Legal Updates in Litigation, Liability, 
Governance & Risk Management
(For Business & People)
 
 
  
  
 

  
Published on 4/19/17
  
 
 
 
TOPEditor's Welcome

Welcome to our Legal Updates in Litigation, Liability, Governance & Risk Management newsletter. Litigation and disputes happen. Royse Law has experienced litigation attorneys to represent you. If you have any questions or comments, please feel free to reach out to any of our attorneys at Royse Law.
 
 
   


Editor: David Tate, Esq., civil and probate court litigation (and administrations), audit committees, D&O and governance, 

In This Issue
 
By David Tate 

By Lisa Chapman and Fred Greguras  
By David Tate 


Resources
 
 

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EVALUATING DIRECTOR INDEPENDENCE - ZYNGA SHAREHOLDER DERIVATIVE SUIT 

 
 

Thomas Sandys Derivatively on Behalf of Zynga, Inc. v. Pincus, et al. , Delaware Supreme Court, Case No. 157,2016, December 5, 2016, highlights the sometimes difficulty, and the importance of evaluating director independence in the circumstance of a shareholder derivative suit.

In Zynga the plaintiff filed his shareholder derivative suit without first making a demand upon the board that the Company sue Company insiders that were alleged to have improperly sold Company stock. Instead of first making the demand upon the board, plaintiff argued that such a demand would have been futile because a majority of the nine person board members lacked independence.

In summary, the plaintiff alleged two derivative claims based on allegations that certain top managers and directors at Zynga were given an exemption to the Company's standing rule preventing sales of stock by insiders until three days after an earnings announcement, and that the insiders who participated in the sale breached their fiduciary duties by misusing confidential information when they sold their shares while in possession of adverse, material non-public information. And plaintiff also asserted a duty of loyalty claim against the directors who approved the sale.

The holding in Zynga is that at the pleading stage there was sufficient evidence to suggest that a majority of the board did lack independence so as to excuse not making the demand upon the board. The holding is primarily interesting for the Court's discussion about three particular board members, and the reasons why the Court determined that there was evidence to sufficiently suggest that those three directors did in fact lack independence to impartially consider a demand that the Company bring suit against the selling insiders, which resulted in a majority of the board also lacking independence, so as to excuse making the pre-suit demand upon the board.

To plead demand excusal the plaintiff must plead particularized factual allegations that create a reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.At the pleading stage, a lack of independence turns on whether the plaintiff has pleaded facts from which the director's ability to act impartially on a matter important to the interested party can be doubted because that director may feel subject to the interested party's dominion or beholden to that interested party.

With respect to one of the directors in question, the Court found troubling for the purpose of independence or lack thereof that the particular board member and her husband co-owned an unusual asset, an airplane, with Zynga's former CEO and controlling stockholder, which the Court found was suggestive of an "extremely intimate personal friendship between their families."

And with respect to the other two directors, the Court found troubling for the purpose of independence or lack thereof that the directors are partners at a prominent venture capital firm and that they and their firm not only controlled 9.2% of Zynga's equity as a result of being early-stage investors, but have other interlocking relationships with the controller and another selling stockholder outside of Zynga. More specifically the Court stated "Although it is true that entrepreneurs like the controller need access to venture capital, it is also true that venture capitalists compete to fund the best entrepreneurs and that these relationships can generate ongoing economic opportunities. There is nothing wrong with that, as that is how commerce often proceeds, but these relationships can give rise to human motivations compromising the participants' ability to act impartially toward each other on a matter of material importance. Perhaps for that reason, the Zynga board itself determined that these two directors did not qualify as independent under the NASDAQ rules, which have a bottom line standard that a director is not independent if she has --a relationship which, in the opinion of the Company's board of directors, would interfere with the exercise of independent judgment . . . .[Footnote #1: NASDAQ Marketplace Rule 5605(a)(2)] Although the plaintiff's lack of diligence made the determination as to these directors perhaps closer than necessary, in our view, the combination of these facts creates a pleading stage reasonable doubt as to the ability of these directors to act independently on a demand adverse to the controller's interests. When these three directors are considered incapable of impartially considering a demand, a majority of the nine member Zynga board is compromised for Rule 23.1 purposes and demand is excused. Thus, the dismissal of the complaint is reversed."
 
