Shareholder sues video game maker

March 11, 2008|Alex Pham | Times Staff Writer

Take-Two Interactive Software Inc., maker of the "Grand Theft Auto" series of video games and the target of a $2-billion takeover effort by rival Electronic Arts Inc., has been hit with a shareholder lawsuit alleging that the company's management improperly tried to keep the buyout offer secret in order to enrich its senior executives.

The lawsuit, filed Friday in Delaware Chancery Court, followed EA's disclosure Feb. 24 that Take-Two had rejected two all-cash buyout offers, including one for $26 a share, a 64% premium over Take-Two's closing share price Feb. 19, the day of EA's latest bid.

EA went public with its offer in hopes that shareholders would pressure Take-Two's management to reconsider.

A Take-Two spokesman declined to discuss the suit in detail. "We believe the claim lacks merit, and we intend to defend vigorously against the litigation," the New York-based company said in a statement.

The lawsuit, filed by Prickett, Jones & Elliott on behalf of Take-Two shareholder Patrick Solomon, alleges that the company's board rejected an undisclosed acquisition offer from EA and then acted to increase what its executives would be paid if the company were sold. The suit names Take-Two Executive Chairman Strauss Zelnick and Chief Executive Benjamin Feder, who are partners of investment company ZelnickMedia, which led a boardroom coup in March 2007 that wrested control of the video game company.

The suit spotlights the board's decision Feb. 15 to increase ZelnickMedia's management fees and bonuses to what it calls "an exorbitant" $16.5 million, from $3.8 million, in the event the company were sold. The suit also questions a provision, up for a shareholder vote at next month's annual meeting, that would grant ZelnickMedia 780,000 shares if the company were sold before March 31, 2009, and 1.5 million shares if it were sold after that date. At $26 a share, that stock grant would be worth $20 million to $39 million, depending on when the transaction closed.

But shareholders would probably refuse to approve the share grant because it would dilute their own profit from a sale, said analyst Michael Pachter of Wedbush Morgan Securities. "Investors aren't in the charity business," he said.

The controversy over compensation has threatened to tarnish a squeaky clean image that Zelnick has cultivated since his days as a music industry executive.

"If Strauss Zelnick keeps telling people he's a Boy Scout, someone should ask him what merit badge he expects to get for this," said Jeff Brown, a spokesman for Redwood City, Calif.-based EA.


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