Lions Gate Entertainment Corp. (USA) (NYSE:LGF) revealed in an SEC filing that it has admitted to disclosure violations relating to certain transactions it announced on July 20, 2010, and has agreed to pay $7.5 million in penalties.

Carl Icahn Lions Gate

Lions Gate Entertainment Corp. (USA) (NYSE:LGF) entered these transactions during its defense against activist investor Carl Icahn’s hostile bid to take over the company in 2010.

Dilution by night

According to the SEC, the company thwarted Icahn’s bid by enabling the allotment of about 16 million of new shares to a company-friendly director, since identified as current chairman Mark Rachesky, thereby diluting Icahn’s holdings.

The SEC said the mechanism was of the type commonly known as a “defensive recapitalization,” and involved a series of transactions that commenced at 12:01 AM on July 20, 2010 and were duly authorized by the Lions Gate board.

In effect, these transactions resulted in:

  • An exchange of about $100 million worth of  notes, held by investment firm Kornitzer Capital Management Inc., for new notes that could be converted to Lions Gate stock at a much more favorable rate;
  • Sale of the new notes from the Kornitzer to Rachesky; and
  • Conversion of the new notes to Lions Gate stock by Rachesky.

The transaction “would have required prior approval from the Company’s shareholders under a NYSE rule and was not practical given the time constraints the Company faced in defending against the Shareholder’s (Icahn) takeover effort,” alleges the SEC in its order.

Icahn defeated in proxy battle

As a result of the dilution, “the percentage of Lions Gate’s outstanding stock held by the Shareholder (read Icahn) decreased from 37.87 percent to 33.5 percent, while the percentage beneficially owned by the Friendly Director (read Rachesky) increased from 19.99 percent to 28.9 percent,” says the SEC in its administrative order.

As a result, the slate of directors proposed by Icahn was rejected by shareholders at their meeting on December 14, 2010.

“The margin of defeat for one of the five directors proposed by the Shareholder (Icahn) (who, if elected, would have occupied one of the Company’s twelve board seats) was approximately 16 million shares—the same number of shares the Friendly Director (Rachesky) obtained as a result of the July 20 Transactions,” claims the SEC.

Violations

According to the SEC, Lions Gate Entertainment Corp. (USA) (NYSE:LGF) was guilty of the following:

  • Its July 20, 2010 filing in form 8K omitted material information regarding the transactions;
  • Lions Gate Failed to disclose material Information about the July 20 Transactions in its Schedule 14D-9, dated August 2, 2010;
  • Lions Gate omitted material information about the July 20 transactions in its third amended Schedule 14D-9;
  • The July 20 Transactions effectively blocked The Shareholder’s (Icahn) attempt to take control of Lions Gate, and that as a result of the conduct described above, Lions Gate violated Sections 13(a) and 14(d) of the Exchange Act and Rules 12b-20, 13a-11, and 14d-9 thereunder.

Effect of the penalty on Lions Gate earnings

Lions Gate Entertainment Corp. (USA) (NYSE:LGF) said it booked the $7.5 million penalty as a charge in the third quarter of 2014.

What Icahn lost

According to Bloomberg, Icahn sold his Lions Gate holding of 44 million shares in 2011 at $7 per share. The stock closed at $31.97 Friday.

SEC on watch regarding tender offers

Andrew Ceresney, SEC enforcement director, said the action against Lions Gate Entertainment Corp. (USA) (NYSE:LGF) was the first of its kind against a hostile takeover target in 30 years. “Given the resurgence of (merger and acquisition) activity in the market and the vital importance of disclosure obligations during a tender offer battle, we want to emphasize that the Enforcement Division intends to vigilantly police misconduct that can occur during a tender offer battle,” Ceresney said in a conference call.