The Takeover of Take-Two: The Consequences of Being Unprepared

We have been following the takeover of Take-Two, the computer game company.  Two weeks ago, a collection of shareholders ousted the board of directors.  They did so without engaging in a proxy fight but instead showing up a the meeting and voting out must of the existing board. 

Some may view Take-Two as a possible harbinger of things to come. Institutional investors can combine and quickly oust underperforming management.  These views will be from those longing for a return to the days when hostile acquisitions were common and could be used as an intellectual justification for allowing the market to monitor management.  The  example of Take-Two is, however, likely to prove unique and not be duplicated often.

For one thing, Take-Two had an ownership configuration that would allow a small number of institutions to effectively gain voting control. Not all or even most public companies will have this type of configuration.

For another, Take-Two was woefully unprepared for this type of transaction. The articles of incorporation contain no staggered board provision. The company apparently did not have a bylaw in place that required advance notice of a nomination. Staggered boards have been criticized.

Advance notice bylaws, on the other hand, have gotten less attention. They require shareholders to submit nominations to the board some period in advance of the meeting. Companies have justified the requirement as necessary to make sure that the candidates qualify for election. The provision, however, also effectively requires insurgents to notify management of a proxy fight, sometimes well in advance of the shareholder meeting. See Oliver Press Ptnrs, LLC v. Decker, 2005 Del. Ch. LEXIS 189 (Del. Ch. Dec. 6, 2005)(“Finally, the court observes that there is no evidence of any recent extraordinary change of circumstances at MatrixOne justifying the plaintiffs' request for relief from the 120-day advance notice bylaw provisions they challenge.”). It also effectively prevents shareholders from nominating directors at the meeting itself.

The provisions are not absolute. They cannot be so onerous as to deny a shareholder a “fair opportunity” to nominate candidates, see Accipiter Life Scis. Fund, L.P. v. Helfer, 905 A.2d 115, 124-25 (Del. Ch. 2006)(“In the specific context of advance notice bylaws, Schnell has been understood to mean that such bylaws must on their face and in the particular circumstances ‘afford the shareholders a fair opportunity to nominate candidates.’"), and may be set aside in the case of confusion, see Openwave Systems, Inc. v. Harbinger Capital Partners, 2007 Del. Ch. Lexis 34 (March 5, 2007)(hedge fund nominated director candidate 20 days before the meeting of shareholders; court would wait for trial to determine whether hedge fund complied with advance notice bylaws), fairness, Hubbard v. Hollywood Park Realty Enterprises, Inc., 1991 Del. Ch. Lexis 9 (Jan. 14, 1991) (noting that the facial validity of an advance notice bylaw “is not contested” but nonetheless finding that “considerations of fairness and the fundamental importance of the shareholder franchise dictated that the shareholders be afforded a fair opportunity to nominate an opposing slate, thus imposing upon the board the duty to waive the advance notice requirement of the by-law.”); see also Linton v. Everett, 1997 Del. Ch. LEXIS 117 (Del. Ch. July 31, 1997)(“ This is not to suggest that the advance notice provision was inequitable per se. In quite different circumstances, a case could arise where such a short notice period would be sufficient.  But, in the unusual circumstances presented here, that notice period was not reasonable.”), and equity grounds. See Lerman v. Diagnostic Data, Inc., 421 A.2d 906, 914 (Del Ch 1980) (“ Accordingly, in summary, I do not address the question of whether the 70-day requirement is unreasonable, and thus invalid, on its face. I hold only that under the facts of this case the act of DDI's board, in fixing the date for the annual meeting at a time 63 days in the future, in the face of a by-law which required the plaintiff Lerman and his group to submit the names of their nominees, together with information concerning them, to the corporation at least 70 days in advance of the date of the annual meeting of shareholders, is invalid and cannot be permitted to stand so as to prevent the plaintiff and his group from placing the names of their candidates in nomination.”).

In other words, Delaware already essentially allows companies to deny shareholders the right to nominate directors from the floor of the meeting, at least where they haven’t provided substantial advance notice. It effectively negates a traditional and longstanding right of governance, something that over time this Blog will explore.  To the extent the courts allow these provisions to be widely used to prevent proxy or election contests, they represent another area potentially ripe for federal preemption.