Throw Back the "Mid-Range" Ones: The Demise and Bankruptcy of Game Developer THQ, Inc.

                When individuals and particular legal entities (such as many corporations) are no longer solvent and cannot pay creditors, they may seek to shield themselves and their investors from legal action through reorganization under Title 11 Bankruptcy proceedings. But what happens when a media publishing company, whose assets and wealth are largely in its ownership of intellectual property, enters into bankruptcy? This question can be illustrated and answered by the events of the 2013 dissolution of Toy Head Quarters, otherwise known as THQ, Inc., a mid-range videogame publisher.
                Founded in 1989, THQ was a videogame publishing company which ultimately developed a diverse asset portfolio. The company oversaw numerous subsidiary studios and their respective intellectual properties. They were also known for creating a large variety of licensed videogame projects based on established brands, those based on game shows Jeopardy, and Wheel of Fortune, the quiz game You Don't Know Jack, and even the Nickelodeon children's show Spongebob Squarepants. The company even created an ill-fated action game based on rapper 50 Cent titled Blood in the Sand. However, in 2012 the company began to see tough times. An unreleased massively multiplayer online game which had been in development for quite some time was ultimately canned, costing the company a sizeable investment upon which THQ would see no financial return. Further, its licensed-games divisions were known for creating games based on popular brands which were largely and regularly panned by critics and audiences, alike. With missed shipping dates and sales targets, THQ needed a "silver bullet." This hope was embodied by the massive investment placed in the development of the UDraw Tablet, a peripheral controller device designed for the Nintendo Wii (and later, the XBox360 and Playstation 3). The UDraw Tablet featured a digital touch pad and stylus which allowed for player input via drawing on the tablet. Though well-received on the Wii console, the UDraw Tablet failed to meet sales targets after it launched on XBox360 and Playstation 3 due to low consumer interest, which ultimately trigged several lawsuits against the company for allegedly misleading investors as to its low performance in the marketplace.
                In November 2012, THQ's stock price dropped 50%. The company was in dire straits. Although it retained a sizeable catalogue of well-received games such as Darksiders I and II, Company of Heroes, Metro 2033, and Saints Row the Third, the company just could not perform well enough in the market to keep its head above water. This issue was further exacerbated by the UDraw Tablet's commercial flop in 2012. With several core titles still in development (including a South Park-based role playing game, South Park: The Stick of Truth, which featured creative direction and assets directly from the creators of South Park, Trey Stone and Matt Parker), THQ simply needed to stay afloat while they revamped the focus of the company away from low-quality licensed games toward highly-polished games which appealed to the "hardcore" gaming crowd.
                Unfortunately, this dream was not to be realized. In December 2012, THQ voluntarily filed for Title 11 Bankruptcy protection in order to enter into purchasing agreement with Clearlake Capitol Group. This announcement came as a shock to many. Though it was known that the publisher was suffering some hardships, it was not readily apparent how far the damage reached within the company. As Crytek GmbH's general manager of the games division stated on the matter, "their games were really improving and there was some really top stuff within the portfolio. They had really slimmed down the portfolio. It just felt they couldn’t get through it in time. . . [It's] a little sad they couldn’t finish what they were trying to do.” Stone and Parker lamented that even they were left in the dark by the publisher as they only found out about the bankruptcy filing through THQ's December 19, 2012 public press-release announcement. The purchase was to garner $60 million in order to meet demands of the many creditors knocking on THQ's door. By raising the capitol and reorganizing the company THQ hoped it could maintain development costs for its many in-development titles in order to hopefully  "turn the ship around" and execute its new market strategy.
                In Title 11 Bankruptcy proceedings, the court can find as deemed "necessary and appropriate to enforce or implement courts order or rules." 11 U.S.C. § 105. On January 2, 2013, the U.S. Trustee overseeing the Title 11 proceedings filed an objection to the whole-sale acquisition of THQ by Clearwater, citing that the 30-day timeframe provided by the agreement was not enough for other interested parties to investigate and pursue alternative offers. By allowing more time, it was hoped that THQ would be able to garner more money for its creditors prior to Title 11 shielding the company from further liability pursuant to 11 U.S.C. § 362. The judge in charge of proceedings granted the motion: THQ was to put its individual assets up for auction on January 22, 2013. If the auction raised more than the $60 million offered by Clearlake, then the court would approve the transfer of the assets over the proposed sale to Clearlake.
                 At this point, Clearlake became what is known as a "stalking horse" bidder, an entity making a bid prior to the occurrence of an auction, thus "effectively [placing] a floor underneath a proposed asset sale."As such, a "stalking horse agreement" is the agreement which is held aside until the end and approval of the auction. Clearlake was still "in the game," so to say, so long as the auction failed to surpass the $60 million threshold. Again, this is all in the pursuit of covering the creditors of the Title 11 debtor (in this case, THQ) as much as possible prior to the court shielding that debtor from further action.
                But what high-value assets does a videogame production company have to sell? The simple answer is intellectual property. Intellectual property is defined as "original works of authorship fixed in a tangible medium of expression" including (but certainly not limited to) "motion pictures and other audiovisual works." 17 U.S.C. § 102(a)(6). In the case of a parent corporation such as THQ, this includes the copyrights to the original works of its subsidiary developers, licenses for out-of-house intellectual property, and the development documents and assets which accompany the properties. This is possible due to the transferability of intellectual property.  Although it exists as an intangible asset, intellectual property is conceptually similar to real property in how it is treated legally; it "may be transferred, assigned, and bequeathed via will." 17 U.S.C. § 201(d)(1). As stated by gaming blog Joystiq, "[What was] once expected to be the intimate dinner for two that executives of the bankrupt publisher were hoping for, is turning into a Vegas buffet."
                In such a virulent and highly-competitive industry, it is unsurprising that an auction for well-reviewed intellectual properties and well-proven game studios raised more money than a reorganization buyout. By the time  the dust settle on January 22, the auction had raised $72 million, far outpacing Clearlake's offer, thus nullifying the "stalking horse agreement." The results of the auction are as follows:

