Professional Documents
Culture Documents
651076/2010
NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 07/26/2010
YOU ARE HEREBY SUMMONED to answer the complaint of Plaintiffs Carl C. Icahn,
Icahn Partners LP, Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP, Icahn
Partners Master Fund III LP, Icahn Fund S.à r.l., Daazi Holding B.V., High River Limited
Partnership, and 7508921 Canada Inc., a copy of which is herewith served upon you, and to
serve copies of your answer upon Plaintiffs’ attorneys at their address stated below.
If this summons was personally served upon you in the State of New York, your answer
must be served within twenty (20) days after such service, excluding the date of service. If this
summons was not personally delivered to you within the State of New York, your answer must
be served within thirty (30) days after service of the summons is complete as provided by law.
Arthur Evrensel
2212 Edgemont Boulevard
North Vancouver, BC V7P 2K9
Canada
Jon Feltheimer
628 N. Alta Drive
Beverly Hills, CA 90210
Morley Koffman
1660 Blanca Street
Vancouver, BC V6R 4E3
Canada
Harald Ludwig
4371 Erwin Drive
West Vancouver, BC V7H 1H7
Canada
G. Scott Paterson
Address Unknown
Mark H. Rachesky
834 Fifth Avenue
New York, NY 10065
Daryl Simm
10 Salem Drive
Scarsdale, NY 10583
Hardwick Simmons
83 Hammetts Cove Road
Marion, MA 02738
Brian V. Tobin
6029 Rideau Valley Drive North
Manotick, ON K4M 1B3
Canada
Phyllis Yaffe
70 Rosehill Avenue, Apt. 208
Toronto, ON M4T 2W7
Canada
John C. Kornitzer
6045 Windsor Drive
Fairway, KS 66205
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
------------------------------------x
:
CARL C. ICAHN; ICAHN PARTNERS LP; :
ICAHN PARTNERS MASTER FUND LP; :
ICAHN PARTNERS MASTER FUND II LP; :
ICAHN PARTNERS MASTER FUND III LP; :
ICAHN FUND S.À R.L.; DAAZI HOLDING :
B.V.; HIGH RIVER LIMITED :
PARTNERSHIP; and 7508921 CANADA INC., :
:
Plaintiffs, : COMPLAINT
- against - :
:
LIONS GATE ENTERTAINMENT CORP.; :
LIONS GATE ENTERTAINMENT INC.; :
NORMAN BACAL; MICHAEL BURNS; :
ARTHUR EVRENSEL; JON FELTHEIMER; :
MORLEY KOFFMAN; HARALD LUDWIG; :
G. SCOTT PATERSON; MARK H. :
RACHESKY; DARYL SIMM; HARDWICK :
SIMMONS; BRIAN V. TOBIN; PHYLLIS :
YAFFE; MHR FUND MANAGEMENT LLC; :
MHR INSTITUTIONAL PARTNERS III LP; :
MHR INSTITUTIONAL ADVISORS II LLC; :
MHR INSTITUTIONAL ADVISORS III LLC; :
JOHN C. KORNITZER; and KORNITZER :
CAPITAL MANAGEMENT, INC., :
:
Defendants. :
:
------------------------------------x
Directors, management and their co-conspirators sought to further entrench their own positions
and to protect their personal interests in compensation and perks at the sole expense of their
company, Lions Gate Entertainment Corp. (“Lions Gate”), and its shareholders. The Sham
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direct, below-market issuance of millions of Lions Gate shares to Mark Rachesky, a member of
the Board and major shareholder supporting management, and involved breach of contract,
unlawful tortious activity, violation of stock exchange rules, and violations of law, including
federal securities laws. Defendants carried out the Sham Transaction in a desperate, last-ditch
effort to thwart the wholly proper and lawful efforts by plaintiffs Carl Icahn and his affiliates,
who together own the largest block of Lions Gate’s stock, to seek to elect their own directors to
the Board.
disinterested securities holder, to hide what it really was: the issuance at a below-market price of
a massive block of stock to a corporate insider, for purposes of diluting plaintiffs’ equity interest
and further entrenching the current Board members. The Sham Transaction is the antithesis of
responsible corporate governance; indeed, it belongs more properly in the script for a new reality
3. The Sham Transaction is not the first time Rachesky has attempted to entrench his
own position at the expense of a corporation’s welfare. In In re Loral Space & Comms. Inc.
