Lions Gate Shareholder Rights Plan Cease – Traded Prior to Scheduled Shareholder Vote - M&A/Private Equity

Originally published in Blakes Bulletin on Mergers & Acquisitions, May 2010

On April 27, 2010, the British Columbia Securities Commission (the Commission) issued a cease-trade order in respect of Lions Gate's shareholder rights plan (the Rights Plan), which had been implemented in response to a hostile take-over bid by Carl Icahn and entities affiliated with him (the Icahn Group). On May 7, 2010, the British Columbia Court of Appeal (the BCCA) dismissed an appeal by Lions Gate of the Commission's decision.

The Commission's decision is noteworthy in that it expresses reservations about the 2009 decision of the Ontario Securities Commission in Neo Material Technologies Inc. (Neo) and the Alberta Securities Commission's decision in Pulse Data Inc. (Pulse Data) in 2007. The Neo and Pulse Data decisions suggested that where shareholders approve a rights plan in the face of an unsolicited bid, and the target board is able to demonstrate the exercise of reasonable business judgment in reaching a decision that the unsolicited bid was not in the best interests of the corporation, Canadian securities regulators would be reluctant to cease-trade the rights plan, even in the absence of an ongoing auction for the target company. In the Lions Gate case, although the Rights Plan had not received shareholder approval at the time of the hearing before the Commission, a shareholders' meeting to consider the Rights Plan was imminent. Noting that the Neo and Pulse Data decisions were apparent departures from the Canadian securities regulators' prior views of the public interest as it relates to rights plans, the Commission in Lions Gate ordered that the Rights Plan be cease-traded. (For more details on the Neo and Pulse Data decisions, please see our previous Blakes Bulletins on Mergers & Acquisitions: Neo and Canadian Hydro Decisions Provide New Perspective on Poison Pills in Canada, October 2009 and Alberta Securities Commission Declines to Cease-Trade Poison Pill Following Timely Shareholder Approval, December 2007).

Background

Lions Gate is a British Columbia corporation operating an international media/entertainment business primarily out of Santa Monica, California. Its shares are listed for trading on the New York Stock Exchange.

The Icahn Group is a group of companies and limited partnerships indirectly controlled by Carl Icahn. The Icahn Group held 19% of the outstanding shares of Lions Gate prior to announcing its take over bid.

On March 1, 2010, the Icahn Group made an offer to acquire up to 10% of Lions Gate at a price of US$6 per share. In response, the board of directors of Lions Gate recommended that Lions Gate shareholders reject the offer, saying it was "financially inadequate and coercive and is not in the best interests of the Company". The board adopted the Rights Plan and set a meeting date of May 4, 2010 for shareholder approval of the Rights Plan. After the adoption of the Rights Plan, the Icahn Group amended its offer by offering to acquire all of the outstanding shares and setting an expiry date of April 30, 2010 for its bid. The Icahn Group subsequently increased its offer to US$7 per share and amended the minimum tender condition of its bid to provide that the number of shares tendered under the bid, when combined with those already owned by the Icahn Group, must exceed 50.1% of the number of Lions Gate shares outstanding. The Icahn Group reserved the right to waive the minimum tender condition.

The Icahn Group applied to the Commission to ceasetrade the Rights Plan, and on April 27, 2010, after a hearing, the Commission ordered that the Rights Plan be cease-traded, with reasons to follow.

On April 28, 2010, Lions Gate announced it had filed an application with the BCCA for leave to appeal the Commission's decision, and had changed the date of its shareholders' meeting to May 12, 2010.

On April 30, 2010, the Icahn Group extended the expiry date of the bid to May 10, 2010, and subsequently further extended the expiry date to May 21, 2010.

The BCCA dismissed Lions Gate's appeal on May 7, 2010.

