiff’s Verified Shareholder Derivative Complaint (the “Complaint”) and certain

corporate filings integral to the Complaint.2 Facts regarding the circumstances of board

members are recited as of the date the Complaint was filed, the relevant point in time for

assessing demand futility.3

         A. The Parties

         Nominal defendant Zynga Inc. is a Delaware corporation headquartered in

California. Zynga develops and markets social games such as FarmVille and Words with

Friends, primarily through the gaming platform of Facebook, Inc. Plaintiff Thomas

Sandys owns 400 shares of Zynga Class A common stock, which he acquired on

February 3, 2012. He has been a Zynga stockholder at all relevant times.

         The Complaint names twelve individuals as defendants. Eight of the individual

defendants were members of Zynga’s board at the time of the April 2012 secondary

offering (the “Secondary Offering”). Three of those board members were also members

of management: Mark J. Pincus, Zynga’s founder and Chief Executive Officer from

2007 to 2013; John Schappert, Zynga’s Chief Operating Officer from May 2011 to

August 2012; and Owen Van Natta, Zynga’s Executive Vice President and Chief

Business Officer from August 2010 to November 2011. The other five board members

2
    See In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del. 1995).
3
 Rales v. Blasband, 634 A.2d 927, 933-34 (Del. 1993) (noting that circumstances of “the
board that would be considering the demand” determine demand futility analysis).

                                              3
were outside directors: William Gordon, Reid Hoffman, Jeffrey Katzenberg, Stanley J.

Meresman and Sunil Paul. I refer to these eight directors together as the “Secondary

Offering Board.”

       Four of the members of the Secondary Offering Board sold stock in the Secondary

Offering: Pincus, Schappert, Van Natta, and Hoffman. Pincus alone personally received

$198 million in gross proceeds for shares he sold in the Secondary Offering. Through his

ownership of enhanced voting Class B and Class C common stock, Pincus controls

approximately 61% of the total voting power in Zynga.

       The other four individuals named as defendants (Reginald D. Davis, Cadir B. Lee,

Mark Vranesh, and David M. Wehner) served in various executive positions at Zynga

during time periods relevant to this case. Each of them sold shares of Zynga stock in the

Secondary Offering. I refer to these four individuals and the four directors who sold

shares in the Secondary Offering (Pincus, Hoffman, Schappert, and Van Natta)

collectively as the “Secondary Offering Participants.”

       As of the date of the Complaint, two members of the Secondary Offering Board

(Schappert and Van Natta) had left and three new persons had joined the board: John

Doerr, Ellen Siminoff, and Don Mattrick. Mattrick was serving both as a director and as

the Chief Executive Officer of Zynga at the time this action was filed.

                                             4
      The table below summarizes the composition of Zynga’s board of directors when

the Secondary Offering was approved and when demand was made on the board in

conjunction with the filing of the Complaint (the “Demand Board”): 4

                                                                Sold Shares in
    Secondary Offering Board          Demand Board
                                                              Secondary Offering
            Schappert                                                 ✓
            Van Natta                                                  ✓
              Gordon                      Gordon
             Hoffman                     Hoffman                       ✓
            Katzenberg                  Katzenberg
            Meresman                    Meresman
               Paul                        Paul
              Pincus                      Pincus                       ✓
                                         Mattrick
                                           Doerr
                                         Siminoff

      B. The IPO and the Lock-Ups

      On December 16, 2011, Zynga sold shares of Class A common stock in its initial

public offering (the “IPO”). Zynga and its directors, officers, and various employees

entered into lock-up agreements (the “Lock-Ups”) with the underwriters of the IPO that

prohibited them from selling shares of Zynga stock for up to 165 days following the IPO.

The original expiration date of the Lock-Ups was May 28, 2012.

4
  Hoffman, Meresman, Katzenberg, and Mattrick were members of Zynga’s board when
the Complaint was filed, but they have since left the board.

                                           5
       On March 7, 2012, Zynga’s board met to discuss the Secondary Offering, through

which certain stockholders would be permitted to sell shares before the expiration of the

Lock-Ups. In that meeting, the board approved the Secondary Offering, including the

sales of some of the shares held by director defendants Hoffman, Pincus, Schappert, and

Van Natta.    These four directors comprised a majority of the board members who

approved the Secondary Offering because one member of Zynga’s then eight-member

board (Sunil Paul) was absent.

       On March 13, the Audit Committee of the board approved exceptions to the

trading window restrictions in Zynga’s 10b5-1 trading plan to allow the Secondary

Offering Participants to sell shares in the Secondary Offering. The next day, Zynga

announced the Secondary Offering through a Registration Statement on Form S-1.

       On March 26, Zynga announced that the underwriters for the IPO, Morgan Stanley

& Co. LLC and Goldman, Sachs & Co., had agreed to the release of the Lock-Ups in

connection with the Secondary Offering. On March 28, the board’s pricing committee

approved a Secondary Offering price of $12 per share. The full board did not meet to

ratify the authority of the pricing committee until April 18, after the Secondary Offering

had taken place.

       On March 29, 2012, Zynga filed a prospectus regarding the Secondary Offering

(the “Prospectus”), which included the company’s historical operating financial metrics.

The Prospectus did not disclose recent trends in certain operating metrics, which plaintiff

alleges had begun worsening. For instance, average bookings per user (“ABPU”), a key

                                            6
operating metric, had begun falling.5 Daily average users (“DAU”), a figure reported on

a daily basis to members of Zynga management including Pincus, Schappert, Wehner,

and Van Natta, also had leveled off in the first quarter of 2012.6        The Prospectus

discussed the risk associated with Zynga’s reliance on Facebook for revenue through the

placement of Zynga products in Facebook’s news feed, but did not discuss upcoming

changes to Facebook’s news feed algorithm that would become effective around April 2,

2012, which would negatively impact Zynga’s performance.

         On or about April 3, 2012, Zynga announced that the Secondary Offering had

been completed. The Secondary Offering Participants sold a total of about 20 million

shares for about $236 million, out of a total of about 49 million shares that were sold for

approximately $515 million in the entire Secondary Offering.7            Zynga’s current

non-executive employees were not able to participate in the Secondary Offering because

they were not exempted from Zynga’s trading window restrictions, which disallowed

stock sales until three days after an earnings announcement. Zynga’s former employees

were not able to participate because they were not exempted from the Lock-Ups.

5
    Compl. ¶ 69.
6
    Compl. ¶¶ 75-76.
7
    Certain venture capital investors made some of the remaining sales. Compl. ¶ 113.

                                             7
       C. Zynga’s Stock Price Falls Significantly After the Secondary Offering

       On April 26, 2012, Zynga announced its earnings for the first quarter of 2012,

which ended on March 31, 2012. These earnings reflected a 9.8% decline in APBU. On

April 27, the market price of Zynga’s shares declined by 9.6% to close at $8.52 per share.

       Over the following months, negative trends in Zynga’s financials continued.

ABPU fell 16% further in the second quarter of 2012. After the announcement of those

results, Zynga’s stock closed at $3.18 per share, down 37% from the previous day’s close

of $5.08 per share.

       On October 4, 2012, Zynga announced another set of earnings and lowered its

full-year 2012 outlook. The company also announced an impairment charge of between

$75 million and $85 million regarding the assets of OMGPOP, Inc., another game maker

that Zynga had acquired in March 2012. By October 5, 2012, Zynga’s stock price had

fallen to $2.29 per share, a decrease of 81% from the $12 per-share price of the

Secondary Offering.

       D. Related Litigation Challenging the Secondary Offering.

       In the wake of the rapid decline in Zynga’s stock price after the Secondary

Offering, several litigations were filed before this action commenced in April 2014.

