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SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
Index No.:Date Purchased: 7/26/2010
SUMMONS
CARL C. ICAHN; ICAHN PARTNERS LP; ICAHN
PARTNERS MASTER FUND LP; ICAHN PARTNERSMASTER FUND II LP; ICAHN PARTNERS MASTERFUND III LP; ICAHN FUND S. R.L.; DAAZIHOLDING B.V.; HIGH RIVER LIMITEDPARTNERSHIP; and 7508921 CANADA INC.,
Plaintiffs,- against -
LIONS GATE ENTERTAINMENT CORP.; LIONSGATE ENTERTAINMENT INC.; NORMAN BACAL;
MICHAEL BURNS; ARTHUR EVRENSEL; JONFELTHEIMER; MORLEY KOFFMAN; HARALDLUDWIG; G. SCOTT PATERSON; MARK H.RACHESKY; DARYL SIMM; HARDWICKSIMMONS; BRIAN V. TOBIN; PHYLLIS YAFFE;MHR FUND MANAGEMENT LLC; MHRINSTITUTIONAL PARTNERS III LP; MHRINSTITUTIONAL ADVISORS II LLC; MHRINSTITUTIONAL ADVISORS III LLC; JOHN C.KORNITZER; and KORNITZER CAPITALMANAGEMENT, INC.,
Defendants.
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TO THE ABOVE-NAMED DEFENDANTS:
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, IcahnPartners Master Fund III LP, Icahn Fund S. r.l., Daazi Holding B.V., High River LimitedPartnership, and 7508921 Canada Inc., a copy of which is herewith served upon you, and toserve 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 answermust be served within twenty (20) days after such service, excluding the date of service. If thissummons was not personally delivered to you within the State of New York, your answer mustbe served within thirty (30) days after service of the summons is complete as provided by law.
ILED: NEW YORK COUNTY CLERK 07/26/2010 INDEX NO. 651076/
YSCEF DOC. NO. 1 RECEIVED NYSCEF: 07/26/
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Arthur Evrensel2212 Edgemont BoulevardNorth Vancouver, BC V7P 2K9Canada
Jon Feltheimer628 N. Alta DriveBeverly Hills, CA 90210
Morley Koffman1660 Blanca StreetVancouver, BC V6R 4E3Canada
Harald Ludwig4371 Erwin Drive
West Vancouver, BC V7H 1H7Canada
G. Scott PatersonAddress Unknown
Mark H. Rachesky834 Fifth AvenueNew York, NY 10065
Daryl Simm10 Salem DriveScarsdale, NY 10583
Hardwick Simmons83 Hammetts Cove RoadMarion, MA 02738
Brian V. Tobin6029 Rideau Valley Drive NorthManotick, ON K4M 1B3Canada
Phyllis Yaffe70 Rosehill Avenue, Apt. 208Toronto, ON M4T 2W7Canada
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MHR Fund Management LLC40 West 57th Street24th FloorNew York, NY 10019
MHR Institutional Partners III LP40 West 57th Street24th FloorNew York, NY 10019
MHR Institutional Advisors II LLC40 West 57th Street24th FloorNew York, NY 10019
MHR Institutional Advisors III LLC
40 West 57
th
Street24th FloorNew York, NY 10019
John C. Kornitzer6045 Windsor DriveFairway, KS 66205
Kornitzer Capital Management, Inc.5420 West 61st PlaceShawnee Mission, KS 66205
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SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
COMPLAINT
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. R.L.; DAAZI HOLDINGB.V.; HIGH RIVER LIMITEDPARTNERSHIP; and 7508921 CANADA INC.,
Plaintiffs,- 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; HARDWICKSIMMONS; BRIAN V. TOBIN; PHYLLISYAFFE; MHR FUND MANAGEMENT LLC;MHR INSTITUTIONAL PARTNERS III LP;MHR INSTITUTIONAL ADVISORS II LLC;MHR INSTITUTIONAL ADVISORS III LLC;JOHN C. KORNITZER; and KORNITZERCAPITAL MANAGEMENT, INC.,
Defendants.
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Plaintiffs, as and for their Complaint against Defendants, allege as follows:
Nature of the Action
1. This case involves an unlawful sham transaction by which an incumbent Board ofDirectors, 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
Transaction (described below) involved a multi-step process consciously designed to obscure a
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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 Gates stock, to seek to elect their own directors to
the Board.