Consol. Litig., 2008 WL 4293781 (Del. Ch. Sept. 19, 2008), the Delaware Court of Chancery
invalidated a Finance Agreement entered into between Loral and MHR Fund Management LLC,
another Rachesky-affiliated entity, because the agreement was not the product of arm’s-length
negotiations and its terms were unfair. Rachesky and other principals and affiliates of MHR
dominated the Loral board, and Chancellor Strine noted that the terms of the Finance Agreement
“gave MHR an iron grip on Loral and the ability to extract a control premium for itself in any
future Change of Control.” As an experienced and sophisticated investor who has been held to
account for similar misconduct in the past, there is no question that Rachesky acted intentionally
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here, with full knowledge of the damage that his conduct would cause both to shareholders and
4. Plaintiffs are a group of investors who together own the largest block of shares of
defendant Lions Gate, an independent film studio. But despite the fact that plaintiffs, prior to the
transactions at issue in this lawsuit, together owned approximately 37.9% of the outstanding
common stock of Lions Gate, the company refused to appoint any of plaintiffs’ nominees to its
Board of Directors.
5. Rather, the current Board, seeking to entrench itself and retain its valuable perks,
has closed ranks and closely aligned itself with Lions Gate management. Management, in turn,
has pursued a wasteful, expensive and risky business plan that has been consistently criticized by
plaintiff shareholders.
aimed at increasing their ownership share and electing one or more representatives to the Board
of Directors. The current Board and management have responded by doing everything in their
power to prevent other shareholders from accepting plaintiffs’ bids for their shares—including
enacting a series of poison pills, one of which was recently invalidated by Canadian securities
regulators as contrary to the public interest, and the other of which is in the process of being
challenged.
identify beneficial economic opportunities for the company. On July 9, 2010, plaintiffs and
Lions Gate entered into a Standstill Agreement, pursuant to which the parties agreed to jointly
discuss possible merger and acquisition opportunities over a ten-day period (the “Standstill
Period”). Lions Gate agreed that, during the Standstill Period, it would not issue, agree to issue,
3
or authorize or propose the issuance of, any securities to any member of Lions Gate’s Board of
Directors, or enter into any agreement, contract or understanding with a director outside the
ordinary course of business. It further agreed that it would not engage in active negotiations
involving the issuance or agreement to issue common stock (or convertible securities) in excess
8. In blatant disregard of their Agreement, Lions Gate, acting in concert with its
individual directors, affiliated entities and other defendants, spent the Standstill Period scheming
to insulate themselves from plaintiffs’ anticipated proxy challenge and to entrench their own
position by planning a collusive, multi-step transaction (the “Sham Transaction”) that would
ultimately result in the issuance of over 16 million new shares of common stock to Rachesky, a
9. Indeed, the discount given to Rachesky may have been even deeper since there is
reason to believe that the price of Lions Gate’s stock was manipulated downward during the
10. By agreement dated “as of” July 20, 2010, the very day after the Standstill Period
ended, defendants put their scheme into action. First, they refinanced and exchanged nearly
$100 million in notes held by defendant John C. Kornitzer, a staunch and vocal Board ally, into
new notes that were immediately convertible into Lions Gate stock at a price that was below the
then-current market price. Immediately after, Kornitzer sold the new notes to Board member
Mark H. Rachesky. Rachesky immediately exercised the notes’ conversion option and, as a
result, received over 16 million shares of new common stock at a price of $6.20 per share—
substantially below both the $8.85 value estimate the Board had announced only months before
and the $6.50 being offered for shares at the time by plaintiffs.
4
11. The effect of the Sham Transaction was to issue millions of shares of new
common stock to a Board member and the second-largest shareholder, while simultaneously
overnight, Rachesky’s equity interest in Lions Gate increased from 19.8% to 28.9%, while
plaintiffs’ combined holdings fell from 37.9% to approximately 33.5%. In other words, the
incumbent directors were more entrenched than ever, while plaintiffs’ efforts to replace the
Board with their own nominees through a proxy battle were rendered nearly impossible.
12. Defendants were fully aware of the impropriety of the Sham Transaction—a fact
borne out by their failure to disclose its most important features to either Lions Gate’s
shareholders or the public. Rather, the press release and securities filings issued by Lions Gate
in connection with the Sham Transaction contain glaring material omissions and
misrepresentations. Most dramatically, they failed even to mention that the Board approved the
transaction knowing that the more than 16 million new shares would be issued to Rachesky, one
of its own members. Rather, the deal was falsely painted as a routine “deleveraging transaction”
13. Even apart from entrenching incumbent Board members and frustrating plaintiffs’
tender offer, the Sham Transaction could have dire consequences for Lions Gate. Under New
York Stock Exchange rules, a company must obtain shareholder approval before it issues more
than 1% of common stock to a director. If the NYSE views the Sham Transaction as a de facto
issuance of stock to Rachesky—which, in fact, it was—then Lions Gate faces severe penalties up
to and including delisting of its shares by the Exchange. In essence, the members of the current
Board of Directors risked Lions Gate’s financial well-being and its shareholders’ liquidity in
5
14. The actions of defendants, which stretch back into the Standstill Period, represent
material breaches of the Standstill Agreement and, in the case of those defendants who are non-
parties to the Agreement, tortious interference with plaintiffs’ contractual rights. Defendants
have also tortiously interfered with plaintiffs’ prospective business relations—including their
ability to successfully complete their tender offer and acquire sufficient stock and enlist
sufficient support from independent unaligned shareholders to elect a new Board of Directors.
