Lionsgate Pays $7.5 Million to Settle With SEC

The mini-studio also admitted wrongdoing for failing to tell investors about a key strategy to thwart Carl Icahn in a takeover fight.

TORONTO -- Lionsgate has agreed to pay $7.5 million to settle a case with the Securities and Exchange Commission for failing to disclose to investors a key strategy to thwart a hostile takeover bid by Carl Icahn.

The mini-studio also admitted wrongdoing to settle the SEC.

According to the SEC's settlement agreement, released Thursday, Lionsgate in 2010 put millions of newly-issued company shares "in the hands of a management-friendly director," Mark Rachesky.

The aim was to defeat a hostile tender offer by Icahn, who was locked with Lionsgate in a bitterly-fought proxy fight.

"However, 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 in its order.

"Lionsgate withheld material information just as its shareholders were faced with a critical decision about the future of the company," added Andrew J. Ceresney, director of the SEC's division of enforcement, in a statement.

A July 20, 2010, debt-for-equity transaction with major Lionsgate shareholder Rachesky eventually sank Icahn's proxy fight with the Vancouver-based mini-studio.

The transaction gave Rachesky, a management ally, a key voting block that was used to defeat Icahn at the company's December 2010 annual shareholders meeting.

"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 argued.

Despite Icahn amassing a 37 percent stake in Lionsgate after several tender offers, that bid for control of the company was rebuffed by senior management who argued it did not serve shareholder interests.

The SEC indicated Lionsgate sought a "management ally" to purchase company stock, and found one in Rachesky.

"Lionsgate went on to establish the basic framework for an extraordinary three-part set of transactions that would begin by exchanging $100 million in notes from a holder for new notes convertible to stock at a more favorable conversion rate," the SEC recounted.

"The note holder would then sell the notes to management-friendly director at a premium, and the director would then immediately convert the notes to shares," it added in its order.

Lionsgate has already accrued the $7.5 million in its recent third-quarter earnings to Dec. 31, 2013, which were released in February.