2. The Sham Transaction was funneled through John C. Kornitzer, a putativelydisinterested securities holder, to hide what it really was: the issuance at a below-market price ofa 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
TV program, Mad Management.
3. The Sham Transaction is not the first time Rachesky has attempted to entrench hisown position at the expense of a corporations 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 arms-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
to plaintiffs contractual rights.
4. Plaintiffs are a group of investors who together own the largest block of shares ofdefendant 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.
6. Beginning in early 2010, plaintiff shareholders began a series of tender offersaimed 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 sharesincluding
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.
7. Despite this stonewalling, plaintiffs continued discussions with management toidentify 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,
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or authorize or propose the issuance of, any securities to any member of Lions Gates 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
of 5% of Lions Gates outstanding common stock.
8. In blatant disregard of their Agreement, Lions Gate, acting in concert with itsindividual 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 wouldultimately result in the issuance of over 16 million new shares of common stock to Rachesky, a
friendly member of the Board of Directors, at a below-market and bargain price.
9. Indeed, the discount given to Rachesky may have been even deeper since there isreason to believe that the price of Lions Gates stock was manipulated downward during the
Standstill Period and immediately before the Sham Transaction.
10. By agreement dated as of July 20, 2010, the very day after the Standstill Periodended, 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.
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11. The effect of the Sham Transaction was to issue millions of shares of newcommon stock to a Board member and the second-largest shareholder, while simultaneously
diluting the ownership interest of every other shareholderincluding plaintiffs. Literally
overnight, Racheskys 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 Transactiona factborne out by their failure to disclose its most important features to either Lions Gatesshareholders 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
between the company and a disinterested bondholder.
13. Even apart from entrenching incumbent Board members and frustrating plaintiffstender 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 Racheskywhich, in fact, it wasthen 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 Gates financial well-being and its shareholders liquidity in
order to protect and entrench their own positions.
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14. The actions of defendants, which stretch back into the Standstill Period, representmaterial 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 relationsincluding 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 ShamTransaction, prohibiting the defendants from voting their shares in any election of directors or
other shareholder vote, and awarding compensatory and punitive damages.Jurisdiction & Venue
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 EntertainmentCorp. 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
arises also occurred in New York County.
Parties
21. Plaintiff Carl C. Icahn resides in New York, New York. All of the other plaintiffsare indirectly controlled by Mr. Icahn.
22. Plaintiff Icahn Partners LP is a limited partnership organized under the laws ofDelaware with its principal place of business in White Plains, New York.
23. Plaintiffs Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP andIcahn 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 underthe laws of Delaware with its principal place of business in White Plains, New York.
25. Plaintiff Icahn Fund S. r.l. is a limited liability company organized under thelaws of Luxembourg with its principal place of business in Luxembourg.
26. Plaintiff Daazi Holding B.V. is a limited liability company organized under thelaws 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 ofCanada with its principal place of business in Toronto, Ontario.
28. Defendant Lions Gate Entertainment Corp. (Lions Gate) is a corporationorganized 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 Gates common stock is listed
and traded on the New York Stock Exchange.
29. Defendant Lions Gate Entertainment Inc. (LGEI) is a corporation organizedunder the laws of Delaware with its principal place of business in Los Angeles, California. LGEI
is a wholly-owned subsidiary of Lions Gate.
30. Defendant Norman Bacal is a director of Lions Gate. He resides in Toronto,Ontario.
31. Defendant Michael Burns is a director and Vice Chairman of Lions Gate. Heresides in Los Angeles, California.
32. Defendant Arthur Evrensel is a director of Lions Gate. He resides in NorthVancouver, British Columbia.
33. Defendant Jon Feltheimer is a director and Co-Chairman of Lions Gate. Heresides in Los Angeles, California.
34. Defendant Morley Koffman is a director of Lions Gate. He resides in Vancouver,British Columbia.
35. Defendant Harald Ludwig is a director of Lions Gate. He resides in WestVancouver, British Columbia.
36. Defendant G. Scott Paterson is a director of Lions Gate. He resides in Toronto,Ontario.
37. Defendant Mark H. Rachesky is a director of Lions Gate. He resides in NewYork, New York.
38. Defendant Daryl Simm is a director of Lions Gate. He resides in Scarsdale, NewYork.
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39. Defendant Hardwick Simmons is a director of Lions Gate. He resides in Marion,Massachusetts.