       On July 30, 2012, an action was filed in the United States District Court for the

Northern District of California asserting claims under Section 10(b) of the Securities

Exchange Act.8 This action was later consolidated with several other suits. None of

8
 Compl. ¶ 117(d); Class Action Complaint for Violations of the Federal Securities Laws,
DeStefano v. Zynga, Inc., Case No. 12-CV-4007 (JSW) (N.D. Cal. July 30, 2012).

                                            8
Zynga’s outside directors was named as a defendant in the consolidated action, as

amended.9 A final settlement was recently approved in that case.10

         On August 1, 2012, a class action captioned Reyes v. Zynga was filed in a

California state court asserting claims against the Secondary Offering Board under

Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. 11 When plaintiff filed his

case here, Reyes already had survived a demurrer for lack of subject matter jurisdiction.12

In February 2015, the Reyes action was voluntarily dismissed with prejudice.13

         On April 4, 2013, a former Zynga employee filed an action in this Court captioned

Lee v. Pincus, C.A. No. 8458-CB, on behalf of a class of current and former Zynga

employees who were not permitted to sell their shares in the Secondary Offering or for a

certain period thereafter because they were not exempted from the Lock-Ups or the

trading window restrictions (the “Delaware Class Action”). The Delaware Class Action

named the Secondary Offering Board as defendants, along with Zynga, Goldman Sachs,

9
 See First Amended Complaint for Violation of Federal Securities Laws, In re Zynga Inc.
Sec. Litig., Lead Case No. 12–CV-4007 (JSW) (N.D. Cal. Mar. 31, 2014).
10
  See Order Granting Motion for Final Approval of Class Action Settlement and Motion
for Attorneys’ Fees, DeStefano v. Zynga, Inc., 2016 WL 537946 (N.D. Cal. Feb. 11,
2016) (approving settlement providing for creation of a $23 million settlement fund).
11
     Reyes v. Zynga, Inc., Case No. CGC-12-522876 (Cal. Super. Ct. Aug. 1, 2012).
12
   See Order Overruling Defendants’ Demurrers to Plaintiff’s Amended Complaint on the
Ground That the Court Lacks Subject Matter Jurisdiction, Reyes, Case No. CGC-12-
522876 (Cal. Super. Ct. Aug. 26, 2013). The case later survived a demurrer for failure to
state a claim. See Order Overruling Defendants’ Demurrer to Plaintiff’s Amended
Complaint, Reyes, Case No. CGC-12-522876 (Cal. Super. Ct. Sept. 29, 2014).
13
     Tr. Oral Arg. 7 (Nov. 17, 2015).

                                             9
and Morgan Stanley.        The primary claim asserted in that action was for breach of

fiduciary duty against the Secondary Offering Board for approving the Secondary

Offering on the theory that four of its members who sold some of their shares in the

Secondary Offering before Zynga’s stock price declined significantly had received an

unfair benefit to the detriment of the class members. I concluded that the plaintiff had

stated a direct claim for relief on November 14, 2014,14 and later certified the class.15

         E.      Procedural Posture

         On April 4, 2014, after obtaining books and records regarding the Secondary

Offering under 8 Del. C. § 220, plaintiff filed the Complaint in this action. It asserts

three derivative claims on behalf of Zynga, which is named as a nominal defendant:

          Count I asserts a Brophy16 claim against the Secondary Offering Participants,

              alleging that they breached their fiduciary duties by misusing Zynga’s

              confidential information when they sold shares in the Secondary Offering

              while in possession of materially adverse, non-public information about the

              company.

          Count II asserts a claim for breach of the duty of loyalty against the Secondary

              Offering Board for approving the Secondary Offering and against the Audit

14
     See Lee v. Pincus, 2014 WL 6066108, *5-7, *13 (Del. Ch. Nov. 14, 2014).
15
  Lee v. Pincus, Order Granting Plaintiff’s Motion for Class Certification, 2015 WL
9490433 (Del. Ch. Dec. 30, 2015) (ORDER).
16
     Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).

                                              10
             Committee members for exempting the Secondary Offering Participants from

             trading restrictions to allow them to sell in the Secondary Offering.

          Count III asserts a Caremark17 claim against all defendants, alleging that they

             breached their fiduciary duties by failing to put controls in place to ensure that

             Zynga made adequate public disclosures and avoided material omissions in its

             public statements.

         On December 9, 2014, after the case had been stayed voluntarily by the parties for

over eight months, defendants filed a motion (1) to stay this case in favor of the securities

class actions pending in state and federal courts in California, and (2) to dismiss this case

under Court of Chancery Rule 23.1 for failure to make a pre-suit litigation demand, and

under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. Briefing was

not completed until May 2015, and argument was heard on November 17, 2015.

II.      LEGAL ANALYSIS

         Plaintiff brings all of his claims derivatively on behalf of Zynga under Court of

Chancery Rule 23.1, alleging that each of them has caused harm to Zynga.18 Defendants

do not dispute that the claims are derivative in nature.

         The Brophy and Caremark claims (Counts I and III) are derivative because any

harm stemming from the misuse of Zynga’s confidential information or from oversight

failures that allowed Zynga to make material misstatements or violate laws accrues to

17
     In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
18
     Compl. ¶¶ 118, 123, 128, 134.

                                               11
Zynga itself and to its stockholders only indirectly.19 Although the theory of liability for

Count II tracks the fiduciary duty claim asserted directly in the Delaware Class Action,

the relief sought in this action is different. As I read the Complaint, plaintiff here seeks

to recover for reputational harm to Zynga and for any liability it may incur in the federal

securities class action and the Delaware Class Action.20 Accordingly, I will analyze each

of the claims as being derivative. Because I conclude that demand was not excused for

each of the claims thus necessitating dismissal of the Complaint, I do not address any of

defendants’ other arguments for a stay or dismissal of this case.

         A.     Demand Futility Standard

         Under Court of Chancery Rule 23.1, a derivative plaintiff’s complaint must

“allege with particularity the efforts, if any, made by the plaintiff to obtain the action the

plaintiff desires from the directors or comparable authority and the reasons for the

plaintiff’s failure to obtain the action or for not making the effort.”21 This rule is the

procedural embodiment of the substantive requirement that a plaintiff must either make a

19
  See Latesco, L.P. v. Wayport, Inc., 2009 WL 2246793, at *6 (Del. Ch. July 24, 2009)
(“A Brophy claim is fundamentally derivative in nature, because it arises out of the
misuse of corporate property—that is, confidential information—by a fiduciary of the
corporation, for the benefit of the fiduciary and to the detriment of the corporation.”);
Stone v. Ritter, 911 A.2d 362, 365 (Del. 2006) (applying Caremark standard to derivative
oversight claims); see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031,
1033 (Del. 2004) (holding that whether claim is direct or derivative turns solely on who
suffered the alleged harm and who would receive the benefit of any recovery).
20
     See Compl. ¶ 118.
21
     Ct. Ch. R. 23.1(a).

                                             12
demand upon the board to initiate the litigation or demonstrate that such a demand would

be futile.22

           To determine whether a plaintiff’s demand upon the board would be futile,

Delaware courts employ one of two tests. The first, articulated in Aronson v. Lewis,

requires the plaintiff to plead facts that create a reasonable doubt either that “the directors

are disinterested and independent” or that “the challenged transaction was otherwise the

product of a valid exercise of business judgment.”23 The Aronson test does not apply

when “the board that would be considering the demand did not make a business decision

which is being challenged in the derivative suit.”24 For instance, it will not apply when

the board did not undertake a business decision or when a majority of the members that

made the challenged decision have been replaced.25 In such situations, this Court instead

applies the Rales test, under which plaintiff must create a reasonable doubt that “the

board of directors could have properly exercised its independent and disinterested

business judgment in responding to a demand” at the time the complaint was filed.26

22
  See In re EZCORP Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *32-
33 (Del. Ch. Jan. 25, 2016).
23
     Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).
24
     Rales v. Blasband, 634 A.2d 927, 933-34 (Del. 1993).
25
     Id.
26
     Id. at 934.

