Lee v. Pincus: Delaware Chancery Court Declines to Dismiss Fiduciary Duty Claims Against Board for Post-IPO Waiver of Lock-Up Restrictions But Dismisses Aiding and Abetting Claims Against Underwriters for Consenting to the Waiver

Sullivan & Cromwell LLP - November 17, 2014
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In an opinion issued on November 14, 2014, the Delaware Court of Chancery (C Bouchard) declined to dismiss breach of fiduciary duty claims against the directors of Zynga Inc. (“Zynga”) for waiving post-IPO lock-up restrictions in a manner that permitted certain stockholders, including half the members of the board, to sell some of their stock in a secondary offering two months before the lock-ups agreed at the time of the IPO would have expired, while extending the lock-up period applicable to other shares they owned.  Other stockholders remained subject to the original lock-up timing.  The lock-up waiver had the effect of allowing certain Zynga stockholders, including four Zynga directors, to sell a portion of their shares at a price that turned out to be twice the price of the Zynga stock at the expiration of the original lock-up period.  The Court held, in the context of a motion to dismiss, that it was reasonably conceivable, as of the time the decision was made to restructure the lock-ups, that the opportunity to sell earlier provided the directors an unfair benefit.  However, the Court dismissed the plaintiff’s aiding and abetting claims against Zynga’s underwriters, whose consent was necessary to waive the lock-ups, finding on the facts pled that there was no reasonable inference that the underwriters knowingly participated in a breach of fiduciary duty by the directors.
 
In rejecting the aiding and abetting claim, the Court came to a different conclusion about “knowing participation” than it (VC Laster) did in the recently decided Pontiac General Employees Retirement System v. Healthways, Inc., in which it declined to dismiss aiding and abetting claims against a lender for including a dead hand “proxy put” in a credit agreement.  The difference in result appears to be attributable to the fact that the Healthways Court viewed the negotiating lenders as on notice that there was a potential entrenching element to the conflict-ridden negotiation of the dead hand “proxy put” and as potentially inducing the breach by negotiating for the provision, while in Lee v. Pincus the Court found there were insufficient facts to show that the underwriters knew the directors were treating stockholders unfairly or sought the result.  These cases, together with In re Rural/Metro Stockholders Litigation, make clear not only that aiding and abetting allegations are increasingly commonplace, but also that actions by directors that may be found to be breaches of fiduciary duties could create liability for advisors, particularly in circumstances where advisors are seen as inducing the breach.