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  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview
  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview
  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview
  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview
  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview
  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview
  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview
  • SEAN DEBOTTE VS. KING DIGITAL ENTERTAINMENT PLC SECURITIES/INVESTMENT document preview 
						
                                
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KEVIN P. MUCK (CSB No. 120918)
kmuck@fenwick.com

DEAN S. KRISTY (CSB No. 157646)
dkristy@fenwick.com

MARIE C. BAFUS (CSB No. 258417)
mbafus@fenwick.com

FENWICK & WEST LLP

555 California Street, 12th Floor

San Francisco, California 94104
Telephone: (415) 875-2300
Facsimile: (415) 281-1350

Attorneys for Defendants

King Digital Entertainment PLC,
Hope Cochran, Robert S. Cohn and
E. Stanton McKee

ELECTRONICALLY

FILED

Supertor Court of Caltfornia,
County of San Francisco

12/28/2016
Clerk of the Court
BY:ANNA TORRES

Deputy Clerk

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF SAN FRANCISCO

IN RE KING DIGITAL ENTERTAINMENT
ple SHAREHOLDER LITIGATION

This Document Relates To:
ALL ACTIONS

Lead Case No. CGC-15-544770
CLASS ACTION

KING DEFENDANTS’ SUPPLEMENTAL
SUBMISSION REGARDING PLAINTIFFS’
MOTION FOR PRELIMINARY
APPROVAL OF SETTLEMENT

Date: January 12, 2017

Time: 4:00 p.m.

Dept: 304

Judge: The Honorable Curtis E.A. Karnow

Action Filed: March 17, 2015

PUBLIC — REDACTS MATERIALS FROM CONDITIONALLY SEALED RECORD.

KING DEFS.’ SUPP. SUBMISSION

LEAD CASE NO. CGC-15-5447701 TABLE OF CONTENTS

w
~

TN TROD UC TION errata tabetaatataeaitedat atoll abatarabebaesetederaretataratatababandedadetatetstatelatahatedstatatat 1

4) IL. DEFENDANTS BELIEVE THAT THEY WOULD HAVE PREVAILED IF THE
CASE HAD NOT BEEN SETTLED.......cccscssesesssesssssesseeseessesessesnesseesesasssessesseessencseeeressse 2

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A. King’s Business and Growth .n..cccecesseeesseseseseesesecseanseceesassesucereseseeassesseeeenesees 2

B. King’s IPO, Final Registration Statement and Prospectus...
Cc. King’s Post-IPO Performance and Acquisition by Activision Blizzard ................. 3
D. Plaintiffs Would Not Prevail On Their Disclosure Claims ...........:.:esecseesesseeseees 6

1. Candy Crush .....cecccccceseecesuessscesssesseereacseesssssesnssesneassissserssessassneseensnesnes 6

II.

KING DEFS.’ SUPP. SUBMISSION i LEAD CASE NO. CGC-15-544770w

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TABLE OF AUTHORITIES

Page(s)

Cases
Blackmoss Inv. Inc. v. ACA Cap. Holdings, Inc.,

2010 WL 148617 (S.D.NLY. Jan. 4, 2010)... eeeeeeeeeeceessessesseesessneeessesseesneesesesssessesneeneeeesseteneyy 6
Dura Pharms., Inc. v. Broudo,

544 U.S. 336 (2005) oo. ..sseesscesscessseeseeeseceseceseseseesseesseessessesseesasssuessnessnecsesseesecssmesnessnessnersnecsses 10
Mallen v. Alphatec Holdings, Inc.,

861 F. Supp. 2d 1111 (S.D. Cal. 2012), aff'd, 607 F. App’x 694 (9th Cir. 2015)... eee 7
In re Noah Educ. Holdings, Ltd. Sec. Litig.,

2010 WL 1372709 (S.D.N.Y. Mar. 31, 2010) ..ceececcecessessesseessssnssersseseeessesessessesseeressnseessecssess 7
Schuler v. NIVS Intellimedia Tech. Grp., Inc.,

2013 WL 944777 (S.D.N.Y. Mar. 12, 2013) .....eeceeeeseeceeseesessecsesseeseesseesesneesesareseesneresseeeearene 10

In re Turkcell Iletisim Hizmetler, A.S. Sec. Lit
202 F. Supp. 2d 8 (S.D.N.Y. 2001).

