Zynga founder Pincus to face lawsuit over alleged stock sales

19 November 2014

Mark Pincus, the founder of social gaming company Zynga, is to face a lawsuit alleging that he unfairly benefited by selling $192 million (€153.2 million) of stock in 2012 when other early investors were under a lockup agreement.

According to various reports, the creator of Farmville has asked the Delaware Court of Chancery to dismiss the case that alleged Pincus and other directors at the firm breached their duty of loyalty to shareholders by waiving the lockup for certain investors.

Lockup agreements are put in place to control the supply of stock available for trading, with Zynga barring investors who obtained stock prior to Zynga’s initial public offering in December 2011 from selling until late May 2012.

However, the Zynga board in March 2012 waived the lockup to allow Pincus and four other directors to sell stock before the May deadline, with the lawsuit alleging this stock was worth around $100 million.

A 35-page ruling published by Judge Andre Bouchard alleges that the stock was sold in Zynga’s April 2012 secondary stock offering at $12 per share, nearly double the price when the lockup eventually expired in the following month.

“It is reasonably conceivable that the benefit the director defendants received in the lockup restructuring was not entirely fair,” Judge Bouchard said in his ruling published last week.

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

Zynga had argued that the lawsuit should be missed as Pincus and the other directors involved agreed to sell only 20% of their holdings, while the remaining stock was placed under an extended staggered lockup during July and August of 2012.

The defendants also stated that waiving the lockup did not harm Lee, or any other shareholder, as it did not change the lockup expiration for them.

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