Report of the Special Litigation Committee of the Board of Directors of Zynga Inc

REPORT OF THE SPECIAL LITIGATION COMMITTEE OF THE BOARD OF DIRECTORS OF ZYNGA INC. February 27, 2018 TABLE OF CONTENTS INTRODUCTION ........................................................................................... 1 SUMMARY OF THE STOCKHOLDER DERIVATIVE ACTIONS ........... 5 A. The Three Derivative Lawsuits ................................................................ 7 B. The Nominal Defendant .........................................................................11 C. The Defendants ......................................................................................12 D. The Allegations ......................................................................................15 1. Allegations that Defendants Breached the Fiduciary Duty of Loyalty ....................................................................................17 a) Allegations Relating to Knowledge of Material, Adverse Information .........................................................19 b) Allegations Relating to Director Conflicts........................25 2. Allegations that Defendants Breached the Fiduciary Duty of Care .........................................................................................26 E. Timeline of the Derivative Lawsuits .....................................................28 FORMATION OF THE SPECIAL LITIGATION COMMITTEE .............. 31 A. The Members of the SLC .......................................................................34 B. Compensation ........................................................................................36 C. Retention of Counsel and Expert Consultants .......................................37 THE COMMITTEE’S INVESTIGATION AND WORK ............................ 38 A. Documents Reviewed ............................................................................39 B. Interviews ...............................................................................................42 C. Expert Consultants .................................................................................45 D. SLC Meetings ........................................................................................46 E. Meetings with Counsel for the Parties ...................................................48 1. Company Counsel ........................................................................49 2. Plaintiffs’ Counsel .......................................................................50 3. Defendants’ Counsel....................................................................52 F. The Settlement .......................................................................................52 LEGAL STANDARDS APPLICABLE TO PLAINTIFFS’ CLAIMS ........ 57 A. Applicable Law ......................................................................................57 B. Insider Trading .......................................................................................61 1. Brophy Claim (Delaware Law) ...................................................61 a) Possession of Material, Non-public Company Information ........................................................................63 i b) Use of Material, Non-public Information to Make Trades Motivated by the Substance of that Information ........................................................................65 2. California Corporations Code Section 25402 (California law) ..............................................................................................66 C. Breach of Fiduciary Duties ....................................................................68 1. Duty of Loyalty for Directors ......................................................68 a) Disinterestedness and Independence .................................69 b) The Good Faith Requirement ............................................71 2. Duty of Care for Directors ...........................................................72 3. Duty to Disclose for Directors .....................................................73 4. Caremark Claim: Inaction and Director Oversight Liability ......75 5. Corporate Waste Claim ...............................................................77 6. Duty of Loyalty and Care for Officers ........................................78 7. Delaware General Corporation Law Section 102(b)(7) ..............79 8. Judicial Review of Board Decisions and the Business Judgment Rule .............................................................................80 POTENTIAL MONETARY RECOVERY ................................................... 82 A. Potential Insider Trading Losses ............................................................83 1. Potential Loss Calculation Adjustments and Defense Arguments ...................................................................................87 2. Price Decline from the SPO through the Second Quarter Earnings Release .........................................................................88 B. Market Factors .......................................................................................90 1. The Facebook Factor ...................................................................95 2. New News ....................................................................................99 C. Bookings Forecasts ..............................................................................100 D. Potential Illicit Gains Calculation ........................................................103 E. Potential Direct Losses to Zynga .........................................................106 F. Potential Loss Assumptions Informing the Committee’s Deliberations ........................................................................................107 INSURANCE, INDEMNIFICATION, AND COLLECTABILITY OF ANY JUDGMENT ...................................................................................... 108 A. Insurance ..............................................................................................108 B. Rights to Indemnification ....................................................................113 1. The Defendants ..........................................................................113 2. Others Persons ...........................................................................115 C. Collectability of a Judgment ................................................................117 ii ANALYSIS OF CLAIMS ........................................................................... 119 A. Overview of the Company and Its Board ............................................119 1. Zynga’s Rapid Growth ..............................................................120 a) High Work Demands .......................................................121 b) Priorities ..........................................................................124 2. Mr. Pincus’s Leadership and Decision-Making Style ...............125 a) Focus on Emails ..............................................................126 b) Mr. Pincus’s Decision-Making Style ..............................127 c) Mr. Pincus’s Preexisting Relationships with Zynga’s Directors and Officers .....................................................128 3. Zynga’s Board Engagement ......................................................132 4. Corporate Governance Observations and Improvements ..........135 B. Review of Zynga’s Public Offerings ...................................................141 1. The Initial Public Offering ........................................................144 a) Motivation and Timing ...................................................144 b) Structure of the IPO.........................................................151 c) Contemplation of the Secondary Offering at the Time of the IPO ...............................................................156 2. The Secondary Offering ............................................................157 a) Motivation for the Secondary Offering ...........................157 (1) Allegedly Suspicious Timing ...............................160 (2) Other Alleged Motivations ...................................162 b) Timeline of the Secondary Offering ...............................163 c) Structure of the Secondary Offering ...............................170 (1) Secondary Shares Only .........................................170 (2) Employee Participation in the SPO ......................173 (3) Extended Lock-Up Term ......................................175 d) Zynga’s Publicly Disclosed Risk Factors .......................178 C. Review of Sales Made by Defendants .................................................182 1. Sales in Secondary Offering ......................................................182 2. Other Sales .................................................................................191 D. Consideration of Plaintiffs’ Allegations Regarding Knowledge of Material Adverse Information .............................................................193 1. Allegations Regarding Decline in Performance ........................194 a) Overview of Zynga Metrics ............................................195 (1) Key Financial Metrics ...........................................197 (2) Operational Metrics ..............................................199 b) Zynga’s Business Cycle and Impact on Metrics .............203 c) Overview of Mr. Wehner’s Finance Weekly Emails ......206 iii d) Financial Projections in the January Plan and April Update .............................................................................209 e) Performance of Metrics During

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