In re Worlds of Wonder Sec. Liti
35 F.3d 1407 (9th Cir, 1994)... ccceccseecseecseeesesesessseessesssesseessessuessusssnessnessecssecsserasecssecsssssnecssee 6,8

Zucker v. Quasha,
891 F. Supp. 1010 (D.N.J. 1995), aff'd, 82 F.3d 408 (3d Cir. 1996)... cesses 8

Statutes and Rules

15-1716 1777 (bt aac ata teeta ecb ecctetbtecaedat 10
17 CER. § 210-3.12(f) ssossssnsesssnssssnsesssseesensssasssensssesnnssssnsesnasessensesisssenssensannseusasssasesesses 8

17 CER. § 229.303(a)(3)( ii) -asosscssssnsesssssesssnsenasesessnssnsisssisanenssssisessntivasssesieseseese 7,8

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I. INTRODUCTION

During the hearing on November 17, 2016 in connection with plaintiffs’ pending motion
for preliminary approval of the class action settlement, the Court indicated that it would like the
parties to provide additional information regarding the merits and defenses to plaintiffs”
allegations, as well as causation and damages.

This submission is made by defendants King Digital Entertainment PLC (“King” or the
“Company”), Hope Cochran, Robert S. Cohn and E. Stanton McKee (collectively, the “King
Defendants”) in response to the Court’s request. In providing this information, the King
Defendants have focused on the main issues in this case, and they have not tried to anticipate or
rebut every point or piece of evidence plaintiffs may choose to submit. The King Defendants
have also tried to be selective in providing evidence to the Court that the King Defendants believe
is illustrative of the points being made; it is by no means the full breadth of information that the
King Defendants would offer if this case were being litigated on the merits.' In addition, the
King Defendants have submitted the accompanying Declaration of Alexander Aganin, Ph.D
(“Aganin Decl.”), which addresses certain causation and damages issues.

As with all securities class action settlements, the proposed settlement in this case reflects
a compromise in light of the risks, costs, and distraction associated with continued litigation. It
was bargained for at arms-length, with the assistance of a highly experienced mediator (the Hon.
Layn Phillips, a former federal judge). The parties argued their positions vigorously. While the
King Defendants are highly confident that that they would have prevailed in this case, either on
summary judgment or at trial, there are always risks that need to be considered and evaluated (in
addition to the expense and distraction of ongoing litigation) that make settlement sensible. The

King Defendants briefly summarize their position on the key issues below.

' The evidence cited is contained in the accompanying Appendix of Exhibits filed by the King
Defendants. Because King (and, in one case, a third party) has designated certain of these
documents as confidential pursuant to the Protective Order in this case, the King Defendants are
also filing the companion motion to seal these confidential materials and providing notice of
lodging to the third party pursuant to Cal. R. Ct. 2.551(b)(3). Cites to the exhibits are in the form
“Def. Ex.”

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Il. DEFENDANTS BELIEVE THAT THEY WOULD
HAVE PREVAILED IF THE CASE HAD NOT BEEN SETTLED

A. King’s Business and Growth
This litigation relates to the March 26, 2014 initial public offering of King stock. King is

one of the world’s foremost developers of casual games. Among its games is Candy Crush Saga
(“Candy Crush” or “CCS”), a global phenomenon which was the best monetizing casual game in
history. Other popular games include Farm Heroes Saga, Pet Rescue Saga, Papa Pear Saga and
Bubble Witch Saga. Prospectus, dated March 25, 2014 (“Prospectus”) at 1-4, 51-53.