15. It is for these wrongs that plaintiffs seek relief, including the reversal of the Sham
Transaction, prohibiting the defendants from voting their shares in any election of directors or
16. This Court has subject matter jurisdiction pursuant to 22 NYCRR § 202.70.
17. This Court has personal jurisdiction over defendants Mark H. Rachesky, Daryl
Simm, MHR Fund Management LLC, MHR Institutional Partners III LP, MHR Institutional
Advisors II LLC, and MHR Institutional Advisors III LLC pursuant to CPLR § 301 because
each of these defendants resides in or has their principal place of business in New York.
18. This Court has personal jurisdiction over defendants Lions Gate Entertainment
Corp. and Lions Gate Entertainment Inc. pursuant to CPLR § 302(1) because each of these
defendants transacts business in New York and contracts to supply goods and services in New
York.
19. This Court has personal jurisdiction over each defendant pursuant to CPLR
§ 302(3) because each defendant committed a tortious act outside New York causing injury to
person or property within New York, and each expected or should reasonably have expected the
act to have consequences in the state and derives substantial revenue from interstate or
international commerce.
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20. Venue is proper in this County pursuant to CPLR § 503 because plaintiff Carl C.
Icahn and defendants Mark Rachesky, MHR Fund Management LLC, MHR Institutional
Partners III LP, MHR Institutional Advisors II LLC and MHR Institutional Advisors III LLC
each reside in New York County. A substantial portion of the events from which this action
Parties
21. Plaintiff Carl C. Icahn resides in New York, New York. All of the other plaintiffs
22. Plaintiff Icahn Partners LP is a limited partnership organized under the laws of
Delaware with its principal place of business in White Plains, New York.
23. Plaintiffs Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP and
Icahn Partners Master Fund III LP are limited partnerships organized under the laws of the
Cayman Islands with its principal place of business in George Town, Cayman Islands.
24. Plaintiff High River Limited Partnership is a limited partnership organized under
the laws of Delaware with its principal place of business in White Plains, New York.
25. Plaintiff Icahn Fund S.à r.l. is a limited liability company organized under the
26. Plaintiff Daazi Holding B.V. is a limited liability company organized under the
laws of The Netherlands with its principal place of business in Amsterdam, The Netherlands.
27. Plaintiff 7508921 Canada Inc. is a corporation organized under the laws of
organized under the laws of British Columbia, Canada, with its principal places of business in
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British Columbia, Canada and in Los Angeles, California. Lions Gate’s common stock is listed
under the laws of Delaware with its principal place of business in Los Angeles, California. LGEI
Ontario.
31. Defendant Michael Burns is a director and Vice Chairman of Lions Gate. He
British Columbia.
Ontario.
38. Defendant Daryl Simm is a director of Lions Gate. He resides in Scarsdale, New
York.
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39. Defendant Hardwick Simmons is a director of Lions Gate. He resides in Marion,
Massachusetts.
Ontario.
41. Defendant Phyllis Yaffe is a director of Lions Gate. She resides in Toronto,
Ontario.1
42. Defendant MHR Fund Management LLC is a limited liability company organized
under the laws of Delaware with its principal place of business in New York, New York.
under the laws of Delaware with its principal place of business in New York, New York.
organized under the laws of Delaware with its principal place of business in New York, New
York.
45. Defendant MHR Institutional Advisors III LLC is a limited liability company
organized under the laws of Delaware with its principal place of business in New York, New
York.2
Fairway, Kansas.
the laws of Kansas with its principal place of business in Shawnee Mission, Kansas.3
1
Defendants Bacal, Burns, Evrensel, Feltheimer, Koffman, Ludwig, Paterson, Rachesky, Simm,
Simmons, Tobin and Yaffe are referred to herein as the “Director Defendants.”
2
Defendants Rachesky, MHR Fund Management LLC, MHR Institutional Partners III LP,
MHR Institutional Advisors II LLC, and MHR Institutional Advisors III LLC are referred to
herein as the “Rachesky Defendants.”
9
Plaintiffs’ March 2010 Tender Offer
48. Plaintiffs are shareholders of Lions Gate. Together, plaintiffs hold 44,472,451
shares of Lions Gate common stock which, prior to the transactions that form the basis of this
49. Plaintiffs began acquiring Lions Gate shares in 2006 in the belief that the shares
were undervalued. In 2009 and 2010, plaintiffs had growing concerns about the management of
Lions Gate, including rapidly growing overhead expenses, increasing financial exposure to
internally-developed and risky theatrical releases, and the company’s acquisition of high-priced
distressed assets. In short, plaintiffs believed that Lions Gate’s management and Board were
pursuing a misguided and destructive business strategy that was diminishing shareholder value.
