Law School Case Brief
Sandys v. Pincus - 152 A.3d 124 (Del. 2016)
To plead demand excusal under Rales, the plaintiff must plead particularized factual allegations that create a reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. At the pleading stage, a lack of independence turns on whether the plaintiffs have pled facts from which the director's ability to act impartially on a matter important to the interested party can be doubted because that director may feel either subject to the interested party's dominion or beholden to that interested party. Delaware law requires that all the pled facts regarding a director's relationship to the interested party be considered in full context in making the, admittedly imprecise, pleading stage determination of independence. Although the plaintiff is bound to plead particularized facts in pleading a derivative complaint, so too is the court bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative complaint is sought.
Plaintiff Thomas Sandys alleged two derivative claims, each centering on allegations that defendants, certain top managers and directors at Zynga, Inc., including its former CEO, Chairman, and controlling stockholder Mark Pincus, were given an exemption to the company’s standing rule preventing sales by insiders until three days after an earnings announcement. According to Sandys, insiders sold their shares before Zynga’s earnings announcement, and that immediately after the earnings announcement, the market price dropped 9.6% to $8.52. In the present suit, Sandys alleged that the insiders who participated in the sale breached their fiduciary duties by misusing confidential information when they sold their shares while in possession of adverse, material non-public information and also asserted a duty of loyalty claim against the directors who approved the sale. Defendants moved to dismiss the action under Court of Chancery Rule 23.1 for plaintiff's failure to make a pre-suit demand on the board. The Court of Chancery first determined that the two directors who participated in the transaction, Pincus and Hoffman, were interested in the transaction, and therefore could not impartially consider a demand. The Court of Chancery then found that the other five directors were independent, and thus, demand was not excused. Hence, the Court of Chancery dismissed Sandys’ complaint.
Did the Court of Chancery correctly dismiss a shareholder derivative complaint for failure to make a pre-suit demand as required under Court of Chancery Rule 23.1?
The Court held that the plaintiff has met his pleading stage burden to create a reasonable doubt that a majority of the Zynga board could act impartially in considering a demand implicating Zynga's CEO and controlling stockholder. According to the Court, if a director cannot be presumed capable of acting independently because the director derived material benefits from their relationship with the company that could weigh on their mind in considering an issue before the board, they necessarily cannot be presumed capable of acting independently of the company's controlling stockholder. As such, the Court reversed the decision of the Court of Chancery, and remanded the case for further proceedings.
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