Lions Gate Conspired to Thwart Hostile Bid, Icahn Tells Court

Carl Icahn, the billionaire investor attempting to take control of Lions Gate Entertainment Corp., told a Canadian court that the independent film studio conspired with several large shareholders to thwart his bid.

Lions Gate Vice Chairman Michael Burns worked with investors Mark Rachesky and Kornitzer Capital Management Inc. to dilute Icahn’s stake in a July transaction, his lawyers argued in filings to the British Columbia Supreme Court ahead of an Oct. 12 hearing, citing e-mails from Burns. His argument ignores much of the evidence, Lions Gate said in its filings.

“The purpose of the scheme devised by Burns and Rachesky, if it came to fruition as it did, was to significantly dilute the shareholding interest of Mr. Icahn,” according to the filing. The aim was “to eliminate any realistic ability to achieve his stated goal to win a forthcoming proxy contest to replace the Lions Gate board.”

Icahn is trying to reverse a debt-for-equity swap that hinders his hostile bid for the studio by putting more shares in the hands of opponents. Icahn, 74, contends in documents filed with the court that Lions Gate executives and investors executed the deal at a price below what Icahn was offering at the time.

Icahn’s argument ignores the bulk of the evidence and the transactions’ beneficial effects for the company, Lions Gate said in its own filings. Moody’s cited the deal in raising its outlook on the Vancouver-based company’s debt to positive.

Stake Increased

Rachesky, 51, increased his stake when one of his funds bought $100 million of convertible notes from Kornitzer Capital Management, then exchanged debt for stock. The swap boosted his stake to 28.9 percent, the second largest after Icahn’s 33 percent.

Icahn is offering $7.50 a share for Lions Gate stock he doesn’t own. He was offering $7 when his stake was diluted. The increased tender, made on Aug. 31, is scheduled to run through Oct. 22.

Icahn inferred in a statement at the time that Rachesky paid $6.20 a share in the swap.

“Given its recent decision to issue shares to an insider at $6.20 per share without conducting a market check, we would normally expect that the board must recommend that shareholders accept our offer of $7.50 per share,” Icahn said in the Aug. 31 statement.

Kornitzer, who didn’t own the debt personally, said in an interview that selling it was in the best interest of his clients.

“It had nothing to do with Mr. Icahn,” Kornitzer said. “I made my clients money and I got out.”

E-Mails Questioned

Rachesky didn’t return a phone call seeking comment.

Lions Gate, run from Santa Monica, California, rose 13 cents, or 1.8 percent, to $7.46 in New York Stock Exchange composite trading yesterday. The shares have gained 28 percent this year.

The transactions were expedited and approved by the board in a July 20 meeting after Lions Gate amended insider trading policies and its code of ethics, Icahn says in the court filing. He cites so-called “PIN” messages between Burns and Rachesky.

“Burns and Rachesky plotted throughout the month of July 2010 using surreptitious ‘PIN’ messages that would not show up in their e-mail boxes,” Icahn said.

The e-mails are irrelevant to the board’s decision, Lions Gate said in its filings to the court. Icahn’s filings ignore the bulk of the evidence, the company said.

“Icahn rests his argument nearly entirely on a selection of PIN messages and e-mails, almost exclusively between Michael Burns and Mark Rachesky,” Lions Gate said. “They show only one only very thin slice of the facts.

The e-mails “are simply irrelevant to the purpose of the board in considering and approving the note exchange, and to the beneficial corporate effect that the July 20 transactions were desired to and did have,” Lions Gate said.

Lions Gate spokesman Peter Wilkes said the studio had no comment beyond the documents.

The court has scheduled three days of hearings starting on Oct. 12.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE