In a story right out of the movies, complete with “poison pills” and “white squires,” the SEC announced on March 13, 2014 that motion picture company Lions Gate Entertainment Corporation settled charges that it failed to disclose to investors a set of “extraordinary” corporate transactions designed to thwart takeover efforts by investor Carl Icahn.

The tale of intrigue and midnight board meetings can be traced to Icahn’s efforts, beginning in 2008, to acquire control of Lions Gate. Despite his eventually gaining beneficial ownership of nearly 40 percent of Lions Gate’s outstanding shares, the company rejected various demands from Icahn over the years, including a demand to appoint five of the twelve seats on the Board of Directors.  In March, 2010, Icahn made a tender offer with a premium over the market price to entice shareholders to sell.  To thwart Icahn’s tender offer, Lions Gate adopted a poison pill and began to look for ways to keep the company out of Icahn’s hands.

Then in June 2010, Lions Gate’s vice chairman sought sympathetic third-party investors to purchase blocks of the company’s shares in order to thwart the hostile takeover.  Pursuant to this plan, Lions Gate identified a director friendly to management.  Reading much like a screenplay, the SEC’s order, refers to this director as the “Friendly Director” or the “white squire,” a real-life hero to a company under siege.

But as friendly as the Friendly Director was, the transactions Lions Gate undertook to keep control of the company required a series of complex moves. The plan had three parts.  First, a holder of Lions Gate notes would exchange the notes for new notes convertible to Lions Gate stock at a favorable rate.  Second, the new notes would be sold to the Friendly Director.  And third, the Friendly Director would convert the notes to Lions Gate stock, diluting Icahn’s stake in the company.

Seconds after the expiration of a standstill agreement during which Lions Gate had explored a merger with another movie production company, a Special Committee of Lions Gate’s Board met—at 12:01 a.m.—to discuss the transactions involving the Friendly Director.  The Board also met just after midnight, going so far as to vote to shorten the period during which directors were precluded from trading Lions Gate stock.  Without this change, the Friendly Director would not have been able to immediately convert the new notes to Lions Gate stock.  After a series of communications throughout the night, by that afternoon the Friendly Director-cum-White Squire had converted the new notes into more than 16 million shares of Lions Gate stock. According to this SEC, shareholders later rejected Icahn’s slate of directors.  The margin of defeat for one of the five directors proposed by Icahn?  16 million shares!

Despite the midnight maneuvering, the Lions Gate press release and Form 8-K that followed told investors that the exchange was a “key part of the Company’s previously announced plan to reduce its total debt.” But according to the SEC, Lions Gate “had never announced a plan to reduce total debt prior to issuing the press release.”  And neither the press release nor the 8-K disclosed, among other things, that the exchange was intended to block Icahn’s takeover or that Lions Gate actually changed its insider trading policy to allow the Friendly Director to convert the new notes immediately.  Lions Gate compounded its problems by filing a Schedule 14D-9 with the SEC, recommending that shareholders not tender their shares to a recent offer from Icahn, but without mentioning the nature of the exchange with the Friendly Director.

Lions Gate eventually amended its Schedule 14D-9 some eighteen times, and made further disclosures after being notified by the New York Stock Exchange that it may have violated a rule—NYSE Listed Company Manual Section 312.03(b)—requiring companies to obtain shareholder approval prior to the issuance of common stock and securities convertible into common stock to a director when the number of shares to be issued exceeds one percent of shares outstanding.  As a result, the SEC found that Lions Gate violated Sections 13(a) and 14(d) of the Securities Exchange Act of 1934, as well as Rules 12b-20, 13a-11, and 14d-9.  Lions Gate also agreed to pay a penalty of $7.5 million to the SEC.