2nd UPDATE: Proxy Firms Critical Of Lions Gate, Wary Of Icahn

Lions Gate Entertainment Inc. (LGF) received harsh criticism from three shareholder advisory firms that collectively offered partial support for billionaire investor Carl Icahn in his proxy battle with the film and television production company.

Icahn, who has been waging a hostile takeover effort at Lions Gate this year, nominated a slate of five directors to replace incumbents on the film company's 12-member board at its annual meeting Tuesday. Lions Gate opposes Icahn's slate, and it appears to have the upper hand in the vote, but recommendations from the proxy advisory firms could tip the balance in favor of either party.

Three firms--Institutional Shareholder Services, Glass Lewis & Co, and Egan-Jones--have all weighed in with critical assessments of Lions Gate's performance and its corporate governance. ISS offered partial support to Icahn's slate, while Egan-Jones recommended full support and Glass Lewis recommended voting against all his nominees.

Shares of Lions Gate closed up 5 cents to $7.36 on Thursday.

ISS said Icahn has "demonstrated that change is needed in the boardroom." The firm, however, only supported three of Icahn's five nominees, noting that a majority of shareholders have found Icahn's latest tender offer of $7.50 a share for the company too low and his full nominee slate is one seat short of control of the company.

ISS also recommended withholding support for two of Lions Gate's directors--Arthur Evrensel and Daryl Simm--citing an excessive severance arrangement for Lions Gate Chief Executive Jon Feltheimer they approved on the company's compensation committee.

Glass Lewis offers no support for the dissident slate, saying Icahn lacks a clear plan to rejuvenate the company. Nor does it give a vote of confidence in Lions Gate. The firm gives Lions Gate an F-grade for executive compensation, based on its pay-for-performance model, and it recommends withholding support for Feltheimer, who is Lions Gate's co-chairman.

All three firms paint a bleak picture of Lions Gate's operating and stock performance. They are also critical of a recent debt-to-equity deal the company did with its second-largest shareholder, Mark Rachesky, who is also a board member, which diluted the holdings of Icahn and other shareholders and boosted Rachesky's stake.

"In our view, the calculated intention to dilute the holdings of (Icahn) paints an image of entrenched board in a relatively weak position," Glass Lewis said.

Late Thursday, a New York court declined Icahn's request for a preliminary injunction that would have blocked Rachesky's ability to vote his shares resulting from the deal in question. The court said Lions Gate has committed to hold another shareholder meeting within 10 months, giving Icahn's lawsuit a chance to play out in full.

In a statement hailing the ruling, Lions Gate said that "the transaction, which resulted in the reduction of Lionsgate's debt by approximately $100 million, supported the best interests of the company and its shareholders."

Notably, ISS didn't recommend support for Icahn nominee Chris McGurk, a former executive with Metro-Goldwyn-Mayer Inc., a film studio that is viewed as an attractive merger target for Lions Gate by both Icahn and the company's management team. The firm recommended votes for Daniel A. Ninivaggi, Michael Dornemann and Jay Firestone--all Icahn nominees.

Ninivaggi is an attorney at Icahn's firm and a former executive at auto-parts maker Lear Corp. (LEA). Dornemann, vice chairman of the marketing company Access Worldwide Communications Inc. (AWWC), is a director at videogame maker Take-Two Interactive Software Inc. (TTWO), where Icahn holds a 14% stake. Firestone founded Fireworks Entertainment Inc., an independent production company sold to CanWest Global Communications Corp. in 1998.

Icahn, through a series of tender offers, has become Lions Gate's largest shareholder with a nearly 33% stake in the company. With over 45% of the vote locked up by Lions Gate insiders and institutional holders that have so far been supportive of the company, he faces a steep climb to be successful in his proxy battle.

Lions Gate's annual meeting, which was postponed because of legal wrangling between Icahn and the company, is scheduled to be held in Los Angeles on Tuesday.

In a recent letter to shareholders, Lions Gate said Icahn and his slate have "no vision, much less a strategy, for the future" of the company and they "pose a significant risk to Lions Gate if they obtain board representation."

Icahn fired back with his own missive.

"The actions of Lions Gate's board speak for themselves as does the company's and its stock's performance," he said in a statement, adding, "$100 invested in Lions Gate stock five years ago would be worth $56 today. If you had put that same $100 into an NYSE composite index, it would have been worth $117. If you had put it in my hedge fund, it would be worth $145. If you put it under your mattress, you at least would have still had your original $100."

-By Nat Worden, Dow Jones Newswires; 212-416-2472; nat.worden@dowjones.com

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