We have been discussing some of the problems encountered by Take-Two that apparently galvanized institutional investors to seize control of the board of directors. Some of them likely involved issues relating to the governance of the company.

Take Two was founded by Ryan Brant at 22 or 23, who, when the company went public, was the CEO and chairman of the board at the ripe age of 26.

Despite his age and relative inexperience, the board appears not to have been particularly active in the early days. In the fiscal year ending Oct. 31, 1997, the board met only twice; the compensation committee apparently not at all. The following year, the board met four times, the compensation committee had no meetings. Only in the fiscal year ending on Oct. 31, 1999 did the compensation committee finally meet, twice (the full board met seven times). The compensation committee consisted of Brant, Oliver Grace and Robert Flug for the first two years before Brant stepped down. Flug and Grace were still listed as members in the proxy statement filed in early 2005.

Brant stepped down as CEO in February 2001 and from the board in March 2004. Shortly afterwards, he settled a case with with the Commission involvement alleging that Take-Two the company had engaged in fraudulent accounting practices designed to inflate its reported revenue (and subsequently described by the Commission as “a massive financial fraud”). Brant agreed to disgorgement and pre-judgment interest of $ 3,103,252 and a penalty of $ 500,000.  He was barred from serving as an officer or director of a public company for five years.

Despite having stepped down from the board, Brant remained employed by the company, signing a five year contract appointing him as Vice President of Publishing, something the proxy statement described as a “non-executive position”. The agreement provided for an annual salary of $750,000 and a bonus of $650,000. This also raises interesting issues about the relationship between Brant and the board. See the comment on Fog Cutter where Nasdaq delisted a company because of its continuing relationship with a CEO who had significant legal troubles.

The problems at Take-Two, however, were not over. In April 2006, the Company dismissed its indpependent accountant and disclosed certain material weaknesses in its internal control over financial reporting.  On June 23, 2006, the Board formed a Special Committee consisting of three independent directors to examine stock option practices since the public offering in 1997.  Around the same time, the Company disclosed that the SEC had begun an informal investigation into its options practices.  In October, Brant resigned from the Company.

The Special Committee presented preliminary conclusions to the board in December 2006, causing the Company to disclose in an 8-K that "all consolidated financial statements, earnings releases and similar communications issued by the Company containing financial information for periods beginning 1997 through April 30, 2006 should no longer be relied up."  Another 8-K a month later disclosed some of the results of the investigation, including:  

• The Company, in granting options, failed in many cases to comply with the terms of its Stock Options Plans, did not maintain adequate control and compliance procedures for option grants, and did not generate or maintain adequate or appropriate documentation of such grants. In addition, the Compensation Committee abdicated its option granting responsibilities and permitted the Company’s prior Chief Executive Officer, Ryan Brant, to control and dominate the granting process.
• Between April 1997 and August 2003, Mr. Brant engaged in a pattern and practice of backdating options, and during such period, a significant number of option grants appear to have been backdated. There has been no pattern or practice of backdating for option grants from August 2003 to the present.

In February 2007, Brant settled a case brought by the SEC for backdating. The settlement required disgorgement of $4,118,093 (with $ 1,143,513 in prejudgment interest), the payment of a $1 million civil penalty, and acceptance of a life time bar as an officer or director of a public company. Brant also pled guilty to felony criminal charges of Falsifying Business Records under New York Law and agreed to pay $ 1 million in lieu of fines and forfeiture.

Subsequently, Take-Two revealed that five independent directors (all of whom had, at one time or another, sat on the compensation committee, including Robert Flug and Oliver Grace who served from 1997 until at least 2005), had also received “improperly dated” options and agreed to “remit to the Company after-tax gains that they realized" and to have the unexercised options re-priced “to reflect an appropriate price for which such stock options should have been deemed granted.”

In a written agreement implementing these steps provided that the improper dating was done “without the Independent Directors’ knowledge.” Under the agreement, Flug remitted $244,100.66 and Grace $83,504.05. Todd Emmel agreed to remit a total amount equivalent to $59,532.34; Steven Tisch $10,620.00, and Mark Lewis $141,260.30. The total amount returned to the Company was $539,017.35.

In other words, Take-Two was not exactly the model of good corporate governance.  Moreover, it was likely a management preoccupied with matters other than those relating to the operations of the business.  Perhaps that's why they didn't have a staggered board or advance notice bylaw (requiring advance notice of any director nominees).  It certainly made matters much easier for the insurgents. 

Tomorrow, the takeover of the board.