50. Plaintiffs believed that, in order to have a voice in the company’s finances and
strategy and protect the value of their investment, they should seek representation on the Lions
Gate Board of Directors. However, even though plaintiffs were substantial shareholders at the
time, talks with Lions Gate management about obtaining Board representation were unavailing.
Lions Gate at $6.00 per share; the price was subsequently increased to $7.00 per share. The offer
ended on June 30, 2010. The shares acquired by plaintiffs under the March tender offer
increased their shareholding in Lions Gate from approximately 18.6% of the common shares to
approximately 33.9%. Thereafter, plaintiffs purchased additional shares in the open market to
bring their total shareholdings to approximately 37.9% as of the time of the transactions that
3
Defendants Kornitzer and Kornitzer Capital Management, Inc. are referred to herein as the
“Kornitzer Defendants.”
10
52. The current members of the Lions Gate management and Board—including the
Director Defendants—opposed plaintiffs’ attempt to increase their equity holdings and obtain
Board representation. They sought to entrench and preserve their own positions—and the
valuable perquisites that came along with them, including compensation of over $4 million for
defendant Feltheimer, over $3.6 million for defendant Burns, and substantial fees, stock awards
and stock options for the other directors—by preventing plaintiffs from replacing the current
53. To this end, the Board formally urged shareholders not to accept plaintiffs’ $7.00
tender offer, claiming that the offer was financially inadequate. In communications with
shareholders, Lions Gate opined that its true value exceeded $8 per share.
offer, the Lions Gate Board adopted a defensive “poison pill” on March 11, 2010 designed to
55. On April 27, 2010, the British Columbia Securities Commission issued an order
invalidating the March 11 poison pill on the ground that its continued operation would be
contrary to the public interest. The Commission emphasized that allowing the poison pill to
operate would frustrate the right of Lions Gate’s shareholders to decide whether or not to accept
or reject plaintiffs’ bid. The Commission’s decision was upheld by the British Columbia Court
56. Notwithstanding these decisions, the Lions Gate Board unilaterally adopted a new
poison pill on July 1, 2010. Plaintiffs are in the process of preparing a formal application to
challenge the new poison pill before the British Columbia Securities Commission.
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The July 9 Standstill Agreement
57. Despite the Board’s intransigent opposition to plaintiffs’ attempts to exercise their
shareholders’ rights and secure board representation, plaintiffs continued negotiating with the
Lions Gate Board and management to discuss certain possible merger or acquisition
58. On July 9, plaintiffs entered into a written Standstill Agreement with Lions Gate
and its subsidiaries (including LGEI), pursuant to which the parties agreed to work together on
certain acquisition opportunities. This agreement was approved by the Lions Gate Board of
Directors, which was composed of the Director Defendants. The Standstill Agreement was also
filed with the SEC on July 9, 2010 and its terms were known to each of the other defendants at
59. Pursuant to the Standstill Agreement, Lions Gate and its subsidiaries agreed that,
from July 9, 2010 through midnight on July 19, 2010 (the “Standstill Period”), they would not:
(a) “issue, agree to issue, or authorize or propose the issuance of, any securities
to, or enter into any agreement, contract, or understanding outside the ordinary
their affiliates”;
(b) “engage in active negotiations for any transaction that would involve the
contemplated above)”; or
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(c) “arrange for, or encourage, any other person or entity to purchase, any
60. The parties further agreed that, if any of them were to violate the Standstill
Agreement or fail to perform any obligation under the Agreement, “the other parties hereto
would suffer irreparable injury, for which there may be no adequate remedy at law.”
Consequently, the parties agreed that, in the event of breach, “the other parties shall be entitled
… to equitable relief, including an injunction, to prevent any breaches and to enforce specifically
61. As set forth in detail below, despite their representations in, and in breach of their
obligations under, the Standstill Agreement, Lions Gate and LGEI were engaged in machinations
and negotiations throughout the Standstill Period to initiate a series of transactions that would
result in the issuance of more than 16 million shares of new common stock—an amount in
63. On the morning of July 20, 2010, plaintiffs commenced a tender offer to purchase
shares of Lions Gate at $6.50 per share. The offer is scheduled to expire on August 25, 2010.
64. Notice of the offer was published in The New York Times on the morning of July
20, and was publicly filed with the SEC that same day.