                                              13
       Demand futility is assessed claim by claim.27 I will now address each of plaintiff’s

claims, addressing at the outset whether to apply the Aronson or Rales test to each claim.

       B.     Demand Is Not Excused for the Brophy Claim

       Count I asserts a Brophy claim against the Secondary Offering Participants based

on their alleged misuse of Zynga’s confidential information to sell their shares in the

Secondary Offering. Four of these defendants (Hoffman, Pincus, Schappert, and Van

Natta) were directors at the time of the Secondary Offering, but their decision to sell

shares was an individual choice, not a decision of the board.28 Consequently, Count I

does not challenge a business decision of the board, and the Rales test applies.

       Under the Rales test, I must determine if plaintiff has created a reasonable doubt

as to whether Zynga’s board of directors at the time this case was filed was able to

properly exercise its independent and disinterested business judgment in responding to a

demand to file suit. To do so, plaintiff must create a reasonable doubt that at least five of

the nine directors on the Demand Board were disinterested and independent. Conversely,

if there are five directors on the Demand Board for whom plaintiff does not create such a

27
  MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *18 (Del. Ch. May 5, 2010)
(“Demand futility must be determined on a claim-by-claim basis.”).
28
   See In re Career Educ. Corp. Deriv. Litig., 2007 WL 2875203, at *12 (Del. Ch. Sept.
28, 2007) (“Plaintiffs challenge insider stock sales made by various directors. Because
this is not a specific action taken by the entire board, Rales is the proper standard.”);
Zimmerman v. Braddock, 2005 WL 2266566, at *6 (Del. Ch. Sept. 8, 2005) (“[S]ince the
alleged insider trading was not an affirmative action of the [board], demand futility is
evaluated under the Rales standard . . . .”), rev’d on other grounds, 906 A.2d 776 (Del.
2006).

                                             14
reasonable doubt, then plaintiff fails to meet his burden under Rule 23.1 of establishing

that demand would be futile.

         For purposes of this test, an “interested” director is one who receives from a

corporate transaction a personal benefit not equally shared by the stockholders, such that

he or she could face liability if the transaction were subjected to entire fairness scrutiny. 29

Under Rales, a director who faces a substantial likelihood of personal liability also is

unable to consider demand impartially.30

         Count I challenges the Secondary Offering Participants’ sale of shares in the

Secondary Offering. Because Hoffman and Pincus are the only members of the Demand

Board who sold shares in the Secondary Offering and received a benefit from the alleged

wrongdoing, they are the only members of the Demand Board who face potential liability

under Brophy. Consequently, the other seven directors on the Demand Board are not

interested in Count I for purposes of the Rales test,31 and I need only to determine

whether plaintiff has created a reasonable doubt about their independence.

         A director lacks independence for purposes of determining demand futility when

he or she is sufficiently beholden to someone interested in the litigation that he or she

29
     See Guttman v. Huang, 823 A.2d 492, 502 (Del. Ch. 2003); Rales, 634 A.2d at 936.
30
     Guttman, 823 A.2d at 501.
31
   See id. at 502 (noting that the impartiality inquiry under Rales and Aronson involves
assessing whether plaintiff pleads facts creating a sufficient likelihood of liability for the
trading activity).

                                              15
may be unable to consider the demand impartially.32 On a motion to dismiss a claim for

demand futility, the heightened requirement to plead particularized facts under Rule 23.1

is softened by the countervailing requirement that the Court draw all reasonable

inferences from such facts in favor of the plaintiff.33 The Court’s task of assessing

independence can be a difficult one. It requires considering all of the alleged facts and

reasonable inferences that stem from them in their totality, rather than examining each

pled fact in isolation.34 Although plaintiff gets the benefit of all reasonable inferences

from the totality of such facts, these inferences “must logically flow from particularized

facts alleged by the plaintiff,” and plaintiff will not benefit from conclusory allegations.35

         A director on the Demand Board will lack independence under Rales for purposes

of Count I only if plaintiff alleges that he or she is beholden to one or more of the targets

of the Brophy claim (i.e., the Secondary Offering Participants) such that a reasonable

doubt exists as to his or her independence in deciding whether to assert that claim. No

allegations are made in the Complaint challenging the independence of any of the

directors on the Demand Board vis-à-vis any of these individuals other than Pincus or

Hoffman. I will next assess the allegations of independence from Pincus and Hoffman on

a director-by-director basis.

32
     Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004).
33
     See Del. Cnty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1020 (Del. 2015).
34
     See id. at 1019.
35
     Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (quoting Beam, 845 A.2d at 1048).

                                             16
         1. Katzenberg

         Plaintiff makes no allegations regarding Katzenberg’s relationships with Hoffman

or Pincus, nor does he suggest that Katzenberg is dependent on his board membership or

any other relationship with Zynga such that he could be beholden to Pincus, its

controlling stockholder. The Complaint therefore does not raise a reasonable doubt as to

Katzenberg’s independence for purposes of the Brophy claim.

         2. Meresman

         Plaintiff does not allege that Meresman lacks independence from Pincus or that he

is dependent on his Zynga board membership. His only allegation regarding Meresman’s

lack of independence from Hoffman is that he and Hoffman both serve as directors of

LinkedIn.36     Plaintiff does not allege that Hoffman exerts any sort of control over

Meresman’s board position or that Meresman is dependent on his position on LinkedIn’s

board. Common membership on the board of another corporation is not a sufficient

allegation to raise a reasonable doubt as to Meresman’s independence.37 The Complaint

therefore does not raise a reasonable doubt as to Meresman’s independence for purposes

of the Brophy claim.

36
     Compl. ¶ 117(i).
37
   See Beam, 845 A.2d at 1051 (noting that collegiality and moving in same business
circles is insufficient to establish lack of independence); In re Dow Chem. Co. Deriv.
Litig., 2010 WL 66769, at *9 (Del. Ch. Jan. 11, 2010) (“That directors of one company
are also colleagues at another institution does not mean that they will not or cannot
exercise their own business judgment with regard to the disputed transaction.”).

                                            17
         3. Siminoff

         Plaintiff contends that Siminoff lacks independence from Pincus because Siminoff

and her husband are co-owners of a private airplane with Pincus.38 In briefing this

motion, plaintiff characterized Siminoff as a “close family friend” of Pincus but added no

factual allegations to explain the basis for that characterization.39 “[T]o render a director

unable to consider demand, a relationship must be of a bias-producing nature.

Allegations of mere personal friendship or a mere outside business relationship, standing

alone, are insufficient to raise a reasonable doubt about a director’s independence.”40

Plaintiff’s allegations concerning co-ownership of an asset and friendship do not reveal a

sufficiently deep personal connection to Pincus so as to raise a reasonable doubt about

Siminoff’s independence from Pincus.

         Plaintiff also alleges that Siminoff lacks independence from Hoffman because they

both serve as directors of Mozilla Corporation. This allegation is insufficient for the

same reasons regarding Meresman and Hoffman’s common board membership discussed

above.

