Regulation of Activist Investors in the Gaming Industry

Recent purchases of significant blocks of shares of publicly traded corporations in the gaming industry have raised issues for the companies involved and gaming regulators around the globe.1

In the United States, publicly traded corporations were effectively prohibited from participating in the gaming industry until 1969 when Nevada adopted its Corporate Gaming Act.2 After that time, the gaming industry opened to the public capital markets, resulting in billions of dollars of investment in public gaming companies and fueling the expansion of gaming across the country.

The recognition by state legislatures and gaming regulators that publicly traded companies should enjoy full participation in the gaming industry was the culmination of balancing the need for strict regulation of gaming with access to capital from sources that were otherwise not available to the gaming industry. As gaming expanded across the United States, other states built into their gaming statutes specific regulatory schemes for publicly traded corporations.

Typically under modern gaming laws, a publicly traded corporation (or a PTC) is a corporation that has one or more classes of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, or is an issuer of securities subject to Section 15(d) of the Securities Exchange Act.3 PTCs are typically holding companies registered as publicly traded corporations with the gaming regulators in each state in which the PTCs operate through one or more licensed subsidiaries owned by the parent corporation. Rarely are PTCs licensed themselves, although a few companies over the years have received waivers from such requirements and become licensed.

Registered PTCs must comply with certain gaming regulatory requirements, as must the shareholders of a PTC. Under federal securities laws, shareholders must make certain filings with the Securities and Exchange Commission (SEC) when certain ownership thresholds are achieved (e.g. more than 5 percent and/or more than 10 percent). State gaming laws usually require such shareholders and/or the PTC to provide such filings directly to the gaming regulators as well.4

Once these ownership thresholds are achieved, the gaming regulators usually make a determination as to whether a shareholder must file an application for a finding of suitability or other approval. Generally, the shareholder exceeding a 5 percent ownership threshold must file an application for a finding of suitability, and if the shareholder is an entity, officers and directors of the entity must also file applications for personal findings of suitability.

However, most state gaming laws provide that certain classes of institutional investors may own in excess of 5 percent of the voting securities of a PTC without filing applications for findings of suitability, so long as the institutional investor holds such securities for “investment purposes only”.5An institutional investor is typically not deemed to hold voting securities for investment purposes only unless the voting securities are held in the ordinary course of business as an institutional investor and not for the purpose of causing the election of a majority of the members of the board of directors; any change in the corporate charter, bylaws, management, policies or operations of the PTC or any of its gaming affiliates; or any other action that the gaming regulators find to be inconsistent with “investment purposes only.” The following activities generally are deemed to be consistent with holding voting securities for “investment purposes only”:

1. Voting on all matters voted on by the holders of such voting securities;
2. Serving as a member of any committee of creditors or security holders formed in connection with a debt restructuring;
3. Nominating any candidate for election or appointment to the board of directors in connection with a debt restructuring;
4. Accepting appointment or election as a member of the board of directors in connection with a debt restructuring and serving in that capacity until the conclusion of the member’s term;
5. Making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and
6. Such other activities as the gaming regulators may determine to be consistent with an investment intent.

Recently, several publicly traded gaming companies have had groups acquire securities of the PTCs in amounts that are less than the 5 percent thresholds that generally invoke mandatory gaming regulatory scrutiny.6 However, shareholders in several sets of circumstances have engaged in efforts that appear to be more than merely acting as passive investors. In one instance, a group of shareholders attempted to seek to have the PTC reorganize using a REIT structure. In the second example, another group of shareholders proposed a slate of nominees for the board of directors and that the company reorganize into a REIT structure. In a third, a group of shareholders criticized existing management and, in some respects, such criticism may have resulted in management offering the company for sale.

The conundrum for gaming regulators in such type scenarios is whether to mandate the filing of gaming applications by the activist investor groups. While the ownership levels in the situations enumerated above are not sufficient to require a mandatory filing under the governing statutes and regulations, the policies set forth in most institutional investor regulations are designed to limit such shareholders to activities that are general in nature and available to all shareholders. Once a shareholder crosses the line of seeking to nominate a slate of directors and formally requests management to make significant legal, financial and structural changes to the corporate organization, the regulators may no longer consider such shareholders may as “passive investors.”

However, gaming regulators also have other tools they can use. Most state gaming statutes grant to regulators broad discretion to call forward for a finding of suitability or license any person or entity it determines to have the power to exercise significant influence over a licensee’s operation of a gaming establishment.7 Under such a broad mandate, different gaming regulators may reach different conclusions about whether the activities described above constitute the exercise of significant influence.

Regardless, the PTCs, the activist shareholders seeking to participate in management and the gaming regulators have to engage in a delicate dance with each other. The gaming regulators must consider the effect of establishing precedent for involvement in the internal affairs of PTCs before calling forward any shareholder group falling below the minimum threshold of ownership of 5 percent.

1. See Elliot Associates Discloses 5% Stake in Boyd Gaming,… Pinnacle Entertainment Comments on Schedule 13d Filing from Orange Capital LLC,; Bwin Seeks Fresh Faces for Board,… Shareholder Group Seeks Changes in Casino Operator Full House Resorts, Las VegasReview-Journal, October 9, 2014.
2. Nevada Gaming Law, Third Edition, Lionel Sawyer & Collins, 2000, p. 109. The Nevada Gaming Control Act today codifies these provisions regarding publicly traded corporations at Nev. Rev. Stat. 463.635 et seq. The State of New Jersey adopted gaming statutes governing public companies in 1977. The State of Mississippi adopted the same basic Nevada statutory structure for publicly traded corporations in the Mississippi Gaming Control Act passed in 1990. See Miss. Code Ann. Section 75-76-199 et seq.
3. See Miss. Code Ann. Section 75-76-199 (j) (definition of publicly traded corporation under Mississippi gaming laws); Nev. Rev. Stat. Section 463.487 (definition of publicly traded corporation under Nevada gaming laws); New Jersey Stat. Ann. Section 5:12-39 (definition of publicly traded corporation under New Jersey gaming laws).
4. See Miss. Code Ann. Section 75-76-263 (2) and (3) (shareholder filing reports with SEC must also file same with Mississippi Gaming Commission); Nevada Gaming Control Act Section 463.643 (shareholder filing reports with SEC must also file same with Nevada Gaming Control Board).
5. Mississippi Gaming Commission Regulations Title 13, Part 2, Chapter 8, Rule 8.23 Institutional Investors (definition); Nevada Gaming Regulations Section 16.430 (definition of institutional investor). See also, New Jersey Rev. Stat. Section 5:12-27.1 (definition of institutional investor).
6. Schedule 13d filing by Elliott Associates, L.P. in connection with purchase of shares of Boyd Gaming Corporation,… Schedule 13d filing by Orange Capital, LLC in connection with purchase of shares of Pinnacle Entertainment, Inc.,….
7. Schedule 13d filing by Elliott Associates, L.P. in connection with purchase of shares of Boyd Gaming Corporation,… Schedule 13d filing by Orange Capital, LLC in connection with purchase of shares of Pinnacle Entertainment, Inc.,….

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