40. Defendant Brian V. Tobin is a director of Lions Gate. He resides in Manotick,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 organizedunder the laws of Delaware with its principal place of business in New York, New York.
43.
Defendant MHR Institutional Partners III LP is a limited partnership organizedunder the laws of Delaware with its principal place of business in New York, New York.
44. Defendant MHR Institutional Advisors II LLC is a limited liability companyorganized 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 companyorganized under the laws of Delaware with its principal place of business in New York, New
York.2
46. Defendant John C. Kornitzer is a shareholder of Lions Gate. He resides inFairway, Kansas.
47. Defendant Kornitzer Capital Management, Inc. is a corporation organized underthe 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 toherein as the Rachesky Defendants.
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Plaintiffs March 2010 Tender Offer
48. Plaintiffs are shareholders of Lions Gate. Together, plaintiffs hold 44,472,451shares of Lions Gate common stock which, prior to the transactions that form the basis of this
lawsuit, represented 37.9% of Lions Gates outstanding common stock.
49. Plaintiffs began acquiring Lions Gate shares in 2006 in the belief that the shareswere 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 companys acquisition of high-priced
distressed assets. In short, plaintiffs believed that Lions Gates 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 companys finances andstrategy 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.
51. On March 1, 2010, plaintiffs commenced a tender offer to purchase shares ofLions 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
form the basis of this lawsuit.
3 Defendants Kornitzer and Kornitzer Capital Management, Inc. are referred to herein as theKornitzer Defendants.
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52. The current members of the Lions Gate management and Boardincluding theDirector Defendantsopposed plaintiffs attempt to increase their equity holdings and obtain
Board representation. They sought to entrench and preserve their own positionsand 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 directorsby preventing plaintiffs from replacing the current
Board members with their own nominees through a shareholder vote.
53. To this end, the Board formally urged shareholders not to accept plaintiffs $7.00tender offer, claiming that the offer was financially inadequate. In communications withshareholders, Lions Gate opined that its true value exceeded $8 per share.
54. In a further attempt to discourage shareholders from accepting plaintiffs tenderoffer, the Lions Gate Board adopted a defensive poison pill on March 11, 2010 designed to
prevent a change of control.
55. On April 27, 2010, the British Columbia Securities Commission issued an orderinvalidating 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 Gates shareholders to decide whether or not to accept
or reject plaintiffs bid. The Commissions decision was upheld by the British Columbia Court
of Appeal, which dismissed Lions Gates appeal on May 7, 2010.
56. Notwithstanding these decisions, the Lions Gate Board unilaterally adopted a newpoison 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 Boards intransigent opposition to plaintiffs attempts to exercise theirshareholders rights and secure board representation, plaintiffs continued negotiating with the
Lions Gate Board and management to discuss certain possible merger or acquisition
opportunities with other film studios.
58. On July 9, plaintiffs entered into a written Standstill Agreement with Lions Gateand 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
the time of the acts complained of here.
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 securitiesto, or enter into any agreement, contract, or understanding outside the ordinary
course of business with, any member of [Lions Gates] board of directors or
their affiliates;
(b)engage in active negotiations for any transaction that would involve theissuance or agreement to issue common stock (or securities or instruments
convertible into common stock) of Lions Gate in excess of 5.0% of Lions
Gates currently outstanding common stock (other than any acquisition
opportunity that Icahn and Lions Gate are working on together as
contemplated above); or
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(c)arrange for, or encourage, any other person or entity to purchase, anysecurities of Lions Gate outside of the ordinary course of business.
60. The parties further agreed that, if any of them were to violate the StandstillAgreement 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
this Agreements terms and provisions.
61.
As set forth in detail below, despite their representations in, and in breach of theirobligations 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 stockan amount in
excess of 5% of Lions Gates then-currently outstanding common stockto defendant Mark
Rachesky, a member of the Lions Gate Board of Directors.
Plaintiffs July 2010 Tender Offer
62. The Standstill Period expired at midnight on July 19, 2010.63. 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 July20, and was publicly filed with the SEC that same day.
The Sham Transaction and Lions Gates Unlawful Share Issuance To Rachesky
65. Later that same day, July 20, 2010, Lions Gate issued a press release announcingthat 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
common shares at a price of $6.20 per share.
66. The Lions Gate press release stated that the deleveraging transaction wascarried out by causing LGEI, a wholly-owned subsidiary of Lions Gate, to exchange
$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 Gatecommon shares at a price of $6.20 per share.
