Lee v. Pincus

Zynga Inc. (Zynga) completed an initial public offering (IPO). At the time of the IPO, Zynga’s stock was subject to contractual lockup restrictions that barred most pre-IPO investors from selling their shares until a prescribed time after the IPO. Shortly after the IPO, Zynga’s board of directors, including Mark Pincus (defendant), waived the lockups on certain shares, allowing select pre-IPO investors to sell shares in a secondary offering. Shares held by other pre-IPO investors, including Wendy Lee (plaintiff), remained subject to the lockup restrictions. After the secondary offering, Zynga’s stock price declined sharply. Lee and most other pre-IPO shareholders were not permitted to sell their shares until several weeks later at a significantly lower price. Lee filed a lawsuit alleging that Zynga’s board of directors selectively waived the lockup restrictions and conducted the secondary offering in a way that unfairly benefitted certain investors, including Pincus, to the detriment of Lee and the class of shareholders to which she belonged. The modification of the lockup restrictions required the consent of Zynga’s underwriters, Morgan Stanley & Company LLC and Goldman Sachs & Company (the underwriters), who received fees in connection with their work on the secondary offering. Lee alleged that the restructuring of the lockup restrictions constituted a breach of the directors’ fiduciary duties and that the underwriters had aided and abetted that breach. The directors and underwriters moved to dismiss Lee’s complaint. The court found that Lee stated a claim against the directors for breach of fiduciary duty and then turned to the question of whether she stated a claim against the underwriters for aiding and abetting a breach of fiduciary duty.