King’s game development and distribution have fueled incredible growth, both before and
after the IPO. In 2013, bookings rose to $1.98 billion (from $181.6 million), and revenue rose to
$1.88 billion (from $164.4 million). Prospectus at 10-11, 46-47. Profits increased more than
7000%, from $7.8 million in 2012 to $567.8 million in 2013. /d. at 10. By the end of 2013, an
average of 128 million daily active users (DAUs) played King’s games more than 1.2 billion
times per day. Jd. at 52. Other key metrics also increased, including:

© Monthly unique users (MUUs), the number of unique individuals who play any game
ona specific platform in a 30-day period, which grew from 43 million to 304 million;

« Monthly active users (MAUs), a measurement of the overall size of King’s network
of users and their regular engagement with its portfolio of games, which rose from
67 million to 408 million; and

* Monthly unique payers (MUPs), the average number of unique individuals who
purchased a virtual item at least once in a 30-day period, which increased from 1.3
million to about 12.2 million (with a high of 13 million in the third quarter of 2013).

Id. at 52, 55-57.

Documents produced during discovery confirm that King anticipated that its business

would continue to grow and prosper after the IPO. For example, Ee
a King expected that such growth would be fueled by a diverse set of

? The Prospectus was part of the final Registration Statement (“Registration Statement”) filed by
King with the SEC on March 25, 2014 in connection with the initial public offering. It is included
in the King Defendants’ Appendix of Exhibits as Def. Ex. 1.

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games, with non-CCS titles accounting for a0 ID T_T

B. King’s IPO, Final Registration Statement and Prospectus
On March 25, 2014, King filed its final Registration Statement. It described King’s key

business metrics, together with a detailed analysis of those metrics on a quarterly basis for the two
years leading up to the IPO. See Prospectus at 5, 10-12, 46-50, 53-58. Among those metrics
were: revenues; profits and adjusted EBITDA; gross bookings; DAUs:; MAUs; MUUs; MUPs;
and monthly gross average bookings per paying user (MGABPPU), a key measure of
monetization across King’s network showing average spend per player per month. /d. at 53-58.
The Prospectus also provided comprehensive disclosures of the risks and challenges facing King,
including the fact that, at the end of 2013, three games accounted for 95% of its bookings. /d. at
13-36, 51-60.

Cc. King’s Post-IPO Performance and Acquisition by Activision Blizzard

King’s first quarter ended on March 31, 2014, and its results were disclosed on May 7,
2014. Revenues ($607 million) and bookings ($641 million) increased over the prior quarter.
Def. Ex. 4 at 2. As stated in the Prospectus, the portion of bookings attributable to Candy Crush
declined (from 78% to 67%), reflecting greater diversification. User metrics were all up
substantially, and while MUPs declined slightly from 12.2 million to 11.9 million (about 2%),
revenues grew because the average payer continued to spend more (MGABPPU increased). Jd. at

3. As King’s CFO noted internally in her report to the Board shortly after the quarter closed, J

eS

simply, it was a strong quarter.

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ee
ee
De In other words, rather than furnishing
disappointing information at odds with what was in the Prospectus, the disclosures on May 7,
2014 were Ee Analysts were likewise positive, with one noting
that (apart from the slight decline in MUPs) King’s results for the first quarter as a public
company reflected “strong growth on just about every other user metric.” Second Am. Consl.
Cmpl. (“SACC”) 4 56.

In the conference call that followed, King provided financial guidance for the year,
estimating bookings of $2.55-$2.65 billion, revenue of $2.40-$2.50 billion, and an EBITDA
margin of 40%. Def. Ex. 7 at 7-8. For the second quarter, King expected bookings, revenue and
EBITDA margin to remain relatively flat, with continued revenue diversification (i.e., non-CCS
titles contributing a greater percentage of total bookings). Id.