67. On information and belief, this note exchange was approved by the Board ofDirectors 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 hasbeen 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 Gates and LGEIs modification of the notes changed them radically infavor 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 Noteswas significantly higher
than the market price of Lions Gate stock.
70. After the exchange, in contrast, the notes were immediately convertible at $6.20per sharea 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
the notes into stock.
71. The Wall Street Journal, reporting on July 22, recognized the windfallrepresented by the note exchange: . . . Mr. Kornitzer received exchangeable notes with a lower
strike price of $6.20. With Lions Gates 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
opportunity to lock in a profit by converting the notes to equity at a discount.
72.
The July 20 Lions Gate press release also disclosed that the new notes weresubsequently 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
obtained the new shares.
73. The press release did not come close to telling the real story. In fact, it omittedmaterial 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 Gates 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
to a corporate insider in a related-party transaction.
74. In reality, the Sham Transaction consisted of three steps, each purportedly carriedout on July 20, 2010the day after the Standstill Agreement expired.
75. First, Lions Gate and LGEI exchanged Kornitzers 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 MHRInstitutional 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 wasissued 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 Racheskys holdings in LionsGate through his various entities from just under 20% to approximately 29%. After the issuanceof 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 shareholdersmostnotably, plaintiffswere severely diluted. As a result of the Sham Transaction, plaintiffs
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 ata strike price of $6.20well 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
beforethe Director Defendants wasted the corporate assets of Lions Gate and violated their
fiduciary duty to the company and its shareholders, including plaintiffs.
81. Had the true purpose of this transaction been deleveraging, as Lions Gatepublicly claimed, Lions Gate was under a fiduciary obligation to issue the bare minimum number
of shares necessary to retire LGEIs notes at the current market price. If the deleveraging had
been done at the Boards 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 sharea gratuitous windfall and far more than was
needed for an arms-length fair market transaction. The sole purpose of this windfall was to
further consolidate control in management-friendly hands.
82. Moreover, if defendants had truly been concerned with deleveraging LionsGate, 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 issuestock to a corporate insider at a bargain price.
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 andKornitzer 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 cashnamely,
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-dayconversion window. But the changesespecially the feature of immediate convertibility at a
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strike price of $6.20were the lynchpin of Racheskys and Lions Gates 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
Rachesky, a corporate insider.
86. Lions Gates and LGEIs actions in connection with the Sham Transactionbreached the Standstill Agreement because, among other things, Lions Gate and LGEI: (a)
entered into an agreement or understanding regarding the issuance of common stock toRachesky, 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 Gates 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 ShamTransaction during the Standstill Period, each defendant other than Lions Gate and LGEI
intentionally and tortiously interfered with plaintiffs contractual rights under the Standstill
Agreement.
88. Moreover, by arranging for, entering into, facilitating, encouraging or approvingthe Sham Transaction, each defendant employed wrongful meansincluding the Sham
Transaction and its attendant frauds, material misrepresentations and omissions, and other
wrongful conductto 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
their own nominees through a proxy battle.
Lions Gates Deceptive SEC Filings and Other Unlawful Acts
89. From its inception, the Sham Transaction was, and continues to be, clothed infraudulent misstatements and omissions designed to conceal defendants true motives and
actions.
90. As described above, the July 20 press release issued by Lions Gate containedmaterial 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 ExchangeCommission (SEC) purporting to describe the note exchange, which contained similar material
omissions and misrepresentations.
92. For example, the Form 8-K stated that on July 20, 2010, the New Notes wereconverted 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 Gates July 20, 2010 press release,which falsely stated that the note exchange was a deleveraging transaction that was a key part
of the Companys 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 Schedule13D 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
cause to be filed with the Commission an amendment disclosing that change.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
to existing Lions Gate management.
96. As the Sham Transaction clearly indicates, the Rachesky Defendants havecolluded 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 theirintentions.
97. Furthermore, the actions of defendants Kornitzer and Rachesky, and theirrespective 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
and existence of the aforementioned group.
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
changing or influencing control of the issuer of the securities, or as a participant in anytransaction having that purpose or effect. Nevertheless, defendants Kornitzer and Kornitzer
Capital Management, Inc. did not timely file the required Schedule 13D, violated their federal
disclosure obligations, and misled the market.
99. Each of the foregoing failures to file or amend filings constituted a violation ofSecurities 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 natureof the Sham Transaction.
