Lionsgate has agreed to pay $7.5 million and admit wrongdoing to settle Securities and Exchange Commission claims that the studio failed to disclose all information about its 2010 efforts to block a hostile takeover by Carl Icahn.
“Lionsgate withheld material information just as its shareholders were faced with a critical decision about the future of the company,” said Andrew Ceresney, director of the SEC’s enforcement division. “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.”
Ceresney also said it was the first time in nearly three decades that the SEC had filed an enforcement action against a target of a hostile takeover under its tender offer rules.
The SEC said Thursday that Lionsgate management engaged in transactions that allowed board member Mark Rachesky, via his MHR Fund Management, to boost his stake through newly issued company shares — effectively blocking Icahn’s takeover bid.
The SEC took issue with the fact that Lionsgate did not disclose that the $100 million debt-to-equity swap reduced Icahn’s stake to 33.5% from 37.3%. Icahn filed suit but settled in August 2011 as part of cashing out his stake for $7 a share, or $310 million.
Rachesky, a one-time protege of Icahn, bought the converted shares from the company and saw his stake grow to 29% from 19.9%.
The SEC noted that Lionsgate had never announced a plan to reduce total debt prior to issuing the 2010 press release and noted that it would have been “considerably less expensive” for Rachesky to buy stock in the market at that point.
The SEC also said Lionsgate management knew that a large, direct sale of stock from the company to Rachesky would have required prior approval from its shareholders under an NYSE rule. After the transactions, the exchange contacted the studio to inquire whether the transactions violated that rule; the studio responded by asserting that the note exchange was not part of a prearranged plan to boost Rachesky’s stake.
“Lionsgate 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,” the SEC said.
The SEC’s order found Lionsgate violated two sections and three rules and required Lionsgate to “cease and desist” from future violations.
Lionsgate had no immediate comment. The studio accounted for the $7.5 million payment to the SEC in its already-reported earnings for its third quarter ended Dec. 31.
Lionsgate stock began moving upward once the studio cashed out Icahn at $7 a share and began soaring in early 2012 in the wake of buying Summit Entertainment and releasing “The Hunger Games.”
Shares of Lionsgate declined $1.06 to $32.20 in trading Thursday on the New York Stock Exchange.