         4. Gordon and Doerr

         Plaintiff challenges the independence of Gordon and Doerr in several ways based

on their status as partners at Kleiner Perkins Caufield & Byers. To start, plaintiff argues

38
     The Complaint does not explain whether there are other co-owners of this airplane.
39
     See Pl.’s Ans. Br. 54.
40
     Beam, 845 A.2d at 1050.

                                             18
that Gordon and Doerr lack independence from Hoffman because Hoffman has invested

in and sits on the board of Shopkick, Inc., a company in which Kleiner Perkins also has

invested. Plaintiff does not attempt to explain how the fact that Gordon and Doerr’s

employer and Hoffman have invested in the same company would make Gordon and

Doerr beholden to Hoffman. Plaintiff instead asserts in conclusory fashion that they

would not wish to threaten their relationship as business partners in Shopkick. This

allegation does not explain how their relationship as co-investors in Shopkick could be

threatened. Even if it did, an alleged risk of straining a business relationship is a far cry

from an allegation that one director is beholden to or deeply connected to another. This

allegation does not raise a reasonable doubt as to Gordon’s and Doerr’s independence

from Hoffman.

         Plaintiff next alleges that Gordon and Doerr “share interlocking business

relationships”41 with Hoffman and Pincus due to investments in One Kings Lane, an e-

commerce company Pincus’ wife founded. Kleiner Perkins and Hoffman both provided a

funding round to One Kings Lane, the amounts of which are not specified in the

Complaint. Pincus is implicated by virtue of being the founder’s husband. None of these

allegations satisfies the Rales test. Plaintiff does not explain how investments by Kleiner

Perkins in One Kings Lane could make two Kleiner Perkins partners beholden to the

founder’s spouse (Pincus) or to a fellow investor (Hoffman). The fact that venture

41
     Compl. ¶ 117(k).

                                             19
capitalists and entrepreneurs have overlapping investments as alleged here does not raise

a reasonable doubt as to the investors’ independence from each other.

         In his briefing, plaintiff raises a new allegation that Zynga and certain of its

executive officers have invested in Kleiner Perkins funds, thereby compromising

Gordon’s and Doerr’s independence.42 Plaintiff supports this allegation with an affidavit

containing an excerpt from the Prospectus that describes Zynga’s investment in the

Kleiner Perkins funds as a $500,000 capital subscription.          Although the Complaint

mentions for different purposes the filings from which plaintiff retrieved this information

(the Prospectus and the April 2013 definitive proxy), those filings were not incorporated

by reference into or attached to the Complaint. Thus, these new factual allegations are

not properly before the Court.43

         Even if I were to consider this new information, plaintiff does not allege that this

$500,000 investment is material to Kleiner Perkins such that its partners would be

considered beholden to Pincus.        Plaintiff points to In re Google, Inc. Shareholder

Derivative Litigation44 for the proposition that these investments could undercut

Gordon’s and Doerr’s independence. In that case, plaintiffs alleged that “Doerr has

42
     Pl.’s Ans. Br. 51.
43
   See Del. Cnty. Emps. Ret. Fund v. Sanchez, 124 A.3d at 1021 n.14 (declining to
consider additional facts regarding director’s independence raised in briefing and
argument) (“[T]he proper way for the plaintiffs to have used these materials is by seeking
to amend their complaint. It is not fair to the defendants, to the Court of Chancery, or to
this Court, nor is it proper under the rules of either court, for the plaintiffs to put facts
outside the complaint before us.”).
44
     2012 WL 1611064 (N.D. Cal. May 8, 2012).

                                              20
sought substantial investments from Google in private companies in which Kleiner

Perkins is a major investor, including one company that was bought by Google in 2007

and that resulted in a $5 million profit for Kleiner Perkins.”45 Plaintiffs in Google thus

alleged both the magnitude of profit accruing to Kleiner Perkins as a result of Google’s

purchase of a company, and that Doerr personally had sought investments from Google.

Plaintiff fails to make any such allegations here, instead stating only that Zynga made

what appears to be a modest investment in a Kleiner Perkins fund. These allegations fail

to raise a reasonable doubt that Gordon and Doerr lack independence from Pincus.

          Finally, plaintiff notes that Zynga’s 2013 proxy statement does not list Gordon and

Doerr as independent directors under NASDAQ listing rules, although neither the proxy

statement nor plaintiff specifies the reason for this. This Court has noted that stock

exchange independence requirements “are a useful source for this court to consider when

assessing an argument that a director lacks independence,”46 but also that the stock

exchange requirements are not dispositive.47          Director independence under stock

45
     Id. at *9.
46
 In re MFW S’holders Litig., 67 A.3d 496, 510 (Del. Ch. 2013), aff’d sub nom. Kahn v.
M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).
47
   See id. (“. . . the fact that directors qualify as independent under the NYSE rules does
not mean that they are necessarily independent under our law in particular circumstances
. . . .”). The inverse proposition—that a director’s lack of independence under stock
exchange rules does not necessarily mean the director lacks independence under
Delaware law—does not necessarily follow, but the proposition logically runs in both
directions. See In re EZCORP, 2016 WL 301245, at *36 (“The fact that a director
qualifies as independent for purposes of a governing listing standard is therefore a helpful
fact which, all else equal, makes it more likely that the director is independent for
purposes of Delaware law. The opposite is likewise true.”).

                                              21
exchange rules “is qualitatively different from, and thus does not operate as a surrogate

for, this Court’s analysis of independence under Delaware law for demand futility

purposes.”48 Stock exchange rules may involve bright-line tests for independence, but

Delaware law requires “a case-by-case fact specific inquiry based on well-pled factual

allegations.”49

           Plaintiff makes no specific allegations as to why Gordon and Doerr lack

independence under the NASDAQ rules, or whether they lack independence under those

rules due to a relationship with Pincus, with another executive, or with Zynga itself. The

absence of any such allegations makes it difficult to gauge whether Gordon’s and Doerr’s

lack of NASDAQ independence matters because it is not apparent if it stems from

circumstances I already have considered and found insufficient to question their

independence under Delaware law, or from something else.          Their status under the

NASDAQ rules might have sufficed to raise a reasonable doubt as to their independence

if that issue had been a tough call based on the totality of the allegations made in the

Complaint. But that is not the case here. No aspect of the allegedly interlocking business

relationships involving Gordon and Doerr discussed above comes close to creating a

reasonable doubt about their independence in my view.         It would be unreasonable,

moreover, to infer that their lack of NASDAQ independence resulted from an

undisclosed conflict that was significant enough to disqualify them for demand futility

48
  Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 61 (Del. Ch.
2015).
49
     Id.

                                           22
purposes, when the underlying factual basis for such an inference is entirely absent from

the record.     Consequently, drawing all reasonable inferences in plaintiff’s favor,

Gordon’s and Doerr’s status under the NASDAQ rules fails to raise a reasonable doubt as

to their independence from Hoffman or Pincus for demand futility purposes.

                                        *****

       For the reasons explained above, I conclude that plaintiff has raised no reasonable

doubt regarding the disinterestedness or independence of five of the nine directors on the

Demand Board (Katzenberg, Meresman, Siminoff, Gordon, and Doerr) with respect to

the Brophy claim. For this reason, Count I is dismissed for failure to allege demand

futility under the Rales test.