King’s second quarter started very strong. April 2014 bookings vere
ES ©:
April 29, the Company prepared its updated “3 plus 9” forecast for the year, a
ES 3:
as mid-May 2014, King’s outlook for the second quarter estimated Ee
Ee both of which would have exceeded guidance. a

Beginning in the latter part of May 2014, however, King began seeing unexpected
softening in its business. On May 28, management noted that Re
ee As the quarter progressed into June,
ee

The Company announced second quarter results on August 12, 2014. Quarterly bookings
($611 million) were below the Company’s expectations, primarily because: (i) Farm Heroes Saga
peaked earlier than expected; and (ii) CCS declined more than anticipated in the back-half of the
quarter. Def. Ex. 12. Revenue ($594 million) was down sequentially, although profit increased

30% to $165 million. /d. at 2-3. MUPs were 10.4 million (down for the third straight quarter),

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while average spending per paying user increased 8% to $19.54. The Company explained that the
decrease in MUPs was primarily a result of reduced payment activity among the occasional
payers of the network, in addition to an increased share of transactions coming from games
offering virtual currency (resulting in larger but less frequent purchases). Jd. King also revised
its outlook for the year: bookings for 2014 were expected to range from $2.25 billion to $2.35
billion, with bookings in Q3 expected to decline sequentially to a range of $500 million to $525
million. Jd. at 4.

The Company’s actual results for 2014 exceeded its revised guidance. Bookings were
almost $2.4 billion, an increase of $403 million over 2013, representing growth of 20%. Def. Ex.
13 at 2. Revenue was $2.26 billion, an increase of $376 million or 20% as well. Id. The
Company’s EBITDA margin was 42% and, even after paying $364 million in cash dividends to
shareholders during the year, the Company had cash and cash equivalents of $964 million — an
increase of $555 million, primarily the result of generating $661 million in net cash from
operating activities. Jd. In other words, rather than experiencing any sort of collapse, King’s first
year as a public company resulted in revenue and bookings growth of 20%, critical diversification
in its bookings, and enormous profitability and cash flow.

On November 2, 2015, the Company announced that it had entered into an agreement to
be acquired by a subsidiary of Activision Blizzard, Inc., pursuant to which all King stockholders
would receive $18 per share in cash. Following approval by King stockholders and Irish takeover
authorities, the acquisition was completed in February 2016. For those stockholders who bought
during the class period at a price in excess of $18 per share, and who continued to hold their
shares thereafter, the acquisition price limits their alleged loss. Those who acquired King shares

at less than $18 and continued to hold those shares did not incur any loss.*

* Despite the fact that King grew its business over 20% in its first year as a public company, and
was enormously profitable, its share price traded below the IPO price before it was acquired by
Activision Blizzard. King, however, was not a guarantor of the trading price of its shares on the
open market, which is influenced by a wide-variety of factors. Moreover, King provided
extensive risks in the Prospectus regarding factors that could impact its results, and specifically
referenced risks to its stock price. See, e.g., Prospectus at 31-32.

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D. Plaintiffs Would Not Prevail On Their Disclosure Claims

Plaintiffs’ Section 11 claim was based on three alleged omissions from the Prospectus: (i)
the portion of total bookings attributable to CCS would decline from 78% in the fourth quarter of
2013 to 67% in the first quarter of 2014; (ii) the decline in MUPs would continue; and (iii) some
King users had free “lives” donated by Facebook friends allegedly deleted from their accounts.
SACC ff 36-54. Each of these theories is addressed below.

1. Candy Crush

If the case continued to be litigated, plaintiffs would not prevail on their claim regarding
the declining percentage of Candy Crush bookings because the information purportedly “omitted”
was, in fact, disclosed in the Registration Statement. Specifically, King explained that while
Candy Crush accounted for 78% of total bookings during the fourth quarter of 2013, “[i]n future
periods, we expect Candy Crush Saga to represent a smaller percentage of our total mobile
channel bookings as we diversify our mobile game portfolio.” Prospectus at 13 (emphasis

added). That point was reiterated in King’s discussion of its “Key Financial Metrics”:

