Good morning. My name is Keith Schaitkin and I am the deputy general counsel of Icahn Enterprises, which controls the Icahn group of companies that are involved in the Lions Gate transaction. I will call this group of companies the Icahn Group.
The Icahn Group is primarily engaged in the business of investing in securities under the direction of Mr. Carl Icahn, acting through his affiliated entities. Mr. Icahn is a value investor. His focus is on companies that are undervalued. Mr. Icahn commits long-term capital, discipline, and active investment influence to assist companies to realize value enhancement for the benefit of all of their shareholders.
The Icahn Group presently holds just under 19% of the outstanding common shares of Lions Gate. The Icahn Group began acquiring Lions Gate shares in 2006, believing that the shares were undervalued. The Icahn Group is offering to acquire up to all of the outstanding common shares of Lions Gate so that the Icahn Group would be in a position to change the Lions Gate board of directors, which could then address necessary changes in top management.
Mr. Icahn believes that Lions Gate should continue to focus on film distribution and on producing niche films and television programming, which Lions Gate has done very successfully, instead of shifting its focus to producing very costly, and therefore risky, Hollywood celebrity vehicles. Mr. Icahn is also concerned about Lions Gate management's acquisition strategy.
Lions Gate is attempting to do everything it can to stop the Icahn offer. For example, Lions Gate's board of directors instituted a shareholder rights plan, commonly known as a poison pill, that was designed to prevent the Icahn Group from acquiring 20% or more of Lions Gate's common shares. This poison pill was struck down by the British Columbia Securities Commission as being an impermissible defensive tactic and abusive of shareholder rights. On appeal, the British Columbia Court of Appeal upheld the decision of the British Columbia Securities Commission.
We understand the committee is holding these hearings, at least in part, to discuss the approval process under the Investment Canada Act relating to the Icahn Group's offer to purchase shares of Lions Gate. I don't intend to discuss this process today. The Investment Canada Act contemplates that the review process under the act be conducted confidentially. Section 36 of that act makes all information provided to the government by an applicant, such as the Icahn Group, subject to legal privilege. This confidentiality protection is particularly stringent in the case of reviews under the act that are reviews in progress, which is the case here.
We can understand why Parliament determined that the review process under the Investment Canada Act should be conducted confidentially. There would be a strong disincentive for a foreign investor to invest in Canada if the investment process required the investor to publicly disclose commercially sensitive information and engage in an open discussion about its future business plans, as this would benefit competitors and could both compromise the investment and harm the company in which the investment is being made.
I do want to say that the Icahn Group respects Canada's cultural policies and has been engaged in the review process contemplated by the Investment Canada Act. It should also be noted that the Investment Canada Act permits the minister to approve an investment only if it has been determined that the investment is likely to be of net benefit to Canada, having regard to the factors set out in the legislation.
Accordingly, if the Minister of Canadian Heritage approves our investment, it would mean that our investment was determined to be of net benefit to Canada, taking into account all factors determined by Parliament to be relevant. That means that we would have agreed to cause Lions Gate to take actions for the benefit of Canada that exceed the aggregate benefits that Lions Gate currently provides to Canada.
That is as much as I can say at this time about our discussions with the Department of Canadian Heritage, given that the review process is ongoing and in light of the confidentiality provisions of the Investment Canada Act. However, we thought it might be helpful to your consideration of this matter to have some context relating to the nature of Lions Gate's Canadian presence. I raise this point because it appears from the discussion among members of this committee on May 11 that the decision to hold these hearings was taken at least in part because of the perception that Lions Gate has a very significant Canadian presence and for this reason is deserving of special consideration.
Lions Gate was at one time a company with significant Canadian ownership, studio facilities, management, and employees. However, this is no longer the case. Lions Gate retains its Canadian status under the Investment Canada Act only by virtue of the fact that two-thirds of the members of its board of directors are Canadian.
While Lions Gate is still incorporated in British Columbia, Lions Gate's public documents indicate that over time, Lions Gate's connection to Canada has diminished to the point that Lions Gate is not significantly different from any other non-Canadian Hollywood studio that undertakes film and television production in Canada from time to time.
In particular, it should be noted that Lions Gate is based in California, not Canada. In its 2009 annual report, Lions Gate's registered and principal office in Canada is identified as being at 1055 West Hastings Street, Suite 2200, in Vancouver, British Columbia. It should be noted that 1055 West Hastings Street, Suite 2200, is the address of Heenan Blaikie LLP, a law firm, so it is more a mail drop than a Canadian office. I should note that the information in the appendices to this statement that relate to Lions Gate are excerpts from Lions Gate's public documents.