       In considering the question of independence for Count I, I have focused on the

independence of these five directors vis-à-vis the targets of the Brophy claim, namely the

Secondary Offering Participants, which include Pincus and Hoffman. Count II is directed

against the members of the Secondary Offering Board, and Count III is directed against

all defendants. The question of independence for those claims thus implicates whether

any of the directors on the Demand Board lacks independence from any other member of

the Secondary Offering Board (for Count II) or any of the defendants (for Count III)

aside from the allegations concerning Pincus and Hoffman addressed above. That issue

                                           23
is easily resolved, as the Complaint, with one exception, does not contain any such

allegations.50

         C.       Demand Is Not Excused for the Secondary Offering Claim

         Count II of the Complaint asserts that the Secondary Offering Board breached its

fiduciary duties in approving the Secondary Offering and the Lock-Up restructuring.51

Plaintiff does not take a position in his brief whether the Aronson test or the Rales test

should apply to this claim. Plaintiff instead argues simply that a majority of the Demand

Board would be unable to impartially consider a demand relating to the Secondary

Offering because six of its nine members “were involved with the approval of the

Offering and Lock-Up restructuring which is subject to an entire fairness review.”52

Before analyzing this issue, I address what test should apply to determine whether

demand is excused as to Count II.

50
  The exception is the allegation, discussed below, that “Doerr would not threaten his
ongoing business relationship with Gordon by voting to initiate litigation against
Gordon” because they are both partners at Kleiner Perkins. Compl. ¶ 117(g).
51
   Compl. ¶¶ 124-28. Although the Complaint also referred to the Audit Committee’s
waiver of the trading restrictions, see Compl. ¶¶ 58, 126, plaintiff made little effort to
advance a demand futility argument in its brief based on the trading restriction waivers.
In any event, demand would not be excused for the trading restriction waivers for the
same reason that it is not excused for the Secondary Offering Board’s decision to
restructure the Lock-Ups—that is, plaintiff has failed to allege particularized facts
providing a reason to doubt the impartiality of a majority of the directors on the Demand
Board to decide whether to initiate or to refrain from initiating litigation against any of
the directors on the Secondary Offering Board, which would include the members of its
Audit Committee.
52
     Pl.’s Ans. Br. 36.

                                            24
         At a superficial level, a good argument could be made under past precedents to

apply the Aronson test to Count II because it involves an affirmative decision of the

Secondary Offering Board, a majority of whom continued to serve on the Demand Board.

In my opinion, however, Count II should be evaluated under the Rales test.

         As noted above, the Aronson test requires the plaintiff to plead facts that create a

reasonable doubt either that (1) “the directors are disinterested and independent” or (2)

“the challenged transaction was otherwise the product of a valid exercise of business

judgment.”53 The challenge in applying this test when the composition of a board has

changed concerns the second prong because it focuses on the board that approved the

underlying transaction rather than the board that must decide whether the corporation

should enter litigation in response to a demand.

         In Harris v. Carter, Chancellor Allen noted that “Aronson has been criticized as

focusing the test for futility on the wrong time,”54 probably because in most cases

(including Aronson itself) “the board that approves ‘the challenged transaction’ and the

board upon whom a demand could be made is one and the same.”55 Chancellor Allen

53
     Aronson, 473 A.2d at 814.
54
     582 A.2d 222, 229 (Del. Ch. 1990).
55
   Id. See also Aronson, 473 A.2d at 810-12 (noting that “futility is gauged by the
circumstances existing at the commencement of a derivative suit” and that “if the
underlying transaction supported a reasonable inference that the business judgment rule
did not apply, then the directors who approved the transaction were potentially liable for
a breach of their fiduciary duty, and thus, could not impartially consider a stockholder’s
demand.”).

                                              25
went on to explain that the operative focus should be on the impartiality of the board in

place at the time of the demand and not at the time of the challenged transaction:

         What, in the end, is relevant is not whether the board that approved the
         challenged transaction was or was not interested in that transaction but
         whether the present board is or is not disabled from exercising its right and
         duty to control corporate litigation. I do not consider that Aronson intended
         to determine that demand under Rule 23.1 upon an independent board that
         has come into existence after the time of the “challenged transaction”
         would be excused if the board that approved the challenged transaction did
         not qualify for business judgment protection.56

         Three years later, in Rales, in the context of deciding a certified question, the

Delaware Supreme Court acknowledged that the Aronson test was not suited to address

all questions of demand futility and identified three scenarios in which it would not

apply:

         Consistent with the context and rationale of the Aronson decision, a court
         should not apply the Aronson test for demand futility where the board that
         would be considering the demand did not make a business decision which
         is being challenged in the derivative suit. This situation would arise in
         three principal scenarios: (1) where a business decision was made by the
         board of a company, but a majority of the directors making the decision
         have been replaced, (2) where the subject matter of the derivative suit is not
         a business decision of the board, and (3) where, as here, the decision being
         challenged was made by the board of a different corporation.57

In identifying these three scenarios, the Court included a qualification that they were the

“principal” scenarios where Aronson would not apply, implying that there could be other

scenarios. In my opinion, this case presents such a scenario.

56
     Harris v. Carter, 582 A.2d at 230.
57
     Rales, 634 A.2d at 934.

                                              26
       Here, a majority of the members of the Secondary Offering Board had a personal

financial interest in the transaction such that they may have received an unfair benefit and

the transaction may be subjected to entire fairness review.58 Furthermore, because a

majority of the directors from the Secondary Offering Board were not replaced, none of

the exceptions identified in Rales applies here.      Critically, however, enough of the

interested members of that board were replaced (and an additional director was added) so

that the Demand Board had a majority of directors (seven of nine) who derived no

personal financial benefit from the challenged transaction. To my mind, it makes no

sense under these circumstances to focus any aspect of the demand futility inquiry on the

board that approved the underlying transaction, as the second prong of Aronson

contemplates. Just as Chancellor Allen realized in Harris v. Carter that Aronson’s

second prong should not excuse demand when a disinterested new board steps in, demand

here should not be excused if a majority of the Demand Board can impartially consider a

demand, even when less than a majority of them were replaced.

       To be clear, the Rales test investigates the same sources of potential partiality that

Aronson would examine. As many members of this Court have recognized, the Rales test

functionally covers the same ground as the Aronson test in determining the impartiality of

58
   See Lee v. Pincus, 2014 WL 6066108, at *13 (concluding that plaintiff had “pled facts
sufficient to rebut the business judgment standard of review because the lockup
restructuring was not approved by a majority of disinterested and independent
directors.”).

                                             27
directors.59   That ground focuses on three circumstances that may cast doubt on a

director’s impartiality. First, a director may have a personal interest in considering a

plaintiff’s litigation demand because the director obtained a financial benefit from the

challenged transaction not shared by the stockholders generally, raising the risk of

liability for self-dealing. Second, a director may have a personal interest in considering a

plaintiff’s litigation demand because the director otherwise faces a substantial risk of

liability in the litigation, such as for approving the challenged transaction in bad faith so

as to be susceptible to a non-exculpated claim for breach of fiduciary duty. Third, a

director may lack independence from someone who is at risk of liability under those first

two categories because the director is controlled by or beholden to such person.

59
    See, e.g., Guttman v. Huang, 823 A.2d at 501 (Strine, V.C.) (“Upon closer
examination, however, that singular inquiry [under Rales] makes germane all of the
concerns relevant to both the first and second prongs of Aronson.”); In re China Agritech,
Inc. S’holder Deriv. Litig., 2013 WL 2181514, at *16 (Del. Ch. May 21, 2013) (Laster,
V.C.) (noting that the Rales test asks questions regarding a director’s risk of liability in
the litigation that are “precisely the questions that Aronson asks”); David B. Shaev Profit
Sharing Account v. Armstrong, 2006 WL 391931, at *4 (Del. Ch. Feb. 13, 2006) (Lamb,
V.C.) (“This court has held in the past that the Rales test, in reality, folds the two-pronged
Aronson test into one broader examination. It allows, in other words, a court to
determine both whether a corporate board on which demand might be made is
disinterested and independent, and whether a majority of directors face a substantial
likelihood of personal liability, because doubt has been created as to whether their actions
were products of a legitimate business judgment.”) aff’d, 911 A.2d 802 (Del. 2006); see
also 2 David A. Drexler et al., Delaware Corporation Law and Practice § 42.03[2][a] at
42-15 to -16 (2015) (interpreting Aronson’s first prong analysis as regarding “interested
director transactions” in which directors “had personally profited from a challenged
transaction” and its second prong analysis as regarding “complaints not involving
directorial self-dealing” wherein “the threat of personal liability for having approved the
challenged transaction” was at issue, requiring particularized facts showing likelihood of
liability based on transactional flaws).

