Lionsgate Beats Shareholder Lawsuit Over Failure to Disclose SEC Probe

Investors claimed that the studio had a duty to report a federal investigation about its tactics against Carl Icahn.

Lionsgate is off the hook for not letting investors know sooner that the Securities and Exchange Commission was investigating the studio for its tactics in battling Carl Icahn.

Icahn made a takeover bid in 2010 for Lionsgate, which caused the studio behind such movies as The Hunger Games and television shows including Mad Men to issue new shares with the effect of diluting Icahn’s stake. Lionsgate was able to fend off Icahn, but in 2014, it came to a $7.5 million settlement with the SEC over some of the public disclosures related to the transactions made in the Icahn takeover fight.

The shareholder lawsuit in the subsequent months presented a federal court with an opportunity to weigh a corporation's obligations with respect to disclosing an SEC investigation and a potential settlement. In doing so, the court would have to look at omissions to see whether information was material enough to be reported. On Friday, U.S. District Judge John Koeltl in New York delivered a 56-page opinion (read here) discussing the plaintiff's various theories.

The judge writes that when Lionsgate received word of the investigation and was delivered subpoenas in 2012, there was no "obligation on a company to predict the outcome of investigations," and that "a government investigation, without more, does not trigger a generalized duty to disclose."

The shareholders pointed to other past cases to argue for the opposite proposition, but Koeltl distinguishes what happened there: Either the companies made prior disclosures about an investigation that made silence about new information misleading or the investigation itself was material.

What's material is information that "significantly alters the total mix of information" available to an investor, and while there's no hard-and-fast rule, Koeltl says the facts in this case don't meet guidance from an appeals court.

"The $7.5 million civil penalty was less than one percent of Lions Gate’s consolidated revenue of $839.9 million for the third quarter of 2014," he notes. "That percentage is much lower than the five percent numerical threshold that the Court of Appeals for the Second Circuit has determined is a 'good starting place for assessing the materiality of the alleged misstatement.' Of course, a de minimis percentage of revenue is not entirely dispositive of the materiality issue. But the plaintiffs do not explain any qualitative factors that would plausibly show materiality."

The shareholders attempted to present the $7.5 million as 10 percent of what the studio had in cash on hand at the time, and argued this could have impacted Lionsgate's financials, but the judge writes, "This is not a case where the penalty imperiled an important line of business or a significant revenue stream," and further, there's no precedent measuring materiality based on a company’s cash on hand.

Koeltl adds, "Moreover, Lions Gate disclosed the civil penalty amount as soon as it entered into the settlement and order with the SEC on March 13, 2014. The securities laws do not require a company to hypothesize the worst results of an investigation when those results do not materialize and when the company chooses not to speak about the investigation."

Lionsgate also beats the allegation that when it offered generalized notice that it was involved in “certain claims and legal proceedings,” but failed to disclose the specific SEC probe related to the Icahn matter, that this was misleading. Koeltl responds that such statement about Lionsgate's involvement in legal matters was accurate, and that there isn't much to suggest its leaders ever believed that the outcome of the Icahn probe would have a material adverse effect on its financials. The judge notes it was "an opinion that proved to be correct."

The stock price for Lionsgate dropped from about $33 to $30 in the days after the announcement of an SEC settlement. It later went as high as $41 last November. Today, the stock trades at under $28.