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Carl Icahn threatens legal action against Lions Gate

July 21, 2010 |  3:39 pm

Carl Icahn is threatening to sue Lions Gate Entertainment one day after the company made a defensive move that endangers the investor's long-running crusade to take over the film and television studio.

On Tuesday, Lions Gate issued new shares to its second-largest shareholder, Mark Rachesky, increasing his holdings to just under 29% from 20% as part of a complex debt-for-equity swap. The action diluted the equity of all shareholders, including Icahn, whose stake fell to just over 33% from nearly 38%.

Icahn contends the stock deal violates an agreement he and Lions Gate made for a 10-day truce that ended at midnight Monday. Although Lions Gate announced the stock deal on Tuesday, after the expiration of the agreement, Icahn and his lawyers said they are going to look at whether the company had agreed to the debt-for-equity swap with Rachesky during the detente. 

In a July 9 letter to Icahn outlining the truce, Lions Gate Vice Chairman Michael Burns said that during the 10-day period, his studio would not "issue, agree to issue or authorize or propose the issuance of any securities to ... any member of its board of directors or their affiliates." Rachesky, a former employee of Icahn's, is on Lions Gate's board.

"Not only has Lions Gate's board diluted the company's shareholders in an attempt to entrench themselves, but it has violated the agreement it made with us, which among other things prohibited Lions Gate from issuing stock during this period," said Icahn. "We intend to litigate."

A Lions Gate spokesman declined to comment.

Icahn said he also intends to litigate against Lions Gate's recently adopted "poison pill," which would make it difficult for him to accumulate more shares. The investor successfully persuaded regulators in Canada, where the company is legally based, to throw out a previous poison pill.

"We are going to challenge the poison pill again and go to court to try to get it removed," said Icahn.

On Tuesday, after the 10-day truce with Lions Gate elapsed, Icahn launched a new tender offer at $6.50 per share, 50 cents less than his previous bid to buy up the company's outstanding shares.

In an attempt to fend off Icahn's hostile takeover try, Lions Gate announced Tuesday that it had converted $100 million of its debt to equity at a price of $6.20 a share. Later  that day, Rachesky, who has been supportive of management in its battle against Icahn, disclosed in a filing that one of his investment funds had received the stock in exchange for the debt it had acquired from Kornitzer Capital Management. 

The transaction makes it more difficult for Icahn to win the majority of Lions Gate's outstanding stock or win the proxy war he is threatening to replace the company's top management and board directors.

It now appears that in order to take over Lions Gate, Icahn is banking on the courts to rule in his favor and void the deal with Rachesky.

Lions Gate stock closed down slightly Wednesday at $6.50.

-- Claudia Eller and Ben Fritz

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