Regulators said that Lionsgate failed in 2010 to properly disclose that a financing move it said would reduce debt was actually designed to help thwart activist investor Carl Icahn‘s takeover attempt. The company agreed to pay a $7.5M penalty which it says in a filing it already accounted for in Q3 as a charge to general and administrative expenses. The SEC took issue with the press release that Lionsgate sent out on July 20, 2010 that characterized a $99.7M debt to equity swap as “a key part of the Company’s previously announced plan to reduce its total debt” — without noting that by issuing new shares it would also dilute Icahn’s stock holdings to 33.5% from 37.9%. “Lionsgate withheld material information just as its shareholders were faced with a critical decision about the future of the company,” says SEC Division of Enforcement Director Andrew Ceresney. “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.”
The SEC’s order notes that Lionsgate “had never announced a plan to reduce total debt prior to issuing the press release.” What’s more, “It would have made no economic sense” for the owner of the debt to swap for stock since it “would have been considerably less expensive for the Note Holder to buy stock in the market.” Still, the company arranged an “extraordinary three-part set of transactions” — including a change to its insider trading policy — that enabled a company director friendly to management (apparently MHR Fund Management’s Mark Rachesky, now Lionsgate’s chairman) to buy the notes and convert them to stock. Directors knew the implications. Notes from their midnight meeting on July 20, after a standstill agreement with Icahn expired, showed that they “considered the dilutive effect of the transaction” on Icahn. That would be deemed a “defensive recapitalization” and, the SEC says, “would have required prior approval from the Company’s shareholders under a [New York Stock Exchange] rule.” The SEC says that Lionsgate held that the note sale to what the agency describes as a “Friendly Director” was “not a related party transaction and, thus, did not require shareholder approval.” Icahn ended his effort to buy Lionsgate in mid-2011 after several setbacks.