Gross bookings in the quarter ended December 31, 2013 slightly declined

compared to the quarter ended September 30, 2013. The decline was driven by a

decrease in Candy Crush Saga gross bookings, which was mostly offset by an

increase in gross bookings across all of our other games... [4] In future periods,

as we continue to diversify our mobile game portfolio, we expect Candy Crush

Saga to represent a smaller percentage of our total mobile channel and

overall gross bookings.
Id. at 54-55 (emphasis added). There can be no Section 11 liability where the supposedly omitted
facts are actually disclosed in the Prospectus. See, e.g., Blackmoss Inv. Inc. v. ACA Cap.
Holdings, Inc., 2010 WL 148617, at *8 (S.D.N.Y. Jan. 4, 2010).

Plaintiffs have argued the Company should have quantified the precise amount by which
Candy Crush bookings would decline in the first quarter of 2014 — i.e., that for the quarter in
progress at the time of the IPO, Candy Crush would comprise 67% of total bookings (down from
78% in the preceding quarter). However, King was not required by statute or SEC rule to include
interim first quarter results in the Registration Statement. See In re Worlds of Wonder Sec. Litig.,

35 F.3d 1407, 1419 (9th Cir. 1994), To the contrary, “[t]he disclosure structure set out by the

SEC ... recognizes how unworkable and potentially misleading a system of instantaneous

KING DEFS.’ SUPP. SUBMISSION 6 LEAD CASE NO. CGC-15-544770FENWICK & WEST LLP

ATTORNEYS AT LAW

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disclosure ... would be.” In re Turkcell Iletisim Hizmetler, A.S. Sec. Litig., 202 F. Supp. 2d 8, 13
(S.D.N-Y. 2001). Courts have consistently rejected claims based on alleged omission of interim
results as “little more than an end-run around the carefully delineated SEC regulations that specify
what financial data must be disclosed in the offering documents.” Jn re Noah Educ. Holdings,
Ltd. Sec. Litig., 2010 WL 1372709, at *7 (S.D.N.Y. Mar. 31, 2010). Indeed, for such reasons,

King would have offered evidence that the investment community does not expect such

disclosures to be made. That is especially true here, given ht i
ee
ee

Nor could plaintiffs show that Item 303 of Regulation S-K (17 C.F.R. § 229.303), which
relates to disclosure of “known trends” under certain circumstances, required quantification of
first quarter bookings data. To the extent that there was a “known trend” —i.e., that Candy Crush
bookings would “represent a smaller percentage of ... total mobile channel and overall gross
bookings” — it was expressly disclosed. Prospectus at 54-55. Even setting that aside, Item 303
only requires disclosure of “known trends” if a company “reasonably expects [they] will have a
material ... unfavorable impact on net sales or revenues or income from continuing operations.”
17 CFR. § 229.303(a)(3)(ii); see also Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111,

1127 (S.D. Cal. 2012), aff'd, 607 F. App’x 694 (9th Cir. 2015).

Here, King’s total bookings, revenues and profits increased in the first quarter of 2014.

Moreover, prior to and afer he 1°,

i In other words, the evidence is entirely in line with King’s disclosures and Item 303.'

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2. MUPs

The Prospectus disclosed the number of MUPs over each of the eight quarters leading up
to the IPO, including the most recently completed quarter (the fourth quarter of 2013). MUPs
grew from 411,000 in the first quarter of 2012 to a high of 13,012,000 (in the third quarter of
2013), before declining to 12,165,000 in the fourth quarter of 2013. Prospectus at 5, 56, 58. The
Prospectus also disclosed the level of MUUs over the same period. Jd. at 56. To the extent
anyone wished to calculate the ratio between MUPs and MUUs, and thus ascertain the percentage
of paying users (i.e, MUPs/MUUs), they could do so based on the data provided (and would see
that this ratio had declined since the second quarter of 2013 from about 5.3%, to 4.8% in the third
quarter, to 4.0% in the fourth quarter). See id. at 56. In other words, the Prospectus disclosed that
MUPs had declined (both in absolute terms and as a percentage of MUUs) in the period leading
up to the IPO.