                Interestingly, the court documents detailing the auction proceedings came with a series of assurances regarding the property prior to transfer (on pages 10, 11 of court document linked above). One of these was "As Is, Where Is," which essentially states that the "sale of assets" through auction would be without any warranties or representations, "except to the extent set forth in the 'Stalking Horse Agreement.'" This assurance would shield any of the involved parties from legal arguments based on supposed warranties or representations regarding the purchased assets. Another assurance contained within the court documents was for the property transfer to occur "Free of Any and All Encumbrances." This is a warranty which assures the clear passage of title to the property being conveyed, including liens, security interests, encumbrances, claims, charges, and options, thus promising full and clear title to the property in question. The encumbrances discussed were assigned to attach to the proceeds from the auction, pursuant to 11 U.S.C. § 363.
                On January 24, 2013 it was announced THQ would also be auctioning its back catalogue of games and intellectual properties in a separate auction. This auction occurred in April 2013, and featured three buyers: Gearbox Software LLC, Nordic Games GmbH, and 505 Games, Srl. The results of the purchases may be found here. Although this auction raised considerably less money (in the realm of $6.55 million), it still served to further bolster the funds to be allocated to THQ's creditors.
                On September 16, 2013 the proceedings were officially approved and closed. THQ is now yet another defunct company which failed to keep its head above the turbulent waters of the consumer marketplace. This interesting and high-profile case of the crumbling of a media corporation illustrates the many interesting issues which lurk beyond the shelves in our local game, music, and movie stores. Beyond the screen of your favorite game or film is a company which faces very real and very complex legal and business issues. A slew of ill-timed or simply ill-fated financial decisions can topple even a multi-million dollar, multi-national corporation, resulting in wide-reaching consequences for not only those involved in the business, but also some of our favorite pastimes and hobbies.
                As for what became of the properties acquired through auction, some are on the back-burner at their respective new homes, while others are being evaluated and reorganized into the new owners' business models. Others have been completed and will reach market quite soon, as is the case with South Park: The Stick of Truth (age-restricted video; may not be suitable for all audiences), which is being released by Ubisoft on December 10, 2013. Unfortunately, this was not soon enough for THQ, Inc., a company and brand which is now consigned to an existence as a footnote in the annals of videogame history.

By Tom Brodbeck