On March 13, 2014, the SEC charged Lions Gate Entertainment Corp. with failing to fully and accurately disclose its efforts in preventing a hostile takeover bid by shareholder Carl Icahn (SEC Release No. 34-71717, (Mar. 13, 2014)). Lions Gate agreed to admit wrongdoing and pay a $7.5 million fine to settle the charges.

Icahn and various affiliated investment vehicles initially disclosed their stake in the company in February 2009. In February 2010, Icahn announced his intention to launch a tender offer to increase his stake in Lions Gate, and amended the offer in March 2010 to acquire the entire company. After his first hostile tender offer expired, Icahn continued buying shares of Lions Gate in the open market, eventually increasing his stake to 37.9%. On July 20, 2010, Icahn launched a new hostile bid to acquire the rest of the stock of Lions Gate that he and his affiliates did not already own.

In response to the bid, the Lions Gate board of directors convened a meeting at midnight that night (just after a standstill with Icahn expired) for the purpose of approving a three-part set of transactions that would have the effect of diluting Icahn's stake. The steps were:

The "white squire" defense had the desired effect, with Rachesky acquiring an additional 9% of the outstanding stock, enough to make it impossible for Icahn to prevail in his proxy contest. However, to make the transactions possible, the board had amended its insider-trading policy to allow Rachesky to convert the notes into stock, and violated a NYSE rule that required stockholder approval for a large, direct sale of stock to a director (commonly known as a "defense recapitalization"). Following the transactions, Lions Gate stated in its press release, 8-K filing and subsequent filings that the transactions were done as part of a previously announced plan to reduce the company's debt and not as part of a prearranged plan to increase Rachesky's stock ownership. Lions Gate did not disclose its efforts to prevent a takeover bid and in fact had not made any previous announcements about a debt-reduction plan.

The SEC's order found that Lions Gate violated Section 13(a) and Section 14(d) of the Exchange Act, as well as Rules 12b-20, 13a-11 and 14d-9. The enforcement action against a target company of a hostile takeover, charging that it had violated the tender offer disclosure rules, was the first of its kind in 25 years. Lions Gate's admission of wrongdoing also deviates from recent settlements with the SEC, where companies have paid fines without admitting wrongdoing.

For more information, see the SEC's press release.

For more about "white squire" and other takeover defenses, see Practice Note, Defending Against Hostile Takeovers.

For more about the SEC rules that govern tender offer disclosures, see Practice Note, Tender Offers: Overview: Disclosure and Documentation.