Movie studio Lions Gate Entertainment has agreed to pay a $7.5 million fine to settle charges by the Securities and Exchange Commission that it failed to fully and accurately disclose to investors a key aspect of its effort to thwart a hostile takeover bid by activist investor Carl Icahn. As part of the settlement, the company agreed to admit wrongdoing.

According to the SEC, Lions Gate's management participated in a set of “extraordinary corporate transactions” in 2010—authorized during a midnight meeting of directors—that put millions of newly issued company shares in the hands of a management-friendly director. The maneuver was intended to defeat Icahn's hostile tender offer.

Lions Gate, however, failed to reveal that the move was part of a defensive strategy to solidify incumbent management's control, instead stating in SEC filings that the transactions were part of a previously announced plan to reduce debt. It also represented that the transactions were not “prearranged” with the management-friendly director, and failed to disclose the extent to which it planned and enabled the transactions with the expectation that the director would get the shares.

“Lions Gate withheld material information just as its shareholders were faced with a critical decision about the future of the company,” Andrew Ceresney, director of the SEC's Division of Enforcement, said in a statement. “Full and fair disclosure is crucial in tender offers given that shareholders rely heavily on corporate insiders to make informed decisions, especially in the midst of tender offer battles.”

According to the SEC's order, the large shareholder had made several tender offers and acquired more than 37 percent of Lions Gate's outstanding stock.  In response, the company engaged in an active campaign to discourage shareholders from tendering their stock to the shareholder, and sought a management ally to purchase available shares. Lions Gate went on to establish the basic framework for a three-staged set of transactions that began by exchanging $100 million in notes from a holder for new notes convertible to stock at a more favorable conversion rate. The note holder would then sell the notes to the management-friendly director at a premium, and the director would then immediately convert the notes to shares.

According to the SEC, the Lions Gate board of directors approved the transactions at a midnight board meeting on July 20, 2010. Completed in hours, these transactions allowed the friendly director to obtain control of approximately 9 percent of the company's outstanding stock, effectively blocking the takeover bid. Against this backdrop, Lions Gate failed to meet its disclosure obligations, the SEC charged. In a press release and 8-K filing it claimed that the transactions were done to reduce the company's debt, and failed to disclose the effort to foil the takeover bid. 

Management also knew that a large, direct sale of stock from the company to the friendly director would have required prior approval from its shareholders under a New York Stock Exchange rule and failed to do so, the SEC says. In response to an NYSE inquiry following the transactions, Lions Gate said it would disclose additional information. However, in the company's subsequent tender offer filings made to the SEC in September, it represented that the note exchange was not part of a prearranged plan to get shares to the management-friendly director.

Among the admissions made by Lions Gate as part of the settlement were that it also approved the friendly director's last-minute request to change the conversion price; and allowed the friendly director to review the new note terms, term sheet, and exchange agreement before they were provided to the note holder.

Topics