On March 13, 2014, the U.S. Securities and Exchange Commission announced that it had reached a settlement agreement with Lions Gate Entertainment Corp. that will see Lions Gate admit wrongdoing in connection with the issuance of misleading disclosure in 2010, as well as pay a $7.5 million fine. The disclosure at issue was made in connection with Lions Gate’s defense against activist investor Carl Icahn’s 2010 hostile efforts to gain control of the company via a series of takeover bids and a proxy contest.

Background

According to the SEC’s order instituting settled administrative proceedings, Lions Gate admitted to omitting material information in its public disclosure relating to an extraordinary set of transactions that resulted in Lions Gate issuing approximately 16 million Lions Gate shares to a management-friendly director. Lions Gate admitted that the transactions were designed and carried out by management to dilute entities controlled by Carl Icahn (Icahn Group), who had previously launched a campaign to gain control of Lions Gate via a series of tender offers and was expected to launch a proxy contest. The transactions diluted the Icahn Group’s interest in outstanding Lions Gate shares from 37.9% to 33.5% and increased the management-friendly director’s interest from 19.9% to 28.9%. Additionally, at the Lions Gate shareholders meeting, shareholders elected management’s slate of directors and rejected the Icahn Group’s slate. The margin of defeat for one of the five Icahn Group nominees was approximately 16 million Lions Gate shares.

The transactions included: (i) the exchange of convertible notes with an aggregate principal amount of approximately $100 million for new convertible notes on substantially the same terms except with more favourable conversion terms; (ii) the prearranged sale of the new notes from the note holder to a management-friendly director; and (iii) the immediate conversion of all of the new notes into approximately 16 million Lions Gates shares at a discount to the then market price.

In November 2010, the British Columbia Supreme Court surprisingly ruled that the transactions were not oppressive or unfairly prejudicial to Lions Gate shareholders under applicable corporate law. Query, however, given the admission of wrongdoing, what approach Canadian securities regulators or the New York Stock Exchange might take.

Disclosure

On July 20, 2010, Lions Gate announced the transactions in a press release that stated that the transactions were “a key part of [Lions Gate’s] previously announced plan to reduce its total debt, as well as its nearer term maturities,” despite the fact that Lions Gate regularly disclosed that it intended to take on more debt. In addition, the press release did not disclose that: (i) Lions Gate management hoped and expected the transactions to effectively block the Icahn Group’s tender offer and that management viewed that as a desirable benefit of the transactions; (ii) an investment partnership managed by the management-friendly director purchased and converted the new notes; (iii) Lions Gate changed its insider trading policy to allow the management-friendly director to convert the new notes; and (iv) Lions Gate lowered the proposed conversion price of the new notes even further following discussions with the management-friendly director. Moreover, in its subsequent tender offer-related filings made to the SEC, the company represented that the transactions were not part of a prearranged plan to get Lions Gate shares to the management-friendly director.

In the opinion of the SEC, Lions Gate’s disclosure amounted to materially false and misleading disclosure.

It is worth noting, however, that Lions Gate’s shares have risen from the $6.00 – 7.00 trading range in 2010 to a $30.00 - $35.00 range today. This suggests that, notwithstanding the $7.5 million penalty to the SEC, Lions Gate shareholders have benefited over the four years following the Icahn Group’s failed efforts to gain control of the company.

Application

Given that hostile takeover bids and proxy contests are often significantly influenced by investor relations campaigns, the SEC’s four year pursuit of Lions Gate has a broader importance. Specifically, the SEC’s actions appear to demonstrate an increasing focus on reviewing and policing contested transactions from a disclosure perspective. Given past practice, it should be expected that Canadian securities regulators will follow the SEC’s lead and actively investigate aggressive disclosure made in connection with contested transactions. Additionally, the settlement may provide a new outlet for aggrieved parties dissatisfied with Canadian court decisions.

Moving forward, advisors involved on either side of a contested transaction should consider carefully reviewing their client’s public disclosure from both an effective “messaging” perspective and from a full disclosure perspective.