The Consequences Of Failure To Disclose Material Information – Lions Gate Agrees To Pay SEC Significant Financial Penalty

On March 13, 2014, the United States Securities and Exchange Commission (the "SEC"), in connection with a settlement order (the "Lions Gate Order"),1 commented on a company's disclosure requirements in the context of a takeover bid. The Lions Gate Order settles administrative proceedings by the SEC against Lions Gate Entertainment Corp. ("Lions Gate") for failing to disclose material information about a three-part set of transactions that prevented an activist investor's hostile efforts to gain control of Lions Gate. Given that the failure to disclose material information in a company's continuous disclosure documents is a breach of Canadian and United States securities laws and the test for materiality2 is similar in both jurisdictions, we believe that the Lions Gate Order may be instructive to issuers governed by Canadian securities laws.

Background

Lions Gate is a British Columbia company with its principal offices in California and its shares listed on the New York Stock Exchange (the "NYSE").3 In the course of a more than one year battle for control, limited partnerships, owned or controlled by Carl Icahn, (the "Icahn Group") sought to take control of Lions Gate by way of takeover bids and a proxy fight. In July 2010, in between takeover bids by the Icahn Group, immediately following the end of an agreed upon standstill between Lions Gate and the Icahn Group, and in the face of the Icahn Group's declared intention to replace the Lions Gate's board of directors through a proxy vote at the forthcoming but unscheduled annual general meeting, Lions Gate completed a transaction (the "Financing Transaction") that had the effect of converting approximately US$100 million of its debt into equity, thereby deleveraging Lions Gate, but also diluting the Icahn Group holdings.

At a hearing held in October 2010, the Icahn Group sought to set aside the Financing Transaction before the British Columbia Supreme Court (the "BCSC");4 however, Lions Gate successfully argued that it had not engaged in oppressive conduct as the primary purpose of the Financing Transaction was to deleverage the company, notwithstanding that a secondary purpose was to dilute the Icahn Group holdings and thereby impede a takeover by the Icahn Group.

The Financing Transaction was effected in three stages: first, by exchanging convertible notes held by a noteholder (the "Noteholder") with new notes convertible into common shares at a more favourable price; then, the Noteholder...