The Sham Transaction and Lions Gate’s Unlawful Share Issuance To Rachesky
65. Later that same day, July 20, 2010, Lions Gate issued a press release announcing
that it had completed a “deleveraging transaction” pursuant to which nearly $100 million of
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outstanding debt was exchanged for new notes which were immediately convertible into
common stock. The press release stated that the new notes were converted into 16,236,305
66. The Lions Gate press release stated that the “deleveraging transaction” was
$36,009,000 of its 3.635% Convertible Senior Subordinated Notes due in 2025 and $63,709,000
of 2.9375% Convertible Senior Subordinated Notes due in 2024 for new notes that had an
extended maturity date, extended put rights by two years, and were (within a five-day conversion
window effective as of the date of the exchange) immediately convertible into Lions Gate
67. On information and belief, this note exchange was approved by the Board of
Directors of Lions Gate, as well as the Board of Directors of LGEI, which was also bound by the
Standstill Agreement.
68. The notes were held by defendant Kornitzer, a Lions Gate shareholder who has
been described in the national press as a “vocal critic” of plaintiffs’ tender offers and attempts to
gain representation on the Lions Gate Board, and his affiliate, defendant Kornitzer Capital
Management, Inc.
69. Lions Gate’s and LGEI’s modification of the notes changed them radically in
favor of the noteholder. For example, prior to the exchange, the conversion rate for both classes
of notes—$11.50 for the 2024 Notes and $8.25 for the 2025 Notes—was significantly higher
70. After the exchange, in contrast, the notes were immediately convertible at $6.20
per share—a discount to market price, given that Lions Gate common stock traded at above
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$6.50 on July 20, the day of the exchange. Moreover, the immediate convertibility feature and
five-day conversion window not only permitted, but virtually ensured, immediate conversion of
71. The Wall Street Journal, reporting on July 22, recognized the windfall
represented by the note exchange: “. . . Mr. Kornitzer received exchangeable notes with a lower
strike price of $6.20. With Lions Gate’s shares trading above $6.50 Tuesday, rallying from
Monday's close of $6.03 after Mr. Icahn announced a new tender, Mr. Kornitzer had an
72. The July 20 Lion’s Gate press release also disclosed that the new notes “were
subsequently converted” into 16,236,305 share of Lions Gate common stock. It deliberately
used the passive voice so as not to disclose that it was Rachesky who did the converting and who
73. The press release did not come close to telling the real story. In fact, it omitted
material facts surrounding the exchange and conversion that reveal it to be a sham structured to
conceal a below-market-price share issuance to a corporate insider for the sole purpose of
diluting plaintiffs’ equity holdings and further entrenching Lions Gate’s current Board members.
The Sham Transaction was funneled through Kornitzer, a putatively “disinterested securities
holder,” to hide its true nature and effect: the below-market issuance of a massive block of stock
74. In reality, the Sham Transaction consisted of three steps, each purportedly carried
out on July 20, 2010—the day after the Standstill Agreement expired.
75. First, Lions Gate and LGEI exchanged Kornitzer’s notes for new, immediately-
convertible notes with a strike price of $6.20 per share, as described above.
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76. Second, Kornitzer immediately sold his new convertible notes to defendant MHR
Institutional Partners III LP, an investment fund affiliated with defendant Rachesky, a director of
Lions Gate.
77. Third, MHR Institutional Partners III LP exercised the conversion option and was
issued 16,236,305 Lions Gate common shares at a price of $6.20 per share. In effect, the new
shares were issued without shareholder approval to Rachesky, a member of the Board of
Directors.
78. The Sham Transaction had the effect of increasing Rachesky’s holdings in Lion’s
Gate through his various entities from just under 20% to approximately 29%. After the issuance
of the new shares, Rachesky held close to a majority of all shares outstanding that were not
owned by plaintiffs.
79. At the same time, the holdings of all other Lions Gate shareholders—most
holdings in Lions Gate were reduced from approximately 37.9% to approximately 33.5%.
80. By enabling Rachesky to convert the new notes into Lions Gate common stock at
a strike price of $6.20—well below the $6.50 that Icahn was offering for shares at the time of the
conversion, and dollars below the $8.85 value announced by the Lions Gate Board only months
before—the Director Defendants wasted the corporate assets of Lions Gate and violated their
81. Had the true purpose of this transaction been “deleveraging,” as Lions Gate
publicly claimed, Lions Gate was under a fiduciary obligation to issue the bare minimum number
of shares necessary to retire LGEI’s notes at the current market price. If the “deleveraging” had
been done at the Board’s stated $8.85 value, or at the conversion price of the notes before they
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were changed to lower their conversion price, or even at the market price of $6.50 on July 20, far
fewer shares would have had to be issued. Instead, Lions Gate issued Rachesky 16,236,306
shares at a conversion price of $6.20 per share—a gratuitous windfall and far more than was
needed for an arms-length fair market transaction. The sole purpose of this windfall was to
82. Moreover, if defendants had truly been concerned with “deleveraging” Lions
Gate, they could have accomplished that goal by publicly selling stock at market prices, the
proceeds of which could have been used to buy back debt on the open market. There was no
need to enter into a private transaction with a single noteholder, the effect of which was to issue
83. In light of this sequence of events, it is apparent that Lions Gate, LGEI, Rachesky,
Kornitzer and others engaged in negotiations and machinations during the Standstill Period to
engineer the ultimate issuance of shares to Rachesky. Specifically, the defendants entered into
agreements and understandings, and engaged in active negotiations, regarding the Sham
Transaction.