Notwithstanding that the Rights Plan therefore remained subject to a cease-trade order, Lions Gate proceeded with its shareholders' meeting to consider the Rights Plan on May 12, 2010. Turnout at the shareholders' meeting was strong, with holders of 90.9% of Lions Gate shares casting votes at the meeting. Of the votes cast, 55.7% were in favour of the Rights Plan, while 44.3% were against the Rights Plan. Excluding the votes submitted by the Icahn Group, 70.4% of votes were in favour of the Rights Plan, while 29.6% were against. In a press release issued following the meeting, Lions Gate stated that it was continuing to evaluate all of its alternatives in connection with the Commission's decision to cease-trade the Rights Plan.

Reasons of the Commission

On May 6, 2010, the Commission issued its "summary majority reasons" (the Reasons) for its decision to cease trade the Rights Plan, knowing that the appeal of its decision would be heard the following day.

The Public Interest and Take-Over Bid Defence Tactics

The Reasons summarized the views expressed by securities regulators in previous decisions (intentionally excluding the decisions in Neo and Pulse Data) regarding the public interest as it relates to the adoption of shareholder rights plans by target companies. In summary, the Commission noted:

It is in the public interest that each shareholder of a target company be allowed to decide whether or not to accept or reject a bid.

Faced with a bid, the board of directors of a target company has a fiduciary duty to act in the best interests of the corporation.
In discharging this duty, target company boards often take various defensive measures. Regulators will be reluctant to interfere with the steps the directors are taking to discharge that duty.
Shareholder rights plans are not contrary to the public interest when used to buy time for the target company to respond appropriately to the bid. The issue is not whether the shareholder rights plans should go, but when.
Take-over bids are fact-specific, so the relevance and significance of the factors to be considered will vary in each case.

The Commission framed its discussion around the principle that shareholders must have an opportunity to decide whether or not to tender to a take-over bid. In National Policy 62-202 – Take-Over Bids – Defensive Tactics (NP 62-202), the Canadian Securities Administrators state that they will take appropriate action if they become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a take over bid. While the Commission acknowledged that a rights plan helps a board to discharge its fiduciary duties, it specifically rejected the notion that it should be left to the target board to determine whether a take-over bid is acceptable, citing earlier decisions of the Ontario Securities Commission. Instead, the Commission stated that it was implicit in NP 62-202 that rights plans can stay in place only as a temporary measure, and that the cases considered by the Commission are explicit and uniform in expressing Cont 'd from Page 2 the view that, when considering an application to ceasetrade a rights plan, the issue is not whether the rights plan must go, but when. In addition to summarizing various factors considered in leading cases, the Commission noted that:

In past cases, the securities commissions panels were dealing with situations where target boards were actively negotiating or seeking competitive bids or alternative transactions.
In cases where the securities commissions panels decided it was time for the rights plan to go, it was because the plan had achieved its purpose of generating an enhancement to the original bid or an alternative transaction, or there was no evidence that its continuation would result in such an enhancement or alternative transaction.
In cases where the securities commissions panels decided it was not time for the rights plan to go, it was because the plan had not yet resulted in an enhancement to the original bid or an alternative transaction, and it was too soon to conclude its continuation would not yield such a result.

Applying the principles discussed above, the Commission focussed part of its discussion on the purpose of the Rights Plan, stating that once a rights plan has allowed the board to discharge its fiduciary duties by improving the bid or generating competitive bids, the rights plan "has outlived its usefulness and must go." The Commission pointed to the fact that after Lions Gate adopted the Rights Plan, the Icahn Group made several improvements to its offer, including raising the offer price and amending the bid so that it was for all shares 0of Lions Gate, to suggest that the Rights Plan had served a useful purpose. The Commission noted that Lions Gate did not seek, or plan to seek, any competing bids or alternative transactions for Lions Gate shareholders and therefore the only effect of continuing the Rights Plan would be to deny the Lions Gate shareholders the opportunity to accept or reject the Icahn offer.