                                             28
         The utility of the Rales test is not that it examines different subject matter from

that of the Aronson test, but that it provides a cleaner, more straightforward formulation

to probe the core issue in the demand futility analysis for each board member who would

be considering plaintiff’s demand: “whether there is a reason to doubt the impartial[ity]

of the directors, who hold the authority under 8 Del. C. § 141(a) to decide [for the

corporation] ‘whether to initiate, or refrain from entering, litigation.’”60 Applying Rales,

I will now assess whether plaintiff has alleged facts creating a reasonable doubt that a

majority of the Demand Board directors could impartially decide whether to pursue

plaintiff’s Secondary Offering claim.

         Beginning with the independence of the Demand Board directors, as I concluded

above, Katzenberg, Siminoff, Meresman, Gordon, and Doerr are independent from

Pincus and Hoffman.61         Plaintiff only makes one other allegation regarding the

independence of any of these directors—specifically, that Doerr would not wish to

initiate litigation against Gordon, his partner at Kleiner Perkins. Plaintiff does not allege

that Doerr is beholden to Gordon or that they have any relationship aside from being

partners at the same venture capital firm. Without more, these allegations do not cast a

60
  See Teamsters Union 25, 119 A.3d at 67 (Del. Ch. 2015) (quoting Zapata Corp. v.
Maldonado, 430 A.2d 779, 782 (Del. 1981)). Indeed, although I recognize that the
Supreme Court in Rales declined to adopt a “universal demand requirement,” Rales, 634
A.2d at 934, it is not apparent what scenario implicating a question of demand futility
could not sensibly be analyzed under the Rales test given how it has now been applied for
over two decades.
61
     See supra Part II.B.

                                             29
reasonable doubt on his independence from Gordon.62             Consequently, none of these

directors lacks independence for demand futility purposes concerning Count II.

         Siminoff and Doerr, both of whom joined Zynga’s board after approval of the

Secondary Offering, as well as Katzenberg, Meresman, and Gordon, did not sell shares in

the Secondary Offering and thus derived no personal financial benefit from it. Thus, the

only open question concerning the impartiality of these five individuals is whether any of

them who served on the Secondary Offering Board (i.e., Katzenberg, Meresman or

Gordon) could be interested based on the theory that they face substantial litigation risk

for approving the Secondary Offering, thereby potentially biasing their decision whether

to pursue litigation.

         Plaintiff asserts that entire fairness review will apply to the decision to approve the

Secondary Offering because it was approved by an interested majority of directors.63

Relying on In re China Agritech, Inc., plaintiff argues that the non-selling directors on

the Secondary Offering Board are interested because of the litigation risk they would face

in an entire fairness challenge.64       After China Agritech was decided, however, the

Delaware Supreme Court made clear in Cornerstone Therapeutics that, even if the entire

62
     See supra note 37.
63
  Paul did not participate in the meeting during which the Secondary Offering Board
voted to approve the transaction. Consequently, directors planning to sell shares in the
Secondary Offering accounted for four out of the seven votes in favor of the transaction.
64
    See In re China Agritech, 2013 WL 2181514, at *17 (determining that litigation risk
Audit Committee members faced regarding an entire fairness challenge to a certain
transaction raised “reasonable doubt about their ability to disinterestedly consider a
litigation demand”).

                                               30
fairness standard applies to the Court’s review of a transaction, a “plaintiff seeking only

monetary damages must plead non-exculpated claims against a director who is protected

by an exculpatory charter provision” to state a viable claim against that director.65

         Zynga’s charter contains an exculpatory 102(b)(7) provision.66 Thus, to show that

a particular director is interested based on the theory that the director faces a substantial

risk of personal liability for approving the Secondary Offering,67 plaintiff must plead

particularized facts demonstrating an intentional dereliction of duties or conscious

disregard for the directors’ responsibilities, such that a reasonable inference of bad faith

or a breach of the duty of loyalty exists that would overcome the exculpatory provision in

Zynga’s certificate of incorporation.68

65
  See In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1175 (Del.
2015).
66
   Rohrer Aff. Ex. 11 (Sixteenth Amended and Restated Certificate of Incorporation of
Zynga Inc.) at Art. IX (“To the fullest extent permitted by law, no director of the
corporation shall be personally liable for monetary damages for breach of fiduciary duty
as a director of the Corporation.”). I may take judicial notice of the contents of Zynga’s
certificate of incorporation. See Zucker v. Andreessen, 2012 WL 2366448, at *1 n.1 (Del.
Ch. June 21, 2012) (“Delaware courts may take judicial notice of certificates of
incorporation filed with the Secretary of State on a motion to dismiss under Rule 23.1.”).
67
     See Rattner v. Bidzos, 2003 WL 22284323, at *9 (Del. Ch. Sept. 30, 2003).
68
   See In re Goldman Sachs Grp., Inc. S’holder Litig., 2011 WL 4826104, at *12 (Del.
Ch. Oct. 12, 2011) (noting that because of 102(b)(7) clause, plaintiff must make
particularized allegations of scienter or bad faith); In re Lear Corp. S’holder Litig., 967
A.2d 640, 647-48 (Del. Ch. 2008) (requiring plaintiffs to “plead specific facts that
support the inference that the Lear directors breached their fiduciary duty of loyalty”
because a 102(b)(7) clause prevented liability for care breaches, including gross
negligence).

                                             31
       This analysis is irrelevant to Siminoff and Doerr, who were not on the board at the

time of the Secondary Offering.       That leaves Gordon, Katzenberg, and Meresman.

Plaintiff does not allege particularized facts leading to a reasonable inference that any of

them consciously disregarded their duties in approving the Secondary Offering.

Plaintiff’s arguments generally focus on the directors’ knowing approval of the

Secondary Offering and on the fact that the Secondary Offering was approved by a

majority-conflicted board at the time. But plaintiff makes no particularized allegations

that Gordon, Katzenberg, or Meresman knowingly failed to inform themselves about the

Secondary Offering or otherwise consciously disregarded their directorial duties, as is

required to allege a non-exculpated claim against them. Consequently, although the

transaction itself may be subject to entire fairness review, plaintiff has not pled

particularized allegations against a majority of the Demand Board members

demonstrating that they face a substantial litigation risk for approving the Secondary

Offering.69

                                         **** *

       Because at least five directors on the Demand Board are independent and

disinterested for purposes of the Secondary Offering claim, plaintiff fails to allege that

demand would be futile, and Count II is dismissed.70

69
   See Teamsters Union 25, 119 A.3d at 65 n.121 (declining to excuse demand under
second prong of Aronson even when transaction may be subject to entire fairness review).
70
   Although I need not analyze more than five directors, I would reach the same
conclusion regarding Paul, who did not participate in the Secondary Offering or even
vote to approve it.