84. On information and belief, at some point prior to July 20, 2010, Lions Gate and
Kornitzer reached an understanding that if Kornitzer agreed to the proposed changes to the notes
he held, there was a ready and willing buyer available to purchase the notes for cash—namely,
Rachesky. Kornitzer agreed to the changes as a precondition of the sale to Rachesky. Indeed,
the debt purchase agreement between Kornitzer and Rachesky is dated “as of July 20,” strongly
suggesting that the purchase was negotiated and its terms agreed upon before that date.
85. Kornitzer had no intention to convert the notes into shares during the five-day
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strike price of $6.20—were the lynchpin of Rachesky’s and Lions Gate’s scheme to issue
additional shares to a sympathetic corporate insider at a bargain price in order to dilute plaintiffs’
holdings, frustrate their efforts to obtain representation on the Board of Directors, and further
entrench the existing directors’ positions. Kornitzer was a straw man whose involvement in the
Sham Transaction was designed to obscure the issuance of this massive block of stock to
86. Lions Gate’s and LGEI’s actions in connection with the Sham Transaction
breached the Standstill Agreement because, among other things, Lions Gate and LGEI: (a)
Rachesky, a member of the Board of Directors, during the Standstill Period; (b) engaged in
active negotiations regarding the issuance of notes convertible into common stock in excess of
5% of Lions Gate’s then-currently outstanding common stock during the Standstill Period; and
(c) arranged for and encouraged Kornitzer, Rachesky and their related entities to purchase Lions
Gate securities outside the regular course of business during the Standstill Period.
87. By arranging for, entering into, facilitating, encouraging or approving the Sham
Transaction during the Standstill Period, each defendant other than Lions Gate and LGEI
intentionally and tortiously interfered with plaintiffs’ contractual rights under the Standstill
Agreement.
the Sham Transaction, each defendant employed wrongful means—including the Sham
Transaction and its attendant frauds, material misrepresentations and omissions, and other
wrongful conduct—to reduce plaintiffs’ relative stockholdings, and triggered key withdrawal
conditions of plaintiffs’ tender offer, thus tortiously interfering with plaintiffs’ legitimate attempt
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to (a) bid for outstanding shares held by Lions Gate shareholders and (b) replace the Board with
89. From its inception, the Sham Transaction was, and continues to be, clothed in
fraudulent misstatements and omissions designed to conceal defendants’ true motives and
actions.
90. As described above, the July 20 press release issued by Lions Gate contained
material misrepresentations and omissions. It failed even to identify that the over 16 million new
shares would be issued to Lions Gate director Rachesky, and at a bargain price. And it
misdescribed the purpose of the note exchange and conversion as a “deleveraging transaction,”
when in fact the Sham Transaction was carried out to frustrate plaintiffs’ attempts to elect their
own nominees to the Board and to entrench the positions of Rachesky and the other current
Board members.
91. On July 21, 2010, Lions Gate filed a Form 8-K with the Securities and Exchange
Commission (“SEC”) purporting to describe the note exchange, which contained similar material
92. For example, the Form 8-K stated that “on July 20, 2010, the New Notes were
converted in full into 16,236,306 common shares of the Company.” However, it entirely failed
to disclose that the new shares were issued to an entity controlled by Rachesky, a director of
Lions Gate.
93. The Form 8-K also included a copy of Lions Gate’s July 20, 2010 press release,
which falsely stated that the note exchange was a “deleveraging transaction” that was a “key part
of the Company’s previously announced plan to reduce its total debt.” It failed to disclose the
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true purpose of the transaction: to frustrate plaintiffs’ attempts to elect their own nominees to the
Board and to entrench the positions of Rachesky and the other current Board members.
