Carl Icahn plans to sue Lions Gate Entertainment over note exchange

Carl Icahn has relaunched a hostile bid for the Hollywood studio, known for film and television hits like 'Precious' and 'Mad Men.'

Clint Spaulding/ Press/Newscom
Carl Icahn at the 2010 New York City Police Foundation 32nd Annual Gala held at the Waldorf-Astoria Hotel on March 16. Icahn is looking to take over Lions Gate Entertainment.

Billionaire Carl Icahn on Monday accused Lions Gate Entertainment Corp of using "scorched-earth" tactics to thwart his bid to take over the Hollywood studio and pledged legal action to stop it. Icahn last week relaunched a hostile bid for Lions Gate Entertainment Corp, the studio behind film and television hits like "Saw", "Precious," and "Mad Men," after a 10-day truce.

In response the company announced a debt-to-equity swap that slashed the stake that Icahn had built up over five months to about 33.5 percent from 37.9 percent.

As well as reducing Icahn's stake, the transaction could hurt his ability to revamp the board at Lions Gate. Shares of the company, based in Vancouver, have plummeted since Icahn bought into the company.

In the July 20 transaction, $105 million of Lions Gate senior subordinated notes were purchased by an investment fund affiliated with MHR Fund Management, which is controlled by Mark Rachesky, a Lions Gate director and significant shareholder.

The notes were then converted into 16,236,305 common shares, or about 11.9 percent of the company, at a price of $6.20 a share.

Shares of Lions Gate rose 2.06 percent to $6.92 in midday trading in New York.

"We view this transaction as a prime example of scorched earth tactics executed with other people's money - in this case, the money of Lions Gate shareholders - and they will be met with an equally forceful response," Icahn said in a statement.

"Mark Rachesky is a supporter of Lions Gate's board of directors and senior management. If allowed to stand, this scheme will insulate the directors and management from having to face a fair election at the upcoming annual meeting of Lions Gate's shareholders," he said.

Lions Gate and MHR declined comment on Icahn's action.

Icahn offered $6.50 each for all of the outstanding shares of Lions Gate last Tuesday. The bid came after the expiration of a ceasefire agreement between the parties to explore acquisition opportunities.

Icahn said he would file a lawsuit in New York State Supreme Court on Monday against Lions Gate, its board of directors, a wholly owned subsidiary, Mark Rachesky and his investment fund, and the fund's principal, John C. Kornitzer.

Icahn said the lawsuit will seek "a preliminary and permanent injunction rescinding the note exchange and the issuance of shares to Mr. Rachesky's fund, prohibiting the defendants from voting their shares in any election of directors or other shareholder vote, and awarding compensatory and punitive damages to the Icahn Group."

Under the terms of the note exchange, Rachesky's stake jumps to 28.9 percent of the outstanding shares of Lions Gate from 19.9 percent previously, Icahn said.

"All other Lions Gate shareholders were significantly diluted as a result of this transaction," he said.

Icahn, one of the world's most famous corporate raiders, started his bid to raise his Lions Gate stake in February, when he owned 18.9 percent of the company.

The investor and his affiliates want to change the make-up of the board of directors at Lions Gate, which they accuse of poor cost control and mismanagement of the company.

He has held Lions Gate shares since 2006 and is frustrated by the stock's lackluster performance. The shares have fallen from a high of $12 in 2007.


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