After spending the last 18 months feuding in shareholder letters and in the media, Lions Gate Entertainment Corp. and its largest investor, Carl Icahn, will go head-to-head in court next week.
Icahn is suing the film and TV studio in Vancouver, Canada, where Lions Gate is domiciled, over a controversial financial transaction designed to fend off the activist investor's long-running attempt to seize control of the company and oust its management. The outcome of the hearing, which begins Tuesday and could last several days, will provide a crucial advantage for one of the two sides in determining whether Lions Gate will remain in the control of its current leaders or end up in Icahn's hands.
"The decision is going to have a substantial effect one way or another," said Candace Carlo, a partner in the entertainment group of law firm Greenberg Glusker who does not represent either party. "It could put the power back in Icahn's lap or make it very difficult for him to achieve his ends."
Icahn is asking the Supreme Court of British Columbia to unwind a debt-for-equity swap that Lions Gate undertook in July that increased shareholder Mark Rachesky's stake to 29% from 19% and diluted Icahn's stake to 33.5% from 38%.
A favorable ruling would give Icahn leverage in his planned proxy fight to replace Lions Gate's board. It would also allow him to proceed with his tender offer of $7.50 a share, which expires Oct. 22.
However, if the court lets the transaction stand, it would be a big win for Lions Gate. Icahn's tender offer would no longer be valid under the conditions he originally placed on it. If he attempted to raise his stake above 33% through another offering or buy up additional shares on the open market, Lions Gate could dilute his holdings once again.
In either scenario, the parties could be pressured to finally reach a settlement giving Icahn seats on Lions Gate's board. All previous attempts at a peaceful accommodation, however, have failed.
Icahn is further asking the court to "sterilize" Rachesky's new shares by not allowing him to vote them in a proxy battle. Even if the court doesn't unwind the transaction, such a move would be advantageous to Icahn because it would give him more power in a vote to replace Lions Gate's board with his own candidates. The proxy vote would take place at Lions Gate's annual shareholders meeting, which has yet to be scheduled but is expected later in the fourth quarter.
Neither Icahn nor the Lions Gate chiefs, who operate the studio in Santa Monica, are expected to attend the hearing, which lawyers will argue on behalf of each side. A decision in the case could come as soon as Tuesday.
Icahn is suing Lions Gate on similar grounds in New York Supreme Court, where the activist shareholder is arguing that the company violated a 10-day standstill agreement with the July transaction. The hearing in New York has not yet been scheduled.
The feud between Icahn and Lions Gate has cost each side millions of dollars, which could go higher depending on how determined Icahn remains in his quest to take over the studio. Lions Gate disclosed in its Aug. 10 first-quarter earnings call with analysts that it had so far spent $14 million fending off Icahn. Icahn has not said what he has spent.
Icahn could launch a new hostile bid for more than $7.50 a share, risking that he would pay too much for the company but making it difficult for the Lions Gate board to continue recommending that shareholders resist his entreaties.
"Carl Icahn may have to reconsider his options, but he's not going away," Carlo said. "He is a very determined person."