94. On July 21, 2010, the Rachesky Defendants filed an amendment to their Schedule
13D with the SEC. SEC rules require directors, officers and significant stockholders to file and
update their beneficial ownership reports periodically. Item 4 of Schedule 13D is required to set
forth the “purpose or purposes of the acquisition of securities of the issuer.” SEC Rule 13d-2
states, “If any material change occurs in the facts set forth in the Schedule 13D required by Rule
13d-1(a), the person or persons who were required to file the statement shall promptly file or
95. The Schedule 13D amendment that the Rachesky Defendants filed on July 21,
2010 did not comply with SEC rules and was materially deficient, false and misleading. The
Schedule 13D amendment failed to disclose material terms of the transaction by which the
Rachesky Defendants increased their ownership stake in Lions Gate, including (i) the fact that
the new notes were issued on July 20, 2010 (the same day that the Rachesky Defendants
purchased them from an “existing holder” that is not named in the amendment), (ii) the fact that
the conversion price of the new notes of $6.20 per share was highly favorable to the Rachesky
Defendants, and much more favorable than the conversion price of the old notes, and (iii) the fact
that the entire transaction was part of a scheme to frustrate plaintiffs’ attempts to elect their own
nominees to the Board of Directors by increasing the shareholdings of an insider who is friendly
96. As the Sham Transaction clearly indicates, the Rachesky Defendants have
colluded with Lions Gate management to engage in transactions in Lions Gate common stock
that are specifically designed to influence control of Lions Gate and to impede the success of a
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public tender offer for Lions Gate common stock. These purposes are required to be disclosed
on Schedule 13D, but were not. Therefore, the Rachesky Defendants’ Schedule 13D amendment
is materially deficient and violates SEC rules. In fact, because the Rachesky Defendants’
investment purpose changed prior to July 20, 2010, they were required to file promptly an
amendment to their Schedule 13D disclosing the change in their investment intent at that time.
Accordingly, the Rachesky Defendants were deficient in complying with their Schedule 13D
disclosure obligations before they engaged in the Sham Transaction with the specific purpose of
influencing control of the company and interfering with plaintiffs’ public tender offer. They
violated their federal disclosure obligations and misled the market by failing to disclose their
intentions.
97. Furthermore, the actions of defendants Kornitzer and Rachesky, and their
respective affiliates, in conceiving, negotiating and consummating the Sham Transaction for the
purpose of diluting the interests of other shareholders, including plaintiffs, and entrenching
current Board members, constituted the formation of a “group” for the purpose of acquiring,
holding, voting or disposing of equity securities of Lions Gate, as defined in Securities Exchange
Act Section 13(d)(3) and SEC Rule 13d-5(b)(1) thereunder, no later than the time that they first
agreed to act together. Rachesky and his affiliates failed to file an amended Schedule 13D
reflecting the formation of such a group, as required by Section 13(d). In addition, although on
July 21, 2010, defendant Rachesky and his affiliates filed Amendment No. 4 to their Schedule
13D providing certain details of the Sham Transaction, they still failed to disclose the formation
98. On January 22, 2010, defendants Kornitzer and Kornitzer Capital Management,
Inc. filed a Schedule 13G indicating beneficial ownership of Lions Gate common stock, pursuant
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to SEC Rule 13d-1(b). As part of that filing, defendants Kornitzer and Kornitzer Capital
Management, Inc. certified that the securities referred to therein were held in the ordinary course
of their business and not for the purpose of or with the effect of changing or influencing the
control of the issuer of the securities or as a participant in any transaction having that purpose or
effect. However, from the moment that they first became involved in the conception,
negotiation and consummation of the Sham Transaction, defendants Kornitzer and Kornitzer
Capital Management, Inc. could no longer assert that the securities referred to in their filings
were held in the ordinary course of their business and not for the purpose of or with the effect of
transaction having that purpose or effect. Nevertheless, defendants Kornitzer and Kornitzer
Capital Management, Inc. did not timely file the required Schedule 13D, violated their federal
99. Each of the foregoing failures to file or amend filings constituted a violation of
Securities Exchange Act Section 13(d) and SEC Rules 13d-1 and 13d-2 thereunder.
100. These misrepresentations and omissions were designed to conceal the true nature
101. By concealing the fact that the Sham Transaction was, in essence, a single
transaction designed to transfer shares to director Rachesky that was anticipated and negotiated
prior to the July 20 transaction date, defendants intended to conceal their breach of and
102. Defendants’ misrepresentations also concealed the fact that the Sham Transaction
subjected Lions Gate to serious penalties—up to and including the delisting of its shares by the
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New York Stock Exchange—pursuant to section 312.03 of the New York Stock Exchange Listed
where the total number of shares to be issued exceeds one percent of common stock outstanding.
insiders. If Mr. Rachesky had sought to buy over 16 million shares on the open market, he
would have been forced to pay a significant premium over current market prices, and his buying
would have resulted in an increase in stock price benefitting all shareholders. Instead, through
the Sham Transaction, Mr. Rachesky was able to dramatically increase his holdings by paying
$0.30 per share (almost $5 million) less than current market prices, to say nothing of the
premium above market he would have otherwise had to pay. Mr. Rachesky was thus unjustly
104. Pursuant to NYSE Listing Rule 312.03, Lions Gate’s issuance of over 16 million
shares of common stock to director Rachesky without shareholder approval subjects the
company’s stock to serious penalties, including potential delisting by the NYSE. If Lions Gate’s
stock were delisted, the company’s shares would be limited to trading over the counter, resulting
105. Because of this risk of delisting, Lions Gate’s decision to issue this large block of
shares to Rachesky also violated SEC Rule 13e-3, that prohibits transactions which have “a
reasonable likelihood” of causing any class of equity securities to be delisted from a national
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securities exchange unless the issuer files additional extensive disclosure statements, which were
106. Had defendants disclosed the true nature of the Sham Transaction, they would
have been required to obtain shareholder approval of the transaction as required by NYSE
nonpublic information when he engaged in the Sham Transaction. Indeed, in his purchase
agreement with Kornitzer, Rachesky acknowledged in a so-called “big boy” provision that he
Kornitzer, such disclaimers cannot shield an individual from insider trading laws.