Shareholder Approval

The Commission considered the significance of shareholder approval of the Rights Plan, noting that shareholder approval of a rights plan is a relevant, but not determinative, factor in deciding whether it is in the best interests of shareholders that a plan remain in effect. Although the Rights Plan was scheduled to be considered by shareholders within days of the hearing, the Commission was not willing to wait until the Lions Gate shareholders' meeting reached a decision for two reasons. First, the shareholders' meeting was scheduled to be held two business days after the expiry of the Icahn Group's bid, and the Commission could not be sure that the Icahn Group would extend its offer beyond the date of the shareholders' meeting. Therefore, the Commission found that a failure to cease-trade the Rights Plan could result in Lions Gate shareholders being deprived of the opportunity to tender to the Icahn Group's bid

The second, and more important reason, according to the Commission, was that shareholder approval of a rights plan is only relevant in the context of considering the purpose of the rights plan and the reason to allow it to remain in place. In the Commission's view, if shareholders support the continuation of a rights plan in order to give the target board more time to seek an improvement in an offer, a competing bid or an alternative transaction, then shareholder support is a factor in favour of leaving the plan in place, although still only on a temporary basis. The Commission stated that, in this case "... that is not what the Lions Gate [Rights Plan] is all about". In the Commission's view, because the Rights Plan did not result in a competing bid or an alternative transaction and there was no evidence that the Icahn Group would make any further improvements to its offer, leaving the Rights Plan in place could serve no purpose other than to deny Lions Gate shareholders the opportunity to tender to or reject the bid.

Coercion

In its arguments to the Commission, Lions Gate took the position that the Icahn Group's bid was coercive, because a shareholder could not know how much of the company would end up in Icahn's hands and would therefore not have the information necessary to make an informed decision. Lions Gate shareholders could feel forced to accept the bid, even if they considered it to be inadequate, in order to avoid being shareholders in a company with a controlling shareholder. The Commission disagreed. It noted that the Icahn Group's bid included a provision whereby if the minimum tender condition was satisfied, the bid would be extended for 10 days so that those who rejected the offer could have the opportunity to tender their shares. If the Icahn Group waived the minimum tender condition, there would similarly be a 10-day extension during which those shareholders who had not tendered could reconsider their decision, and those who had would have a right to withdraw.

Comments on Pulse Data and Neo

The Reasons then referred to the recent decisions in Pulse Data and Neo, which the Commission had intentionally not referred to in its prior discussion of the case law on rights plans. Although the Commission stated that the Pulse Data and Neo decisions may be distinguishable from the Lions Gate situation on the facts (including, presumably, because the Lions Gate Rights Plan had not been approved by shareholders), the Commission stated that it had reservations about them. It noted that in both decisions there had been an apparent departure from the Canadian securities regulators' previous views of the public interest in respect of shareholder rights plans (and stated that it would elaborate further on its reservations in its final reasons).

In both Pulse Data and Neo, the securities commissions declined to cease-trade a rights plan that had been approved by shareholders in the face of a hostile bid, notwithstanding that there was no ongoing auction or real possibility of an alternative bid. In the case of Neo in particular, the Ontario Securities Commission (citing the Supreme Court of Canada's decision in BCE) found that shareholder rights plans may be adopted for the broader purpose of protecting the long-term interests of shareholders. In contrast, the Commission in Lions Gate, following the reasoning from decisions that preceded Pulse Data and Neo, assessed the desirability of maintaining the Rights Plan in the context of what the Rights Plan had accomplished, or was likely to accomplish, in terms of generating alternative bids for shareholders to consider.

It remains to be seen what additional steps, if any, Lions Gate may take with respect to the Commission's decision in light of the support expressed for the Rights Plan by the Lions Gate shareholders (other than the Icahn Group) at the shareholders' meeting. Meanwhile, we await the issuance of the Commission's final reasons, in which it will elaborate on its reservations with the Pulse Data and Neo decisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.