Wang v. Zymergen Inc.

Background

Zymergen Inc. went public in April 2021, selling approximately 18.5 million shares at $31 per share. Its registration statement described Hyaline and other products in development, estimated large markets, and suggested that the company expected to begin generating revenue from Hyaline in late 2021. After Zymergen disclosed in August 2021 that problems with its commercial product pipeline would affect delivery timelines and revenue projections, and that its chief executive officer was stepping down, its stock price fell from $26.58 to $8.25 the next day. Zymergen later discontinued Hyaline, merged into a subsidiary of Ginkgo Bioworks Holdings, Inc., and filed for bankruptcy.

Biao Wang, the lead plaintiff in a proposed class action, alleges that Zymergen’s registration statement contained false or misleading statements and omitted material information. The operative complaint asserts a claim under Section 11 of the Securities Act against Zymergen, individual defendants, and the offering underwriters, and claims under Section 15 against individual defendants and the funds and management companies associated with SoftBank, DCVC, and True Ventures. Section 15 extends liability to a person or entity that controls someone liable under Section 11 or Section 12. The complaint also asserts secondary liability under the doctrine of respondeat superior, which can make a principal liable for an agent’s violation when the agent acted within the scope of the agency.

The court previously dismissed Section 15 claims with leave to amend. Wang later obtained permission to file a second amended complaint, which reasserted Section 15 claims and added the three management companies. The funds and management companies then moved to dismiss. The opinion addresses those motions and requests for judicial notice.

Requests for Judicial Notice

The court granted requests by DCVC and True Ventures to take judicial notice of Zymergen’s pre-IPO registration statement and related filings with the Securities and Exchange Commission. The notice was limited to the existence of the filings, not the accuracy of their contents. The court also granted True Ventures’s request concerning an archived webpage, but only as to the webpage’s existence, contents, and the fact that it was saved by the Internet Archive on the indicated date. The court declined to infer that the webpage belonged to True Venture Management, L.L.C.

Statute of Limitations and Relation Back

The investors argued that the claims were barred by the one-year limitations period in Section 13 of the Securities Act. The court explained that, at the motion-to-dismiss stage, a statute-of-limitations defense can justify dismissal only when the pleadings and materials subject to judicial notice show that the defense is certain to apply and no factual dispute exists.

The court held that Section 15 claims are subject to the same Section 13 limitations period as Section 11 claims because Section 15 liability is created under Section 11 and exists to the same extent as the controlled person’s liability. The relevant claims in the second amended complaint were timely only if they related back to the first amended complaint.

The Section 15 claims against the funds related back under Federal Rule of Civil Procedure 15(c)(1)(B) because the funds were already parties and the claims arose from the same conduct and transactions alleged in the earlier complaint. The earlier dismissal of those claims was not a final judgment ending the action as to the funds.

The claims against the management companies, which had not been named in the first amended complaint, were governed by Rule 15(c)(1)(C). That rule permits relation back when the claims arise from the same conduct, the newly named party received notice without prejudice, and the party knew or should have known that it would have been named but for a mistake about its identity. The court found plausible allegations that the management companies received notice through their managed funds and knew or should have known that Wang might have sued them because of a mistake about their roles. Whether the rule’s requirements were actually met raised factual questions that could not be resolved on the pleadings. The court therefore rejected the statute-of-limitations arguments at this stage.

Section 15 Control Claims

A Section 15 claim requires an underlying violation of Section 11 or Section 12 and the defendant’s actual power or control over the person who committed that violation. The court had previously found the underlying Section 11 violation adequately pleaded. The issue here was whether Wang adequately alleged that the investors controlled their board appointees or Zymergen itself.

The allegations concerning SoftBank’s control of Travis Murdoch were sufficient. The complaint alleged that Murdoch was employed by SoftBank’s management company, held a carried interest in funds that invested in Zymergen, and needed SoftBank’s approval to make decisions as a Zymergen board member. Similar allegations were sufficient concerning True Ventures’s control of Rohit Sharma, who was alleged to be a True Ventures employee with a carried interest and no authority to act as a board member without True Ventures’s approval.

The allegations concerning DCVC’s control of Zachary Ocko were insufficient. Ocko was alleged to be a DCVC co-owner rather than an employee. The complaint’s assertions that DCVC controlled Ocko and that Ocko acted as its agent were legal conclusions, and the complaint did not allege that Ocko needed approval from DCVC or its other co-owner before making board decisions. The court dismissed this Section 15 claim with leave to amend.

The court separately found sufficient allegations that all three investors controlled Zymergen in connection with its public offering. The complaint alleged that two of the three investors had to approve most business matters, that all three had to approve issuing common stock, that they authorized the IPO and related governance changes, and that they helped prepare the registration statement. The allegations also stated that the investors could have prevented the challenged statements from being issued or required corrections by withholding approval. These allegations were sufficient to plead that each investor possessed control individually and that the investors could act together.

Respondeat Superior Claims

The court held that Ninth Circuit precedent continues to recognize respondeat superior liability for statutory securities violations. Under that doctrine, a principal may be secondarily liable for an agent’s violation when the agent acted within the scope of the agency.

The claims against SoftBank and True Ventures were adequately pleaded. The complaint alleged that Murdoch and Sharma were employed by the respective investors, were appointed to Zymergen’s board by those investors, and served on portfolio-company boards as part of their jobs. Their need to obtain investor approval for major decisions in their board roles further supported the allegations. Whether they actually acted within the scope of their employment was a factual issue for summary judgment or trial, not dismissal at the pleading stage.

The allegations against DCVC were insufficient. Ocko was alleged to be a co-owner rather than an employee, and the complaint’s assertions that he was DCVC’s agent and acted within the scope of that agency were conclusory. The complaint did not allege facts such as a requirement that Ocko obtain DCVC’s approval before making board decisions. The court therefore granted DCVC’s motion as to the respondeat superior claims.

Disposition

The court granted the requests for judicial notice. DCVC’s motion to dismiss was granted in part with leave to amend as to the Section 15 claim based on control of Ocko and the secondary-liability claims based on respondeat superior. DCVC’s motion was otherwise denied. SoftBank’s and True Ventures’s motions were denied in full. Any amended complaint was due September 12, 2024.