108. Each of the above material misrepresentations and omissions also constituted a
separate violation of federal securities laws, including section 10(b) of the Securities Exchange
109. The unlawful conduct described above, which includes breach of fiduciary duty,
corporate waste, numerous violations of applicable statutes and regulations, and fraud, was
essential to the completion of the Sham Transaction, and, singly and collectively, the means by
which defendants interfered with the Standstill Agreement and plaintiffs’ prospective business
relations with Lions Gate shareholders, including the July 20, 2010 tender offer. This illegal
conduct was performed by the defendants knowingly and intentionally with the sole purpose of
causing the breach of the Standstill Agreement and interfering with plaintiffs’ prospective
business relations.
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FIRST CAUSE OF ACTION
(against Defendants Lions Gate and LGEI)
Breach of Contract
110. Plaintiffs repeat the allegations set forth in paragraphs 1 - 109 above as if fully set
forth herein.
111. The Standstill Agreement was a valid and binding agreement between Lions Gate
and its subsidiaries (including LGEI), and Mr. Icahn and his affiliates (the plaintiffs).
112. Lions Gate and LGEI promised in the Standstill Agreement, for the Standstill
Period from July 9, 2010 through midnight on July 19, 2010, not to:
(a) “issue, agree to issue, or authorize or propose the issuance of, any securities
to, or enter into any agreement, contract, or understanding outside the ordinary
their affiliates”;
(b) “engage in active negotiations for any transaction that would involve the
contemplated above)”; or
(c) “arrange for, or encourage, any other person or entity to purchase, any
113. The parties further agreed that if any of them were to violate the Standstill
Agreement or fail to perform any obligation under the Agreement, “the other parties hereto
would suffer irreparable injury, for which there may be no adequate remedy at law.”
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Consequently, the parties agreed that in the event of breach, “the other parties shall be entitled …
to equitable relief, including an injunction, to prevent any breaches and to enforce specifically
114. Lions Gate and LGEI breached the above promises by encouraging, arranging,
approving, planning and/or negotiating all three steps of the Sham Transaction during the
Standstill Period.
115. Plaintiffs were damaged and irreparably harmed by the foregoing breach.
116. Plaintiffs repeat the allegations set forth in paragraphs 1 - 115 above as if fully set
forth herein.
117. The Director Defendants, the Rachesky Defendants and the Kornitzer Defendants
each knew about the Standstill Agreement at the time they negotiated and executed the Sham
Transaction. The Standstill Agreement was publicly filed with the SEC by both Lions Gate and
118. The Director Defendants, the Rachesky Defendants and the Kornitzer Defendants
each tortiously interfered with plaintiffs’ rights under the Standstill Agreement by inducing and
causing its breach, and by engaging in the unlawful, deceitful, illegal and wrongful conduct
described above.
119. Indeed, the personal profit of the Director Defendants was the motivating intent
for their unlawful conduct, and they were well aware they were acting maliciously and directly
contrary to Lions Gate’s own corporate interests. They also knew full well that if plaintiffs
succeeded they would have been ousted from Lions Gate management, ending their ability to
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120. Plaintiffs were damaged and irreparably harmed by the foregoing breach.
121. Plaintiffs repeat the allegations set forth in paragraphs 1 - 120 above as if fully set
forth herein.
122. Each of the defendants was aware that, for over a year, the plaintiffs have been
purchasing Lions Gate shares and communicating with its shareholders for the purpose of
acquiring additional stock, electing directors to its board, and changing the wasteful, expensive
and risky business plan the Board has pursued. Each of the defendants was also aware that
plaintiffs commenced a tender offer on the morning of July 20, 2010 seeking to purchase all
Lions Gate shares on the open market at $6.50 per share. Plaintiffs’ tender offer, prior stock
purchases, and attempts to elect new directors, were part and parcel of an expectant business
relationship with Lions Gate’s public shareholders, which would have provided a future
123. The defendants each intentionally and tortiously interfered with plaintiffs’
prospective business relationships by participating in the Sham Transaction, causing the breach
of the Standstill Agreement, and committing the other unlawful conduct described in this
Complaint.
124. Plaintiffs were damaged and irreparably harmed by the foregoing interference.
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