Take-Two Named in Shareholder Lawsuit

SAN FRANCISCO -- Take-Two Interactive's(TTWO - Cramer's Take - Stockpickr) rejection of Electronic Arts'(ERTS - Cramer's Take - Stockpickr) $2 billion takeover bid and its plan to give senior management a financial boost has brought the video-game maker a shareholder lawsuit.

A "breach of fiduciary duty" suit filed Friday in Delaware on behalf of Patrick Solomon, an investor in Take-Two, questions a decision by Take-Two that gives management a substantial financial hike, and asks for the enforcement of stockholders' right to nominate and elect directors at Take-Two's 2008 annual meeting.

Take-Two rejected EA's $26-a-share offer saying it was inadequate, even though it was a 64% premiumover Take-Two's closing stock price on Feb. 15, the last trading day before EA made its latest bid.

Take-Two didn't publicly disclose EA's first offer on Feb. 6, the suit alleges. Instead, a week later, Take-Two's board passed amendments that would, among other things, substantially increase the compensation for ZelnickMedia, the firm co-founded by Take-Two Chairman Strauss Zelnick, and Take-Two's management, in case of an event defined as "change in control."

"While the original management agreement was negotiated with stockholders owning 46% of Take-Two's stock, the amendment was entered into without stockholder approval," the suit alleges. "The amendment itself is not subject to stockholder approval."

Take-Two's annual shareholder meeting has been scheduled for April 10. Shares of Take-Two closed down 72 cents, or 2.8%, to $24.85.

"We believe the claim lacks merit and intend to defend vigorously against the litigation," said Take-Two in a statement.

Much of the case against Take-Two focuses on the recent change in management agreement that has already raised eyebrows.

The new agreement allows for a hike in ZelnickMedia's monthly management fee from $62,500 a month to $208,333 a month, says the suit. The maximum annual bonus for ZelnickMedia also was increased to $2.5 million a year from $750,000.

The "change in control" payments for ZelnickMedia for the period April 1, 2008 to Oct. 31, 2011 would be 3.33 times more than the amount payable under the original agreement, the lawsuit alleges. That pushes the management fees payable upon a change in control for the period to $8.95 million from $2.66 million, the suit said.

"Overall, defendants structured the amendment with knowledge of EA's initial offer and keen interest in acquiring Take-Two so that an acquisition by EA would entitle ZelnickMedia to approximately $17 million in fees and bonuses, $22 million in option profits and $20 million to $39 million for restricted shares," the lawsuit said.

Last week, Take-Two disclosed in a filing with the Securities and Exchange Commission that it had put in place an employee severance plan that kicks in case of a "change in control." The plan would make it more expensive for EA to buy the company.