Plaintiffs assert that King should have projected that MUPs would decline in the in-
progress first quarter of 2014. As discussed above, Section 11 does not require an issuer to
provide interim results or projections concerning the quarter in which it goes public. See SEC
Reg. S-X, 17 C.F.R. § 210-3.12(f) (setting forth required financial data, which does not include
the quarter in which the issuer goes public); Zucker v. Quasha, 891 F. Supp. 1010, 1019 (D.N.J.
1995), aff'd, 82 F.3d 408 (3d Cir. 1996); Worlds of Wonder, 35 F.3d at 1419.

Furthermore, as discussed in the preceding section, Item 303 applies only to “known
trends” that are “reasonably expect[ed] ... [to] have a material ... unfavorable impact on net sales

or revenues or income from continuing operations.” 17 C.F.R. § 229.303(a)(3)(ii). Here, King’s

revenues increased in the first quarter of 2014. Def. Ex. 4 at 2-3. a
PE (e280 ine of ie PO,

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an unassailable indication that it did not anticipate that the level of MUPs would adversely impact
revenues or operating results. ee

Accordingly, if the case continued to be litigated, plaintiffs would be unable to establish
that King both knew that MUPs would decline significantly and that any decline was likely to
have an adverse effect on revenues or operating results.”

3. Deleted Free Lives

Plaintiffs’ last claim is that the Prospectus failed to disclose that some users had free
“lives” donated by Facebook friends allegedly deleted from their accounts. SACC §§ 50-53. This
allegation was derived from a consumer class action suit filed on March 2, 2015 in the Northern
District of Hlinois.

There is no evidence that this was a material or significant issue, or that it even existed at
the time of the IPO. Rather than “alienating users,” King experienced unprecedented growth in
the popularity of its games: in December 2013, an average of 128 million DAUs — up from 15
million a year earlier — played the Company’s games more than 1.2 billion times per day and, by
February 2014, an average of 144 million DAUs played King’s games more than 1.4 billion times
per day. Prospectus at 1,57. This hardly demonstrates that the large and growing network of
users playing King’s games were somehow being alienated, much less that this “issue” was
having a significant or material impact on the Company.

Similarly, as to the assertion that revenues were inflated in an unspecified amount over an
unstated period prior to the IPO, plaintiffs ignore that no user paid for “free lives,” and any user
who ran out of lives could simply wait 30 minutes (or adjust the clock on his device) to receive

further free lives. Plaintiffs have been unable to establish that any revenues — which grew from

$164 million in 2012 to over $1.88 billion in 2013 due to the enormous popularity of King’s

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games — were even inflated by this issue, let alone materially inflated.

Even ignoring these issues, however, plaintiffs’ claim fails due to the absence of loss
causation. As explained further below, a “negative causation” defense bars Section 11 claims
where, as here, defendants can show the Company’s stock price did not decline in reaction to any
“corrective” disclosure of relevant information to the market. Plaintiffs allege that King’s stock
price declined “over 5%” when the Illinois lawsuit was filed on March 2, 2015, apparently
referencing the decline from the closing price on Friday, February 27 ($15.79) to the closing price
on Monday, March 2 ($15.02). See SACC 453. This assertion is wrong for two fundamental
reasons.

First, there is no evidence that the market was aware of the Illinois lawsuit until after the
market closed on March 2 (at the earliest). Accordingly, the decline on March 2 was not due to
“news” of the Illinois case. Second, defendants’ expert has explained that the decline on that date
was attributable to another factor: the effect of King’s $300 million special dividend to
shareholders and that fact that King’s shares went “ex-dividend” on that date. See Aganin Decl. §
15. Accordingly, if the case proceeded, plaintiffs would be unable to establish any liability or

damage associated with this allegation.