101. By concealing the fact that the Sham Transaction was, in essence, a singletransaction 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
interference with the Standstill Agreement from plaintiffs and others.
102. Defendants misrepresentations also concealed the fact that the Sham Transactionsubjected Lions Gate to serious penaltiesup to and including the delisting of its shares by the
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New York Stock Exchangepursuant to section 312.03 of the New York Stock Exchange Listed
Company Manual (NYSE Listing Rule 312.03), which provides that:
[s]hareholder approval is required prior to the issuance of common stock, or of
securities convertible into or exercisable for common stock, in any transaction orseries of related transactions, to: (1) a director, officer or substantial securityholder of the company (each a Related Party); or (2) a subsidiary, affiliate orother closely-related person of a Related Party; or (3) any company or entity inwhich a Related Party has a substantial direct or indirect interest,
where the total number of shares to be issued exceeds one percent of common stock outstanding.
103. NYSE Listing Rule 312.03 is designed to prevent self-dealing by corporateinsiders. 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
enriched, at the expense of other shareholders.
104. Pursuant to NYSE Listing Rule 312.03, Lions Gates issuance of over 16 millionshares of common stock to director Rachesky without shareholder approval subjects the
companys stock to serious penalties, including potential delisting by the NYSE. If Lions Gates
stock were delisted, the companys shares would be limited to trading over the counter, resulting
in a loss of liquidity for shareholders and a diminution of value of the company.
105. Because of this risk of delisting, Lions Gates decision to issue this large block ofshares 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
not filed here.
106. Had defendants disclosed the true nature of the Sham Transaction, they wouldhave been required to obtain shareholder approval of the transaction as required by NYSE
Listing Rule 312.03.
107. Moreover, by virtue of his position as director, Rachesky possessed materialnonpublic 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
possessed inside, non-public information. Although Rachesky apparently made theseacknowledgments in an attempt to insulate himself from charges of unfair dealing with
Kornitzer, such disclaimers cannot shield an individual from insider trading laws.
108. Each of the above material misrepresentations and omissions also constituted aseparate violation of federal securities laws, including section 10(b) of the Securities Exchange
Act and SEC Rule 10b-5 thereunder.
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 setforth herein.
111. The Standstill Agreement was a valid and binding agreement between Lions Gateand its subsidiaries (including LGEI), and Mr. Icahn and his affiliates (the plaintiffs).
112. Lions Gate and LGEI promised in the Standstill Agreement, for the StandstillPeriod 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 securitiesto, or enter into any agreement, contract, or understanding outside the ordinary
course of business with, any member of [Lions Gates] board of directors or
their affiliates;
(b)engage in active negotiations for any transaction that would involve theissuance or agreement to issue common stock (or securities or instruments
convertible into common stock) of Lions Gate in excess of 5.0% of Lions
Gates currently outstanding common stock (other than any acquisition
opportunity that Icahn and Lions Gate are working on together as
contemplated above); or
(c)arrange for, or encourage, any other person or entity to purchase, anysecurities of Lions Gate outside of the ordinary course of business.
113. The parties further agreed that if any of them were to violate the StandstillAgreement 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
this Agreements terms and provisions.
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.SECOND CAUSE OF ACTION
(against all Defendants except Lions Gate and LGEI)
Tortious Interference With Contract
116. Plaintiffs repeat the allegations set forth in paragraphs 1 - 115 above as if fully setforth herein.
117. The Director Defendants, the Rachesky Defendants and the Kornitzer Defendantseach 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
plaintiffs on July 9, 2010.
118. The Director Defendants, the Rachesky Defendants and the Kornitzer Defendantseach 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 intentfor their unlawful conduct, and they were well aware they were acting maliciously and directly
contrary to Lions Gates 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
enrich themselves at the companys and plaintiffs expense.
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120. Plaintiffs were damaged and irreparably harmed by the foregoing breach.THIRD CAUSE OF ACTION
(against all Defendants)
Tortious Interference With Prospective Business Relationships
121. Plaintiffs repeat the allegations set forth in paragraphs 1 - 120 above as if fully setforth herein.
122. Each of the defendants was aware that, for over a year, the plaintiffs have beenpurchasing 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 Gates public shareholders, which would have provided a future
economic benefit to plaintiffs but for the defendants interference.
123. The defendants each intentionally and tortiously interfered with plaintiffsprospective 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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