The opinion of the court was delivered by: Shirley Wohl Kram, U.S.D.J.
This litigation comes before the Court on a motion filed by the Special Litigation Committee (the "SLC") of the board of directors of Take Two Interactive Software, Inc. ("Take Two"), a Delaware corporation headquartered in New York. The Amended Complaint (the "Complaint") filed by the plaintiff, St. Clair Shores General Employees Retirement System ("St. Clair" or "Plaintiff"), avers three basic causes of action. First, the Complaint asserts derivative claims against various officers and directors in connection with alleged insider trading (the "Derivative Insider Trading Claims"). Second, the Complaint advances derivative claims against several officers and directors who allegedly issued materially misleading proxy statements in the years 2003, 2004, and 2005, in violation of Section 14(a) of the Exchange Act and Rule 14a-9 (the "Derivative Section 14(a) Disclosure Claims"). Third, the Complaint sets forth direct, class action claims for injuries suffered by St. Clair and other holders of Take Two common stock as a result of the allegedly misleading proxy statements of the years 2003, 2004, and 2005 (the "Direct Common Law Disclosure Claims"). The SLC has moved to stay these three causes of action while it considers whether this litigation is in the best interests of Take Two.
For the reasons that follow, this court grants the SLC's motion and stays this litigation in its entirety for a period of 150 days.
I. The Allegations of the Complaint
The Complaint names Take Two and eleven of its officers and directors as defendants. The Complaint alleges that the officer and director defendants: (A) engaged in insider trading and (B) violated disclosure requirements under Exchange Act Section 14(a), Rule 14a-9, and Delaware law.
A. The Derivative Insider Trading Claims
Plaintiff avers two separate episodes of insider trading. In both instances, directors and officers of Take Two allegedly sold shares of Take Two while in possession of material nonpublic information concerning the corporation.
The first alleged episode of insider trading involved the sale of Take Two common stock by certain officer and director defendants between June and November 2003. The Complaint alleges that these defendants sold 465,000 shares of Take Two stock at a time when they knew that the SEC would likely bring an enforcement action for Take Two's revenue overstatements in the years 2000 and 2001.
The second alleged episode of insider trading involved the sale of Take Two common stock by certain officer and director defendants between March and July 2005. The Complaint alleges that these defendants sold 573,000 shares of Take Two common stock while aware that Take Two's best selling video game, Grand Theft Auto San Andreas ("San Andreas"), contained hidden, sexually explicit content, which would negatively impact its marketability.
In order to remedy these alleged instances of insider trading, the Complaint seeks disgorgement of profits realized by the defendants through their sale of Take Two stock at inflated values.
In addition to the Derivative Insider Trading Claims, Plaintiff asserts that the defendants violated their disclosure duties by filing materially misleading proxy statements over the past several years (the "Disclosure Claims"). The crux of these claims is that certain defendants caused proxy statements to be filed in February 2003, May 2004, and May 2005, while failing to disclose material information to the shareholders. In connection with these allegedly misleading proxy statements, Take Two shareholders approved the issuance of five million additional shares for Take Two's employee stock option plans.
In order to remedy the harm caused by the proxy statements in question, Plaintiff asserts two types of claims. First, in its Derivative Section 14(a) Disclosure Claims, Plaintiff seeks an award of compensatory damages for Take Two. Second, in its Direct Common Law Disclosure Claims, Plaintiff seeks an award of damages to the class for any harm caused by the allegedly misleading proxy statements.
After this litigation was commenced, Take Two's board of directors appointed the SLC to investigate whether litigation was in Take Two's best interests. The SLC now moves the Court to stay all proceedings for a period of 150 ...