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December 14, 2010 9:26 AM

Icahn Gives Up Fight for Lions Gate Shares

Posted by Alison Frankel

From The Am Law Litigation Daily

On Monday, Carl Icahn announced he's dropping his tender offer for shares of Lions Gate, the movie studio he had hoped to merge with MGM. And for that reprieve from the rapacious activist investor, Lions Gate's board members and the shareholders who support them can thank Wachtell, Lipton, Rosen & Katz and Quinn Emanuel Urquhart & Sullivan.

Here's why. Icahn imposed an unusual condition on his $7.50-a-share tender offer for Lions Gate equity, insisting that he'd purchase shares at that price only if New York state supreme court justice James Yates issued a preliminary injunction blocking rival investor (and Lions Gate director) Mark Rachesky from voting his recently acquired Lions Gate shares at the company's December 14 annual meeting. (Shareholders will vote at the meeting on Icahn's proposed opposition slate of five new directors.) But on December 9, after a two-day hearing in which Lions Gate's lawyers at Wachtell and Rachesky's counsel from Quinn Emanuel opposed the injunction, Judge Yates denied Icahn's bid to enjoin Rachesky from voting the new shares.

"The Icahn Group has not made an actual showing that it would be irreparably and inequitably harmed by the denial of the preliminary injunction," Judge Yates concluded, noting that Lions Gate has pledged to hold another shareholders meeting in September 2011. "The court's denial of the application for a preliminary injunction is conditioned upon that commitment. In effect, denial of the preliminary injunction at this time will permit existing shareholders to vote on December 14 while giving Icahn, if he loses the proxy fight on that day and should prevail in the ensuing itigation, an opportunity for a new election with votes counted as he seeks in less than ten months."

Icahn had accused Lions Gate and Rachesky of tortious interference in the July 2010 exchange of about $100 million in convertible notes held by Kornitzer Capital Management into Lions Gate shares held by a fund affiliated with Rachesky. The debt-to-equity swap had the effect of increasing Rachesky's stake in Lions Gate to 29 percent and diluting Icahn's stake from 37.9 percent to 33.5 percent.

Rachesky counsel Andrew Rossman of Quinn told us Icahn's "principal objective" in the tortious interference suit was to obtain an injunction blocking Rachesky from voting his new shares at the annual meeting Tuesday. In October, Icahn lost a parallel attempt to enjoin the Rachesky swap in a proceeding in Vancouver, British Columbia. Wachtell and Quinn Emanuel also led the defense in the Canada case, in which the court held a four-day hearing on Icahn's injunction bid.

In his statement announcing the withdrawal of his Lions Gate tender offer, Icahn conceded that it was "now virtually impossible for us to prevail in the proxy contest" for board seats at the December 14 meeting, but he urged shareholders to vote for his slate nonetheless. As Brian Baxter has reported at The Am Law Daily, Icahn's slate of proposed Lions Gate directors includes former Winston & Strawn partner Daniel Ninivaggi, who's now president of Icahn Enterprises.

Perhaps not surprisingly, Winston & Strawn has been Icahn's counsel in the Lions Gate litigation. We called Joseph DiBenedetti but didn't hear back.

Icahn's statement on the expiration of the tender offer suggests that he intends to continue to pursue the case against Rachesky and Lions Gate. "We are pleased that [Judge Yates] agreed to hold a full trial on the matter within the next several months and will require Lions Gate to hold a meeting of shareholders again in September 2011 following his ruling in the case," the statement says. "We will continue to monitor the situation at Lions Gate and will aggressively take all actions necessary to protect our investment, and we reserve all of our rights with respect to Lions Gate and its securities."

Rachesky counsel Rossman said his side was pleased with Judge Yates's ruling. "In our view [the debt-to-equity swap] was a valid transaction, a highly beneficial transaction for the company," he said. "Icahn's claims are without merit."

We should note that Wachtell is on a nice roll in bet-the-company M&A litigation. Last month, you'll recall, the firm won a Delaware Supreme Court ruling that bars an Air Products-sponsored attempt to push up the annual meeting of its takeover target, Airgas. William Savitt is Wachtell's lead in the Lions Gate case.

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