It isn’t surprising that dissident shareholders of Take Two Interactive Software seized control of the videogame maker’s board recently. When a company restates its financial results four times in five years and its former CEO pleads guilty to fraud, that sort of thing happens.
What is surprising is how the investor group, led by a gaggle of hedge funds, managed to pull off the boardroom coup. Rather than go through the standard process of printing and mailing proxy materials, the investors simply showed up at Take Two’s annual shareholder meeting on March 29 and, you know, voted.
“It is extremely rare at large companies,” says Richard Grubaugh, a senior vice president at proxy solicitation firm D.F. King & Co. Likewise, FactSet Research Systems, which tracks proxy fights, can find no similar example of Take Two’s battle.
Observers say the investors—led by D.E. Shaw, SAC Capital, Tudor Investment, and Oppenheimer Funds—prevailed for a number of reasons. First, and critically, the company had no advance-notice provision requiring nominations for the board of directors to be filed well ahead of the annual meeting. Usually that window is 60 to 90 days before the annual meeting, according to John Laide, a FactSet analyst. Take Two had no such window, which allowed nominees to be elected from the floor.
In fact, four days after Take Two filed its proxy on Feb. 28, the dissidents announced in a regulatory filing that they had formed a group and planned to vote as a group for their own slate of director nominees. “I’ve never seen a group of investors try to get board representation after the filing of the proxy,” Laide says.
The dissidents also owned 46 percent of Take Two’s shares. Typically shareholder groups can’t solicit votes from more than 10 investors without filing a formal proxy statement. But by controlling so much of Take Two’s stock, the dissidents only needed to win more votes than the incumbent board, under Take Two’s plurality election rules—and consequently did not need to file a proxy and go trolling for more votes.
Dooley
“If there is a concentrated ownership—five, six, eight people—you can get enough support and walk into a meeting sure that you can win,” says Patrick Dooley, a partner at the law firm Akin Gump Strauss Hauer & Feld.
Meanwhile, proxy research firms helped out in an indirect way. Since the dissidents filed no proxy statement and shareholders therefore had no proxy card, the advisory firms couldn’t recommend individual dissident nominees. But at least two research firms recommended that shareholders withhold their votes from certain company-nominated directors: Oliver R. Grace, Robert Flug, and Mark Lewis. Votes withheld against them became de facto support for the dissidents.
So, in the end, all the dissident shareholders really needed to do was show up to the meeting and vote their shares.
Avoiding The Take Two Missteps
Companies could be vulnerable to similar moves by their own shareholders. For example, while hundreds of businesses have adopted rules requiring that nominees to the board of directors receive a majority of votes cast, almost all of them apply that standard only to uncontested elections; in contested votes, a simple plurality still carries the day.
But most companies also have the advance-notice provision that Take Two did not, insulating them from unexpected floor nominations. And a staggered board of directors can also block a dissident group from taking majority control.
Experts also stress that waging a “proxy-less proxy fight” is much easier at companies with a smaller number of shareholders, since only a few dissidents would need to band together to make a formidable group. “At a widely held, large company, it would be impossible to get enough shareholders together to pull this off,” says Laide.
“It can only be done in situations where a handful of institutional investors own a significant stake,” adds Grubaugh. That might change, however, as more mutual funds become concerned about the governance practices at companies in which they have invested.
Another dynamic to remember is that while hedge funds are usually the aggressive investors that flex their muscles and at times force showdowns with management, institutional funds are usually the critical power broker because they typically own a much bigger stake in the company. Oppenheimer Funds, for example, was Take Two’s largest institutional investor with 24.5 percent of the shares.
“You need all of the cards to break the right way,” says Dooley.
And a final theory about Take Two’s dissidents: They pursued a non-proxy route because the hedge funds in the group frequently engage in program trading, and didn’t want to reveal in a proxy statement their moves into and out of Take Two stock for the last two years. SAC Capital is particularly known as a frenetic trader, sometimes accounting for as much as 3 percent of the New York Stock Exchange’s daily volume.
So why skip the proxy filing? “They didn’t want someone to reverse-engineer their trades and figure out their algorithms,” says one expert on hedge funds.
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