As you might correctly assume, board member independence can arise as an issue in several different corporate and governance related circumstances.

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VIDEO: TOP TEN MISTAKES STARTUPS MAKE AND HOW TO AVOID THEM


   

 


Financial and legal mistakes go hand in hand and often overlap. This interactive "conversation" between a CFO and an attorney will shed light upon these common mistakes, as well as provide solutions for avoiding common pitfalls. This webinar is geared towards current and future executives at startups, financial and legal advisors of startups, and students considering starting their own businesses.

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Lauren Rinsky, who concentrates her practice on representing individuals and businesses having tax disputes with the Internal Revenue Service (IRS), Department of Justice Tax Division, California Franchise Tax Board (FTB), Board of Equalization (BOE), and the Employment Development Department (EDD), discusses controversy and litigation with tax law.
                                                                       

 

TrustNEW CALIFORNIA CASE EXPANDS SHIFTING TRUST/TRUSTEE ATTORNEY'S FEES AND COSTS TO A BENEFICIARY'S SHARE OF THE TRUST - PIZARRO V. REYNOSO

 
 
 

Summary .   The decision in Pizarro v. Reynoso expands the shifting of trust/trustee attorneys' fees and costs to a beneficiary's trust share, and in relevant part reminds us that all trust and estate litigation cases vary and are determined in significant part by the facts and circumstances of that case, the relevant case law, and the discretion of the trial court judge. In Pizarro v. Reynoso , on appeal the Court of Appeal held as follows:
1. The terms and intent of the trustor prevail in substance - refusing to elevate form over substance the court upheld a sale of the trust real property to a specific beneficiary which the trust authorized in the trustee's discretion if the beneficiary could afford to purchase the house. The trustee in fact in part assisted the beneficiary in that purchase so that the beneficiary could purchase the property - never the less the court upheld the sale based on substance over form and the intent and terms of the trust.
2. Under the court's equitable powers, the attorneys' fees and costs incurred by the trust/trustee are chargeable against the trust share of a beneficiary who brings an unfounded proceeding against the trust, but those attorneys' fees and costs cannot be awarded against the beneficiaries other personal non-trust assets, citing  Rudnick v. Rudnick (2009) 179 Cal. App. 4th 1328, 1332-1333, 1335, and  Estate of Ivey (1994) 22 Cal. App. 4th 873, 877-878, 882-886.

 
3. Important - in an expansion of #2 above and charging fees and costs to a beneficiary's trust share , under those same equitable powers, the court also can award the trust/trustee attorneys' fees and costs against the trust share of a beneficiary who has not filed or brought a proceed, but who takes an unfounded position and litigates in bad faith causing the trust to incur fees and costs (the beneficiary changed her position to being against the trustee, and in the trial court's opinion then offered false testimony by declaration, deposition and at trial - offering false evidence in litigation is a bad faith litigation tactic).

 
4. The court's decision also cites or makes reference to California Probate Code §17211(a) and §15642(d), which state as follows (and I have also provided below §17211(b):
 
17211(a)

(a) If a beneficiary contests the trustee's account and the court determines that the contest was without reasonable cause and in bad faith, the court may award against the contestant the compensation and costs of the trustee and other expenses and costs of litigation, including attorney's fees, incurred to defend the account. The amount awarded shall be a charge against any interest of the beneficiary in the trust. The contestant shall be personally liable for any amount that remains unsatisfied.
 
(b) If a beneficiary contests the trustee's account and the court determines that the trustee's opposition to the contest was without reasonable cause and in bad faith, the court may award the contestant the costs of the contestant and other expenses and costs of litigation, including attorney's fees, incurred to contest the account. The amount awarded shall be a charge against the compensation or other interest of the trustee in the trust. The trustee shall be personally liable and on the bond, if any, for any amount that remains unsatisfied.
 
15642(d)

(d) If the court finds that the petition for removal of the trustee was filed in bad faith and that removal would be contrary to the settlor's intent, the court may order that the person or persons seeking the removal of the trustee bear all or any part of the costs of the proceeding, including reasonable attorney's fees.

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