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Key Wall Street advisory firm endorses three Icahn picks for Lions Gate board [Updated]

December 9, 2010 |  8:00 am

In an important victory for Carl Icahn, Wall Street's most influential advisory firm on proxy votes has endorsed three of the dissident shareholder's five nominees for Lions Gate Entertainment's 12-person board of directors.

The recommendation was made Thursday by Institutional Shareholder Services, a firm utilized by many large investment funds to guide their votes in proxy battles for which they don't have the resources to closely analyze evidence themselves.

Shareholder votes will be tallied at Lions Gate's annual shareholders meeting Tuesday.

ISS endorsed Icahn nominees Jay Firestone, a Canadian film producer; Michael Dornemann, a former chief executive of music and television company BMG Entertainment; and Daniel Ninivaggi, the president of the investor's firm. It specifically rejected two Lions Gate nominees -- Arthur Everensel, a partner at the company's legal counsel, and Daryl Simm, chief executive of advertising firm Omnicom Media Group. In recommending votes against them, ISS noted that that the duo served on the Lions Gate board's compensation committee and criticized the severance package they had passed for chief executive Jon Feltheimer.

Notably, ISS did not recommend Icahn's only nominee with movie experience in Hollywood, former Overture Films and Metro-Goldwyn-Mayer executive Chris McGurk, or his other pick, former Princeton University president Harold Shapiro. In addition, it endorsed the company's vice chairman Michael Burns, the most prominent Lions Gate board member, whom Icahn is trying to replace.

In making its recommendation, ISS criticized Lions Gate's financial performance and some of the actions it has taken to block Icahn's takeover efforts in the past year.

"The company's performance over the past five years underscores doubts about its pace toward profitability and its execution, if not quite the strategic vision itself," ISS wrote in its report, particularly noting "poor shareholder returns" in Lions Gate's declining stock price over the last five years.

ISS also criticized what it called a "disturbing pattern of the board's actions to gain a tactical advantage against Icahn," specifically the controversial debt-for-equity swap it enacted this summer that diluted Icahn's stake and increased that of Lions Gate's second largest shareholder, Mark Rachesky, who supports current management and the board.

"The board has demonstrated a disturbing concern with gaining tactical advantage over one large dissident shareholder, yet in the process demonstrated little regard for the collateral damage -– particularly from heavily dilutive insider transactions in July -– to other, unaffiliated shareholders," the ISS report stated.

It then added in a rare note of wit amid a dry analysis: "In the course of the past 10 months this board may have achieved what no other board has managed in at least four decades: make Carl Icahn look like a victim."

But while ISS criticized Lions Gate's current board, it was cautious in its endorsement of Icahn, as evidenced by the fact that it didn't recommend two of his five nominees: "The dissident has not demonstrated a case so compelling," the report said, "that justifies supporting a near-control slate (five of twelve directors), particularly as the dissident also has a hostile tender offer outstanding which most shareholders have found too low."

Icahn has made a tender offer to buy all outstanding shares of the company for $7.50, barely above its most recent trading price of $7.35. He currently owns 32.8% of its stock.

In a statement, Lions Gate described the ISS recommendation as "disappointing" and noted that a smaller advisory firm, Glass Lewis, had recommended the company's entire 12-person slate. A spokesman for Icahn pointed out that another, less influential advisory firm, Egan-Jones, endorsed all five of the billionaire corporate raider's board picks.

[Update, 8:10 a.m.: In his own statement, Icahn said, "We are gratified that ISS shares our belief that change is needed at Lions Gate both operationally and at the board level."]

While the ISS recommendations have been considered crucial by both Lions Gate and Icahn, the most important event before Tuesday's annual meeting will be the verdict in a court case in New York, where Icahn has asked a judge to block Rachesky from voting the new shares he received in the debt-for-equity swap. Icahn admitted in an interview that if he loses the case, it will be nearly impossible for him to gather enough votes to put his nominees on the board.

A verdict in the case is expected by Monday.

-- Ben Fritz


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