Judge's ruling hampers investor's effort to seat dissidents

A New York judge has handed Carl Icahn a setback in his effort to place his five dissident nominees on the Lionsgate board next week.

In a ruling issued Thursday, Judge James A. Yates denied Icahn’s request for a preliminary injunction that would have prevented Lionsgate director Mark Rachesky from voting his shares at next week’s annual meeting. Rachesky’s stake was boosted in July from 19% to 29% while Icahn’s was diluted to 33% from 38% as a result of Lionsgate’s $100 million debt-for-equity swap.

The ruling makes it considerably more difficult for one of Icahn’s nominees to be elected when Lionsgate holds its annual meeting Tuesday in Los Angeles.

Icahn sued Lions-gate in New York State Supreme Court to rescind the Rachesky deal. He lost a similar suit last month in British Columbia, where Lionsgate is headquartered.

“The Icahn Group has not made an actual showing that it would irreparably and inequitably harmed by the denial of the preliminary injunction,” Yates wrote. “Control of company shares is a ‘moving target.’ A variety of tender offers have been made and, at this point in time, almost one-third of the shares are uncommitted. The balance of power in this and future proxy fights rests with the uncommitted votes.”

Icahn also had a $7.50 per share tender offer to acquire more Lionsgate stock that expires today — but the ruling appears to render it moot because it was conditioned on his prevailing in the New York case.

Icahn had previously planned to employ the proxy battle to take over Lionsgate but opted instead to run only five candidates.

Earlier Thursday, Icahn won a partial victory in his battle for control of the Lionsgate board as Institutional Shareholder Services backed three of his five nominees. ISS, viewed as the most influential proxy advisory firm, issued the recommendation five days before Lionsgate holds its annual meeting to elect a 12-member board.

ISS endorsed three Icahn nominees: producer Jay Firestone, former BMG exec Michael Dornemann and Icahn Enterprises president Daniel Ninivaggi. ISS did not recommend two Icahn nominees — former Overture and MGM exec Chris McGurk and former Princeton U. president Harold Shapiro.

Lionsgate called the ISS recommendation “disappointing” and noted the Glass Lewis advisory firm has endorsed its full 12-member slate.

Icahn said in an announcement ISS had slammed July’s $100 million debt for equity swap that cut Icahn’s stake from 38% to 33%.

“The board has demonstrated a disturbing concern with gaining tactical advantage over one large dissident shareholder, yet in the process demonstrated little regard for the collateral damage — particularly from heavily dilutive insider transactions in July — to other, unaffiliated shareholders,” it said.

“The company’s performance over the past five years underscores doubts about its pace toward profitability and its execution, if not quite the strategic vision itself,” ISS added. “Combined with the poor comparative shareholder returns over the past five years — meaningfully worse than peers even despite the significant uplift provided by the Icahn tender offers — we believe the dissidents have met the burden of proving some change is necessary.”

Icahn said he was “gratified” by the ISS announcement. “It is our belief that the company and our investment will continue to deteriorate if Lionsgate continues on its current path.”

ISS rejected two of the 12 Lionsgate nominees — Arthur Evrensel and Daryl Simm. It noted both had served on the compensation committee and criticized the severance package worked out for Lionsgate chief exec Jon Feltheimer.

ISS explained its decision not to endorse all five Icahn nominees by saying, “The dissident has not demonstrated a case so compelling that justifies supporting a near-control slate particularly as the dissident also has a hostile tender offer outstanding which most shareholders have found too low.”

Icahn’s extended his hostile tender offer of $7.50 a share five times.

The Glass Lewis report was critical of Icahn and the “substantial absence” of a specific plan for Lionsgate other than Icahn’s desire to merge Lionsgate with MGM.

“We see no disclosure that suggests that the dissident nominees have a framework around which to build an improved Lionsgate,” Glass Lewis said. “To the contrary, the only plan that may reasonably be implied by available disclosure is the potential combination of the company and MGM, a notion buttressed by the dissident’s substantial debtholding in MGM, his staunch opposition to MGM’s combination with Spyglass Entertainment and his nomination of Christopher McGurk, a former vice chairman of MGM, to the Lionsgate board. In our view, these circumstances raise, at a minimum, concerns about conflicts of interest and the ultimate intentions of the dissident.”

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