Lions Gate's other principal office is identified as being at 2700 Colorado Avenue, Suite 200, Santa Monica, California. This is where Lions Gate conducts its actual business operations. Lions Gate's 2009 annual report indicates that Lions Gate occupies 125,000 square feet of space in the Santa Monica office. Lions Gate shares were delisted from the Toronto Stock Exchange in 2006, and less than 4% of Lions Gate's shareholders are currently Canadian. Lions Gate no longer owns or leases any film studios in Canada. Lions Gate decided not to renew its lease on its Burnaby facilities in 2005 and then sold all of its studios in Vancouver to a third party in 2006.
Lions Gate makes feature-length films and television programs in Canada; however, it does so by renting or leasing equipment and hiring staff on an as-needed basis, just as is done by any foreign film company that undertakes production in Canada.
Lions Gate does not appear to have any facilities or offices in Canada at all. The description of Lions Gate properties in its most recent annual report includes 10 properties in which Lions Gate conducts its operations. All of these are in the United States. It is therefore very doubtful that Lions Gate has any employees in Canada at all. Lions Gate is not managed by Canadians. None of the individuals identified on the Lions Gate website as being part of the Lions Gate management team appear to be Canadian. Lions Gate has been trying to even further minimize its connections to Canada. Lions Gate has acknowledged publicly that it has considered officially changing its jurisdiction of incorporation from British Columbia to the United States, recognizing among other things that the “overwhelming majority of its shareholders” are located in the United States.
Lions Gate also filed an application with the British Columbia Securities Commission to cease being a reporting issuer in Canada in April, 2009, so that it would no longer be subject to Canadians securities laws. Following opposition from Mr. Icahn's representatives, Lions Gate withdrew that application.
Lions Gate currently holds a majority interest in Maple Pictures, a Canadian film distributor. Lions Gate and Maple may say to you that the Icahn Group's proposed investment should not be permitted to occur because it is inconsistent with the Canadian government's film policy, which says that Canadian distributors must be Canadian-owned and controlled. In fact, we believe that the Icahn Group's investment would serve to enhance, not undermine, the ownership and management of Maple by Canadians.
Maple was actually created by Lions Gate in 2005 for the purpose of legally separating Lions Gate from its entire Canadian film distribution business. Lions Gate sold to Maple the entirety of its Canadian distribution operations and entered into a long-term distribution agreement with Maple to distribute Lions Gate's films in Canada. Lions Gate owned only a 10% share in Maple, with the remainder held by Canadian investors. This situation continued until mid-2007, when Maple undertook what appears to be an unplanned repurchase of shares held by a significant third-party Canadian investor. This share repurchase resulted in an increase in Lions Gate's share position in Maple.
Since it reacquired control of Maple in 2007, Lions Gate has disclosed as a material risk to its business the possibility that Lions Gate, and therefore Maple, may at any time lose its Canadian status. This risk is acknowledged by Lions Gate, no doubt in recognition of the fact that Lions Gate is overwhelmingly owned and located outside of Canada and has been pursuing significant potential acquisitions in the U.S. If Maple is determined to be non-Canadian, there could be material financial consequences for Lions Gate and third parties who use Maple as their distributor in Canada, including the requirement to repay tax credits and subsidies to the Canadian government.
In light of the risks of continued ownership of Maple by Lions Gate, the Icahn Group has publicly stated its view that it would be in the best interest of Maple, Lions Gate, and third parties for Maple to be returned to its original status as an independent Canadian film distributor. Lions Gate has made no public statements disagreeing with this position. If the Icahn Group acquires control of Lions Gate, it will seek to cause Lions Gate to divest its shares of Maple to one or more independent Canadian purchasers.
Lions Gate and Maple may also say to you that the Icahn Group's proposal that the shares of Maple be divested to Canadians will create instability that would negatively impact Maple's business. We do not believe that this would be the case. First, we know that Lions Gate and Maple can operate successfully under separate ownership, as they did between 2005 and 2007. Second, in terms of Maple's face to customers and stakeholders, it does not appear to be widely recognized that Maple is controlled by Lions Gate today. Maple currently markets itself on its website as an independent film distributor and does not appear to refer to the fact that it is controlled by Lions Gate.
In summary, based on Lions Gate's public disclosure, Lions Gate's presence in Canada may be summarized as follows: Lions Gate is incorporated in Canada, at least for the time being, but is less than 4% Canadian-owned and is managed and located outside of Canada. Lions Gate currently undertakes film and television production in Canada, but does so without Canadian-based operations, just like any foreign film producer. Lions Gate controls Maple, but Maple's ownership and governance by Canadians would be significantly enhanced if Lions Gate divested its shares of Maple to one or more independent Canadian purchasers, as the Icahn Group has proposed.
In closing, the Icahn Group respects Canada's cultural policies and the importance of supporting a vibrant Canadian cultural sector. We believe that our commitments to Canadian Heritage will be of net benefit to Canada.
Thank you.