                                            32
         D.    Demand Is Not Excused for the Caremark Claim

         Count III is essentially a Caremark claim against all defendants alleging that they

failed to ensure that Zynga maintained adequate controls regarding its public disclosures

and failed to disclose material information to the public.71 For instance, plaintiff alleges

that the Prospectus drew an overly optimistic picture of Zynga’s financial situation, while

defendants knew of or recklessly disregarded recent negative trends, including in ABPU

and DAU. Regarding the change to the Facebook algorithm, plaintiff alleges that Pincus

would have been aware of these changes before they were implemented, due to his

relationship with Facebook’s CEO.          The Complaint also alleges that defendants

authorized or failed to monitor practices that resulted in legal and regulatory violations.

         The Rales test applies here because the claim in question “is not a business

decision of the Board but rather a violation of the Board’s oversight duties.” 72 I will

therefore assess whether plaintiff has alleged a reasonable doubt that a majority of the

Demand Board directors would be independent and disinterested in deciding whether to

pursue plaintiff’s Caremark claim.

         1. Siminoff and Doerr

         Siminoff and Doerr are disinterested because they joined the board after the

alleged Caremark violations occurred. As to their independence, they are independent

71
     Compl. ¶ 131.
72
  Wood v. Baum, 953 A.2d at 140. See also In re Dow Chem. Co. Deriv. Litig., 2010
WL 66769, at *6 n.25 (Del. Ch. Jan. 11, 2010) (“Plaintiffs’ other claims as to failure to
supervise (enabling bribery and insider trading) are not board decisions and, thus, are
appropriately analyzed under Rales.”).

                                             33
from defendants for the reasons explained above.73 Siminoff and Doerr are therefore

impartial for purposes of Count III.

         2. Katzenberg, Gordon, and Meresman

         As explained above, there is no reasonable doubt as to whether Katzenberg,

Gordon, and Meresman are independent from defendants.74 This leaves the question of

whether they are disinterested. In the context of an alleged oversight violation, there is

no transaction in which the directors may be interested. Thus, for the directors to have a

disabling interest, they must face meaningful litigation risk with a substantial likelihood

of personal liability for the alleged violation.75

         Plaintiff argues that Zynga’s directors who were on the board at the time of the

Secondary Offering and the alleged disclosure failures, including Katzenberg, Gordon,

and Meresman, face a substantial likelihood of personal liability for the alleged

Caremark violations.        A Caremark claim “is possibly the most difficult theory in

corporation law upon which a plaintiff might hope to win a judgment” in the absence of a

conflict of interest or other suspect circumstances.76 Katzenberg, Gordon, and Meresman

face no such circumstances here. Because Zynga has a 102(b)(7) provision, they would

not face a substantial likelihood of personal liability unless plaintiff pleads a non-

73
     See supra Parts II.B.3-4 and II.C.
74
     See supra Part II.B.
75
     See Rattner v. Bidzos, 2003 WL 22284323, at *9.
76
     In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d at 967.

                                               34
exculpated claim by alleging that the directors acted in bad faith or consciously

disregarded their directorial responsibilities.77

         Despite these significant pleading hurdles, plaintiff alleges that the directors were

exposed to a substantial threat of liability stemming from their failure to ensure that

Zynga maintained adequate systems and controls relating to its public disclosures, which

caused Zynga to make public statements containing material omissions.78 He further

argues that the directors ignored two red flags: the request in March 2012 to waive

trading restrictions pertaining to the Secondary Offering during a period of declining

business prospects, and the decision not to write down the value of the OMGPOP assets

until October 2012 even though those assets allegedly should have been impaired much

earlier.79 The fatal problem with these allegations is that the Complaint does not contain

particularized facts linking them to the outside directors’ knowledge or actions.80

77
     See supra Part II.C and note 69.
78
     Compl. ¶¶ 131-32; Pl.’s Ans. Br. 40-42.
79
     Pl.’s Ans. Br. 42-43.
80
   See In re China Auto. Sys. Inc. Deriv. Litig., 2013 WL 4672059, at *8 (Del. Ch. Aug.
30, 2013) (rejecting Caremark derivative claim) (“Nowhere within the Complaint are
allegations of particularized facts about the Defendants’ knowledge of any ‘red flags.’
Nothing is alleged about any specific deficiencies of the Company’s or Audit
Committee’s internal financial controls during the Relevant Period. And, the Complaint
lacks particularized allegations about any Defendant’s conscious disregard of Board or
Committee meetings or responsibilities.”); In re Citigroup Inc. S’holder Deriv. Litig., 964
A.2d 106, 128 (Del. Ch. 2009) (“Plaintiffs fail to plead ‘particularized facts suggesting
that the Board was presented with ‘red flags’ alerting it to potential misconduct’ at the
Company.”).

                                               35
         For instance, plaintiff alleges that even though some of Zynga’s user metrics were

trending downward in early 2012, a service known as AppData reported upward trends to

investors.81 Plaintiff does not plead any facts, however, suggesting that any of the

outside directors were involved in creating the information that AppData allegedly

disseminated.       In fact, the Complaint admits that AppData only provides estimates

because it does not have access to any internal company metrics.82 Plaintiff does allege

that certain members of Zynga’s management (including defendants Pincus, Schappert,

Wehner, and Van Natta) received daily reports of Zynga’s daily average users and were

therefore aware that the company’s daily average users had leveled off before the

Secondary Offering.       Critically, however, plaintiff does not allege that any outside

directors, including Katzenberg, Gordon, and Meresman, received this information.

Plaintiff makes other similar allegations without pleading facts suggesting knowledge by

the outside directors.

         Similarly, plaintiff asserts that defendants knowingly or recklessly increased

Zynga’s earnings guidance despite powerful indications to the contrary. Specifically,

referring generally to the “defendants,” he states that they failed to disclose:

         (i) that Zynga’s publicly announced projections were overly optimistic and
         unattainable; (ii) the ABPU was experiencing a negative trend; (iii) the
         DAU was stagnating during 1Q2012; (iv) the negative Facebook feed trend
         was exasperated by the Facebook algorithm change; (v) the delay in
         launching The Ville; (vi) the OMGPOP asset was substantially impaired.83
81
     Compl. ¶¶ 73-76.
82
     Compl. ¶ 29.
83
     Compl. ¶ 131.

                                              36
Again, the fatal problem with these allegations is that they are not made with particularity

against the outside director defendants. To the contrary, plaintiff alleges that internal

management received regular updates in user trend data,84 that the weekly bookings

reports containing delays and other negative information about important Zynga games

including The Ville were “internal” documents,85 and that changes to Facebook’s

algorithms and associated negative Facebook feed trends were discussed in internal

company e-mails, through alleged conversations between Pincus and Facebook’s CEO,

and via a notification to Pincus and Schappert.86        Missing from this list are any

allegations that the outside directors, including Katzenberg, Gordon, and Meresman, saw

any of these alleged red flags.

         Plaintiff’s allegations against the outside directors regarding the OMGPOP

impairment fare no better. Plaintiff challenges the failure to write down the assets of

OMGPOP as impaired until October 2012, despite substantial decreases in the projected

users of Draw Something, its most important game, in May and June 2012. None of

these allegations, however, specifically mentions the outside directors. Plaintiff further

84
   Plaintiff quotes a passage in the Prospectus stating that ABPU “provides useful
information to investors and others in understanding and evaluating our results in the
same manner as our management and board of directors.” Compl. ¶ 70 (quoting
Prospectus at 42). This passage may support plaintiff’s contention that the metric is an
important one, but it does not speak to the frequency with which the outside directors
received this information.
85
     Compl. ¶¶ 46, 83.
86
     Compl. ¶¶ 72-73, 86.