E. Even If Plaintiffs Could Show A Section 11 Violation (And They Cannot),
They Face Loss Causation Obstacles That Will Substantially Diminish Any
Claimed Damages

The Section 11 claim also faces other loss causation issues that will substantially reduce
any claimed damages. Section 11 provides a “negative causation” defense. See 15 U.S.C. §
77k(e). A stock price decline that is not caused by a “corrective disclosure” of allegedly
misleading information in the Prospectus is not recoverable. See, e.g., Schuler v. NIVS
Intellimedia Tech. Grp., Inc., 2013 WL 944777, at *9 (S.D.N-Y. Mar. 12, 2013) (citing Dura
Pharms., Inc. v. Broudo, 544 U.S. 336, 344 (2005).

The King Defendants were prepared to offer expert testimony concerning statistically

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significant stock price drops, whether such drops were tied to any “corrective disclosure,” and the
appropriate measure of damages. Only two post-IPO price movements identified by plaintiffs
have statistical significance: those associated with King’s earnings releases for the first quarter of
2014 (May 7, 2014) and second quarter (August 12, 2014). See Aganin Decl. §§ 11-14.

In the May 7, 2014 earnings release, King reported increases in bookings, revenues,
DAUs, MAUs and MUUs. Def. Ex. 4. It also disclosed that Candy Crush accounted for 67% of
overall bookings (down from 78% in the prior quarter, showing that its diversification strategy
was working). /d. King further reported that MUPs declined from 12.2 million to 11.9 million,
while the average spend per payer again increased (to $18.02 from $17.32). Id.

As set forth above, these disclosures are entirely consistent with the Prospectus, and do not
give rise to any potential liability. Nevertheless, assuming arguendo that the stock price decline
on May 7 constituted a “corrective” disclosure regarding the declining percentage of Candy Crush
bookings and the decline in MUPs, and that the full residual drop on that day ($2.54 per share)
was solely attributable to those disclosures rather than other factors, Dr. Aganin has preliminarily
estimated damages of approximately $53 million.

Once King reported its actual first quarter results and provided forward-looking guidance
on May 7, 2014, investor expectations regarding Candy Crush bookings and MUPs were no
longer based on information in the Prospectus. By then, the market “knew” that Candy Crush
bookings had declined to 67% of total bookings (the allegedly “omitted” fact), and that MUPs had
declined in consecutive quarters (the other allegedly “omitted” fact). As expert testimony would
establish, any price drop after May 7, 2014 cannot be tied to allegedly misleading disclosures in
the Prospectus. In other words, negative causation is a complete defense to any declines after
May 7, 2014. See Aganin Decl. §f{ 9-15.

The second quarter earnings release, issued on August 12, 2014, underscores the point. In
that release, King reported second quarter results that were below its expectations due to
developments well after the IPO, and the Company revised its estimates for the remainder of the
year. See Def. Ex. 12. While the stock price declined on August 13, that was due to the revised

guidance — not to correction of any statements in the Prospectus. See Aganin Decl. § 14.

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Accordingly, none of the price decline on August 13 is recoverable as damages under Section 11.

III. CONCLUSION

For the reasons set forth above, the King Defendants had a very strong case on the merits,
and believe they would have prevailed if the case had not been settled. In addition, even putting
aside liability issues, plaintiffs’ case faced substantial causation and damages problems, which

would have severely limited (or even eliminated) any potential recovery.

DATED: December 28, 2016 FENWICK & WEST LLP

/s/ Dean S. Kristy
DEAN S. KRISTY (CSB No. 157646)
KEVIN P. MUCK (CSB No. 120918)
MARIE C. BAFUS (CSB No. 258417)
555 California Street, 12th Floor
San Francisco, CA 94104
Telephone: 415/875-2384
415/281-1350 (fax)
dkristy@fenwick.com
kmuck@fenwick.com
mbatus@fenwick.com

Attorneys for Defendants King Digital
Entertainment plc, Hope Cochran,
Robert S. Cohn and E. Stanton McKee

KING DEFS.’ SUPP. SUBMISSION 12 LEAD CASE NO. CGC-15-544770