Legal Issues

Court Says Zynga Co-Founder to Face Lawsuit

Court Says Zynga Co-Founder to Face Lawsuit

Zynga CEO Mark Pincus speaks during the Zynga Unleashed event at the company's headquarters in San Francisco, California.

Image credit: Reuters | Stephen Lam
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Mark Pincus, the founder of video game company Zynga Inc, must face a lawsuit alleging he unfairly benefited by selling $192 million of stock in 2012 when other early investors were under a lockup agreement, according to a court ruling.

The creator of FarmVille had asked the Delaware Court of Chancery to dismiss a lawsuit that alleged Pincus and other Zynga directors breached their duty of loyalty to shareholders by waiving the lockup for select investors.

Lockup agreements control the supply of stock available for trading. Zynga barred investors who obtained their stock prior to the company's initial public offering, in December 2011, from selling until May 28, 2012.

However, in March 2012 Zynga's board waived the lockup for Pincus and four other directors, allowing them to sell stock almost two months earlier than originally expected, which the lawsuit alleged was worth $100 million.

"It is reasonably conceivable that the benefit the director defendants received in the lockup restructuring was not entirely fair," Judge Andre Bouchard wrote in a 35-page ruling that was published Friday.

The ruling allows the plaintiff, shareholder Wendy Lee, to seek documents and take depositions.

Zynga spokeswoman Michelle Kramer and Lee's attorney, Evan Wohl of Wohl & Fruchter, declined to comment.

Pincus and the four other directors sold their stock in Zynga's April 2012 secondary stock offering at $12 per share, nearly double the stock's price when the lockup eventually expired, according to Bouchard's 35-page opinion.

On Monday, Zynga was down about 3.8 percent at $2.67 in midday trade on Nasdaq.

Zynga argued that the lawsuit should be dismissed because Pincus and the other defendants agreed to sell only 20 percent of their holdings, while putting the remainder of their Zynga stock under an extended staggered lockup through July and August of 2012.

The defendants also argued that waiving the lockup did not harm Lee or other shareholders because it did not change the lockup expiration for them.

Bouchard dismissed claims that Goldman Sachs & Co and Morgan Stanley aided the breach of fiduciary duty by consenting to the lockup waiver and collecting $10 million in fees from the secondary offering.

In addition to Pincus, the lawsuit names as defendants the members of the Zynga board in 2012 when the lockup agreement was waived.

The case is Wendy Lee v Mark Pincus et al, Delaware Court of Chancery, No. 8458

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Dan Grebler)

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