Playing a Zynga game often requires patience.  Patience, and persistence, were a winning combination for the plaintiff Thomas Sandys who brought a derivative suit against Zynga for alleged breaches of fiduciary duties after the Zynga Board approved a secondary sale of company stock by insiders, including Zynga’s controlling shareholder and then-CEO (“controlling shareholder/CEO”) during a blackout period.  Shortly after the sale, a disappointing earnings announcement resulted in a significant stock price drop.


Under Delaware law [1], a derivative suit demand must be submitted to the board of directors for approval prior to filing the lawsuit, otherwise the plaintiff must provide reasons for the failure to obtain such board approval or for not making the demand altogether.  The plaintiff argued that the demand should be excused because the Zynga Board (the “Board”) was too entrenched with the controlling shareholder/CEO to be able to make an impartial decision with respect to the derivative lawsuit.  The Delaware Court of Chancery disagreed with this conclusion and found that because the plaintiff had failed to plead sufficiently particularized facts to create a reasonable doubt about the independence of a majority of the Board, demand was not excused.

A majority of the Delaware Supreme Court (“DE Supreme Court”) disagreed, focusing on the relationships of three directors in particular:  two directors who were partners in Kleiner Perkins Caufield & Byers (“Kleiner Perkins”), the venture capital firm that owned approximately 9% of Zynga’s equity, and had other business ties to the controlling shareholder/CEO  and his family, and a third director who co-owned a plane with the controlling shareholder/CEO.  In reviewing the pleaded facts and the reasonable inferences in favor of the plaintiff that could properly be derived from those facts, the DE Supreme Court concluded that a majority of the Board lacked independence and therefore demand was excused.

Venture Capital Sponsor Directors

The Board had previously concluded that the two Kleiner Perkins directors were not independent under the NASDAQ rules, although Zynga had not disclosed the reasons the Board had made such a determination (and the plaintiff failed to present this information as part of his demand). Despite the Board’s prior finding of non-independence under the NASDAQ rules, the Court of Chancery found that these two directors “were independent for pleading stage purposes because the plaintiff failed to specifically allege why [they] lacked independence under the NASDAQ rules,” and the other circumstances pled by the plaintiff were “insufficient to question their independence under Delaware law.”[2]

In contrast, the DE Supreme Court placed significant weight on the  Board’s determination that these two directors are not independent under NASDAQ’s rules, noting that the NASDAQ rules “focus on the ability of directors to act independently of management, which should have bearing on decisions regarding similar issues under Delaware law.”  Therefore, the DE Supreme Court  concluded that if a company’s board determines that “a director cannot be presumed capable of acting independently because the director derives material benefits from her relationship with the company that could weigh on her mind in considering an issue before the board, she necessarily cannot be presumed capable of acting independently of the company’s controlling stockholder.”  The DE Supreme Court noted that although overlapping business interests are not unusual in the industry, such an overlapping network may create incentives  that impact a director’s independence.  In this case, because the Kleiner Perkins directors had a significant business relationship with the controlling shareholder/CEO and other insiders across ventures, their decision regarding the demand would have had significant financial and relationship externalities that would have affected other investments and interests.  Therefore the DE Supreme Court concluded these two directors were not independent for purposes of evaluating the demand.

Shared Asset Director

One of the directors and the controlling shareholder/CEO co-owned a plane used for non-business purposes.  In his pleadings, the plaintiff alleged facts that suggested that their relationship was a business arrangement, based on shared ownership of an asset, and that the director was a “close family friend” of the controlling shareholder/CEO.  Based on these limited factual allegations, the Delaware Court of Chancery determined that these allegations of friendship and shared ownership of an asset were insufficient to create a “reasonable pleading stage inference that [this director] could not act impartially.”[3]  In contrast, the DE Supreme Court focused on the unusual nature of the co-ownership of the plane, stating  that it “requires close cooperation in use, which is suggestive of detailed planning indicative of a continuing, close personal friendship.”[4]  The DE Supreme Court then noted that some assets are so unusual in their shared nature as to create a reasonable inference that their co-ownership would significantly affect one’s ability to exercise impartial judgment without further facts demonstrating actual bias.[5]  The DE Supreme Court thus concluded that this director could not act independently in evaluating the merits of the derivative suit.

Independence Considerations after Sandys (and Other Recent Cases)

Sandys, along with two other Delaware cases decided within the last few years, Baiera[6] and MFW[7], provide some context for how to view the stock exchange rules juxtaposed against independence for Delaware law purposes.  Effectively, courts seem inclined to respect the business judgment of directors who have made a determination that certain directors do not meet the independence standards of the stock exchange rules, thus creating a rebuttable presumption of non-independence for Delaware law purposes.  However, in instances where the determination of non-independence is based on the bright-line stock exchange rules that prescribe a three-year bar on independence, and the facts have changed significantly within this three-year period, a court, as the Delaware Court of Chancery did in Baiera, may be willing to accept arguments rebutting this presumption.[8]

This rebuttable presumption, however, is not symmetrical.  A determination of independence under the stock exchange rules by the board does not seem to create a rebuttable presumption of independence more broadly under Delaware law for the Delaware courts.  In such cases, a finding of independence is a fact for the courts to consider in an independence determination, treated and weighed like other alleged facts and circumstances.

That asymmetry is evident in the distinction between the treatment of the venture capital sponsor directors and the shared asset director in Sandys.  With respect to the two venture capital sponsor directors, the majority placed significant weight on the Board’s determination of non-independence under the NASDAQ rules, despite the fact that its underpinnings were never explained by the plaintiff, concluding that the presumption of non- independence it accorded that determination was consistent with the facts pled by the plaintiff regarding the business relationships between the two directors and the controlling shareholder/CEO. With respect to the shared asset director, by contrast, the majority engaged in a de novo analysis of the personal relationship created by the joint ownership of the airplane, never once even mentioning that the Board had found her to be independent under NASDAQ rules. In sum, the DE Supreme Court appears to be sounding a note of caution for future board determinations of independence when business or personal relationships are involved, as well as emphasizing the need for consistency with any prior board findings of non-independence under stock exchange rules.

[1] Ct. Ch. R. 23.1

[2] Sandys, 2016 WL 769999, at *10 (Del. Ch. Feb. 29, 2016).

[3] Sandys v. Pincus, 2016 WL 769999, at *8 (Del. Ch. Feb. 29, 2016).

[4] Sandys v. Pincus, 2016 WL 7094027 (Del. Dec. 5, 2016) at *10.

[5] Although the dissenting Justice noted that she need not reach issues concerning the independence of the shared asset director because, unlike the majority, she had already found a majority of the Board to be independent without regard to the shared asset director, she nevertheless concluded that without allegations of additional specific facts regarding the importance of the co-ownership relationship, she agreed with the Delaware Court of Chancery’s view that asset co-ownership and friendship alone do not reveal a “sufficiently deep personal connection as to raise reasonable doubt about…independence.”  Sandys, 2016 WL 769999, at *8.

[6] Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 61 (Del. Ch.

2015) (finding that a determination by the board of non-independence under the bright-line NYSE independence rules was not dispositive for Delaware law purposes, resulting in a finding of independence for Delaware law purposes).

[7] In re MFW S’holders Litig., 67 A.3d 496, 509 n.37 (Del. Ch. 2013) (finding directors independent under Delaware law rules under a facts and circumstances analysis where one such fact was the board’s determination that  directors were independent for NYSE rule purposes).

[8] Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 61 (Del. Ch.