Lee v. Pincus, C.A. No. 8458-CB (Del. Ch. Nov. 14, 2014).

Why This Chancery Opinion is Noteworthy: The Chancellor provides in this Court of Chancery decision a useful overview of several key statements of Delaware law with widespread applicability in corporate litigation. For example: (i) the standard of review for a breach of fiduciary duty claim, and when self-dealing will require the entire fairness standard instead of the business judgment rule to apply; (ii) the difference between a direct and derivative claim is also examined; (iii) the court’s classic description of the duty of loyalty is helpful to have handy for this fundamental component of fiduciary duty; (iv) an explanation of those instances where a fiduciary duty claim will be permitted notwithstanding arguably affiliated claims based on breach of contract; (v) providing for liquidity of stock only to selected stockholders may form the basis of a claim and damages. (See footnote 29 and text accompanying both footnotes 24 and 34); and (vi) the investment bankers were not held liable for aiding and abetting even though they provided their consent to the waiver. (Cf. In re Rural/Metro). 

Brief Highlights:

The facts of this case involve Zynga, the “social gaming” company that is publicly traded on NASDAQ and is best known for online games such as FarmVille. It raised $1 billion in an IPO. The allegations in this case are that half of the directors waived a restriction that otherwise required them, and others, not to sell their shares until a certain number of days after the IPO. The waiver provided “earlier liquidity” to only selected members of the board and other pre-IPO stockholders. Because the waiver allowed them to sell their shares at higher prices than most other stockholders, who had to wait a longer period before they could sell, resulting in them selling their stock at a lower price, damages were claimed to exceed $200 million for the putative class.

I subjectively selected the following excerpt for my loyal readers:

The obligation Lee seeks to enforce is for the Director Defendants to not receive personal benefits inconsistent with the standard of conduct of fiduciaries under Delaware law.52  She alleges that the Director Defendants gave themselves an improper benefit inconsistent with their duty of loyalty to Lee and the putative class.53 In my view, this is quintessentially a fiduciary duty claim.

52 See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (“Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . . The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.”).

C. Count I States a Claim for Breach of Fiduciary Duty

A motion to dismiss under Rule 12(b)(6) for failure to state a claim for relief must be denied unless, assuming the well-pled allegations to be true and viewing all reasonable inferences from those allegations in the plaintiff’s favor, there is no “reasonably conceivable set of circumstances susceptible of proof” in which the plaintiff could recover.54 Although “conclusory allegations that are unsupported by specific facts” are not accepted as true, and “unreasonable inferences [are not drawn] in the plaintiff’s favor,”55 the pleadings required to satisfy the reasonable conceivability standard are “minimal.”56 “[I]t may, as a factual matter, ultimately prove impossible for the plaintiff to prove his claims at a later stage of a proceeding, but that is not the test to survive a motion to dismiss.”57 (emphasis added)(some citations and footnotes omitted)