Take-Two Interactive and the Battle for the Board

Last week, shareholders of Take-Two Interactive Software succeeded in ousting the existing board of directors, electing six insurgent directors. It is a rare enough event to see non-management directors win an election but in many respects this one was unique.  For an article in the WSJ go here.  Instead of using the proxy process to accumulate votes, a number of large shareholders apparently showed up at the meeting, nominated their directors, and won the election. They filed no proxy materials (so this is not a proxy fight). The operative document disclosing the plan was a Schedule 13D, the form that is filed when a shareholder or group of shareholders accumulates more than 5% of a public company and embark on a plan to, among other things, change the board.

We will spend several posts over the week examining the successful takeover. It raises many issues. First, what do we call this takeover?  It wasn't a proxy fight.  In fact, the most notable thing about it was the insurgent's decision not to use the proxy rules. 

Second, it involved another example of hedge funds participating in a challenge to existing management. For those who favor hostile acquisitions as a means of disciplining management, the advent of hedge funds has been a thankful event since the demise of hostile tender offers. Others view them with greater suspicion.

Third, the approach relied upon stealth. Management only learned about the efforts on March 7 when the group filed a Schedule 13D disclosing the plan. Take-Two did delay the meeting once, from March 23 to March 29, buying a bit of extra time. But ultimately there really wasn’t sufficient time to obtain enough proxies to outvote the various hedge funds and institutions involved in the putsch.

What are the consequences?  One obvious consequence of this is that companies even more so will likely put in place qualifications for directors and require shareholders to submit nominations to the board well in advance of the shareholder meeting.  It may also reduce the trend towards the elimination of classified boards. Had Take-Two had a classified board, the insurgents would have at best obtained only around one third of the board of directors.

But the most important consequence, and the one of greatest interest to this Blog, is a demonstration of the effect of the rules of the SEC on the governance process. Most view the Commission’s role as limited to disclosure, providing the information needed by shareholders to exercise their governance rights.  

That has always been an excessively simplistic view of the Commission’s role in the governance process, particularly in a post-SOX era. But more importantly, the rules of the Commission sometimes in and of themselves alter the dynamics of the governance process, and not always for the better. Requiring insurgent shareholders to draft a proxy statement and distribute it to investors has, by itself, significantly complicated the election process and made it more expensive. In other words, the requirements imposed by the Commission have made it harder for shareholders to elect non-management directors.

The Take-Two insurgents addressed the problem by avoiding the proxy rules altogether. We will explore this topic by examining this acquisition. It will be the subject of a paper shortly.

Comments

[Sensbachtal]

Just wanted to say Hello to everyone.
Much to read and learn here, I'm sure I will enjoy !

[theedger]

It seems no matter what the topic everyone wants to give their veiwpoint of how they would do it, and this is the perfect place for those ideas.

I love reading what other people think about it gives me a constant source for new ideas in my job.:)