Pledging to go after companies that deceive shareholders in the course of fighting off a hostile tender offer, the Securities and Exchange Commission said Thursday that Lions Gate Entertainment had agreed to admit wrongdoing and pay a $7.5 million penalty for its actions in fending off a takeover by Carl C. Icahn.
It was the first time in nearly 30 years that the commission had filed an enforcement action under the tender offer rules against a target of a hostile takeover, said Andrew J. Ceresney, the S.E.C.’s s enforcement director.
“Lions Gate withheld material information just as its shareholders were faced with a critical decision about the future of the company,†he said.. “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.â€
While the S.E.C. case, filed as an administrative action, claimed only that inaccurate disclosures were made, Mr. Ceresney told reporters that had the tactics been known, they would have clearly violated rules of the New York Stock Exchange. As such, the proxy battle being waged by Mr. Icahn might have come out very differently.
Shareholders of Lions Gate, a motion picture company, may, however, have reason to be happy about the result. Mr. Icahn, the company’s largest shareholder, had offered to buy the company at $6 a share, but the company had frustrated that by adopting a poison pill. He then mounted a proxy battle to elect a minority slate of directors. Largely as a result of the transactions described in the S.E.C. case, he lost that proxy battle.
Lions Gate has since flourished, with successful movies and television shows. On Thursday the shares closed down more than 3 percent, at $32.20.
The tactics cited by the S.E.C. included a board meeting that began one minute after midnight on the morning of July 21, 2010, just after a standstill agreement with Mr. Icahn had expired. At the meeting, the board agreed to change the terms of some convertible bonds to make them immediately convertible at market prices rather than the premium required under the previous terms of the bonds. The holder of the bonds then sold them to Mark Rachesky, who was a director and the second-largest shareholder, who converted them immediately at a price of $6.20 a share. The board changed the rules requiring director acquisition of shares to facilitate the transaction.
The shares he received, the S.E.C. said, provided the margin that assured none of Mr. Icahn’s nominees were elected to the board.
The commission said that the company failed to disclose relevant parts of the transactions, and lied about the others, in proxy materials sent to shareholders before the shareholder vote was taken. It added that under Big Board rules, such a large sale of shares needed the approval of all shareholders, and could not have been completed prior to the vote.
At the time, the company said the bond transactions were part of a previously disclosed plan to reduce the company’s debt. But the S.E.C. said there was no such earlier announcement, and that in fact the company had planned to increase its debt.
Mr. Icahn eventually sold his shares, with the company buying some and Mr. Rachesky, who is now the chairman of the Lion Gates board, purchasing the rest.
Mr. Rachesky declined to comment, a spokeswoman said. Mr. Icahn did not immediately return a call seeking comment.