                                            37
alleges that the company’s finance team prepared an impairment analysis in June 2012

that determined OMGPOP did not need to be impaired at the time. Whether or not the

conclusion of that analysis was correct, which the parties vigorously dispute, it hardly

raised a “red flag” of the need to take an impairment charge at the time even if one

assumes that the outside directors saw it—a fact which is not alleged.

       Finally, plaintiff alleges that at various times the Audit Committee discussed

Zynga’s financial results and earnings press releases for 2011 and for the first quarter of

2012, statements related to the Secondary Offering, and the acquisition of OMGPOP.

These allegations implicate Meresman, who was a member of the Audit Committee. But

the Complaint is devoid of allegations that the Audit Committee received or reviewed

other internal forecasts or financial metrics, game-specific performance data, or

information about the OMGPOP impairment decision.

       Citing Pfeiffer v. Toll, plaintiff argues that allegations pled generally against the

defendants without differentiating among them are sufficient to establish demand futility

because knowledge of core financials fundamental to the business should be imputed to

outside directors.87 Pfeiffer is distinguishable for a significant reason. There, as the

Court made clear, the allegations of the outside directors’ knowledge were being assessed

on the lower pleading standard of Rule 12(b)(6) rather than the heightened pleading

87
   Pfeiffer v. Toll, 989 A.2d 683, 693 (Del. Ch. 2010) (“It would afford an ostrich-like
immunity to directors not to grant the plaintiff a Rule 12(b)(6) inference that the Outside
Director Defendants knew about core information of this type.”), abrogated on other
grounds by Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011).

                                            38
standard of Rule 23.1.88 Indeed, the Court in Pfeiffer distinguished other decisions of this

Court precisely because they “were decided under Rule 23.1’s particularity standard and

in a procedural posture where the plaintiff sought to establish demand futility by showing

that the directors faced a substantial risk of liability.”89       Additionally, the outside

directors in Pfeiffer sold substantial amounts of their stock during the period in question,

giving rise to a potential inference that they were aware of negative information. No such

allegations are pled here to support such inferences.

          In sum, without particularized allegations that Katzenberg, Gordon, or Meresman

knew of recent internal company data, plaintiff’s “red flags” allegations against them boil

down to the contention that they should have known trouble was afoot at the company

merely because the Secondary Offering was proposed. It is not reasonable to infer,

however, that the mere proposal to conduct the Secondary Offering served as a “red flag”

if the outside directors are not alleged to have had knowledge of non-public negative

trends. The Secondary Offering had the stated purpose of facilitating an orderly

distribution of shares and increasing Zynga’s public float,90 and was not inherently

88
   Id. at 691-93 (“The Complaint is not subject to any heightened pleading standard. . . .
Although a plaintiff must plead with particularity when attempting to establish demand
futility, that is not the issue here. I have already held that demand is futile in light of the
companion federal securities action, which brings the role of Rule 23.1 to a close. . . .
Outside of the procedural context of Rule 23.1, a complaint need only plead a reasonable
basis from which knowledge can be inferred. . . . Several factors combine to convince me
that knowledge and use of inside information is adequately pled under the plaintiff-
friendly Rule 12(b)(6) standard.”).
89
     Id. at 693.
90
     Compl. ¶ 59.

                                              39
suspect. Consequently, these three outside directors are disinterested because they face

no meaningful risk of liability for a Caremark claim.

                                          *****

         For the reasons explained above, five of the nine members of the Demand Board

were disinterested and independent with respect to the Caremark claim. Accordingly,

Count III is dismissed for failure to plead demand futility.

         E.     Lack of Impartiality Due to Related Litigation

         Plaintiff makes a standalone argument that the directors on the Secondary Offering

Board “would be unable to impartially consider a litigation demand in this Action for fear

that it would undercut their defense” in the Delaware Class Action, relying again on

Pfeiffer v. Toll.91 This argument is inapplicable to Doerr and Siminoff, who joined the

Zynga board after the Secondary Offering and were not named as defendants in that

action. As for Katzenberg, Meresman, and Gordon, none of them faces a substantial risk

of liability for the claims in the Delaware Class Action given Zynga’s 102(b)(7)

exculpatory provision and the Delaware Supreme Court’s decision in Cornerstone for the

reasons discussed above.92

          Pfeiffer is distinguishable. In that case, the Court concluded that the board was

unable to consider a demand impartially in light of the fact that the directors were named

91
     Pl.’s Ans. Br. 45-46.
92
  See supra Part II.C. Katzenberg, Paul, and Meresman were voluntarily dismissed from
the Delaware Class Action in August 2015, a few months after Cornerstone was decided.
Because the Demand Board is assessed at the time the Complaint is filed, their
subsequent dismissal does not factor into my analysis.

                                             40
as defendants in a related federal securities action that had “survived a motion to dismiss

under the rigorous standards for pleading securities fraud.”93 Here, no ruling on the

sufficiency of the allegations in the Delaware Class Action had been made when the

Complaint was filed in this action.94

          Finally, plaintiff raises in briefing the threat of liability associated with the Reyes

case. His argument for demand futility because of Reyes fails for two reasons. First, the

Complaint does not refer to Reyes. Although Reyes was pending when plaintiff filed this

action, he failed even to mention its existence in his Complaint and did not amend the

Complaint to include it later. Thus, these allegations are not properly before the Court.95

         Second, the late-raised allegations in plaintiff’s brief concerning the Reyes case

fail to cast a reasonable doubt as to the outside directors’ disinterestedness because they

are superficial and conclusory. Plaintiff alleges that the outside directors potentially may

be liable for alleged violations of Section 11 of the Securities Act and cites one paragraph

of the Reyes complaint to note that the complaint “contested both statements of fact and

93
     Pfeiffer v. Toll, 989 A.2d at 690.
94
   Plaintiff points out that the United States District Court for the District of Delaware
had denied a motion to dismiss the Delaware Class Action, which had been removed to
federal court. Pl.’s Ans. Br. 46. The district court’s denial of defendants’ motion to
dismiss did not address the merits of the claims. The district court considered whether
those claims were preempted under the Securities Litigation Uniform Standards Act, and
concluded that the case should be remanded to the Court of Chancery. See Lee v. Pincus,
2013 WL 6804640, at *2 (D. Del. Dec. 23, 2013).
95
     See supra note 43.

                                                41
opinion”96 and that it alleged that the directors “issued false and misleading statements

and omitted material information from the Prospectus.”97        But plaintiff provides no

further support or explanation for how the directors would face a substantial risk of

liability in Reyes.98 Plaintiff’s late-raised allegations regarding the Reyes case are too

vague and conclusory to cast a reasonable doubt as to the outside directors’

disinterestedness.

         Because neither the Delaware Class Action nor the Reyes case raises any

reasonable doubts as to the outside directors’ impartiality, these arguments do not change

the conclusion that the Demand Board was not disabled from deciding whether to pursue

any of plaintiff’s claims.99

III.     CONCLUSION

         For the foregoing reasons, plaintiff has failed to demonstrate that demand would

have been futile with respect to any of the claims in the Complaint.          Accordingly,

defendants’ motion to dismiss is GRANTED.

         IT IS SO ORDERED.

96
     Pl.’s Ans. Br. 46.
97
     Pl.’s Ans. Br. 16.
98
   Plaintiff does argue that the survival of a motion to dismiss would have increased the
directors’ risk of liability, but this did not occur until several months after he filed the
Complaint.
99
   Although the Complaint referenced the federal securities action, plaintiff did not
challenge in his brief the impartiality of the Demand Board based on the claims asserted
in that action, presumably because Zynga’s outside directors were not defendants in that
case when this action was filed.

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