Capital Stock

(a) Common Shares

As discussed in Note 2, immediately prior to the consummation of the Starz Merger, Lionsgate effected the reclassification of its capital stock, pursuant to which each existing Lionsgate common share was converted into 0.5 shares of a newly issued class of Class A voting shares and 0.5 shares of a newly issued class of Class B non-voting shares, subject to the terms and conditions of the Merger Agreement, resulting in 74.2 million shares issued of Class A voting shares and 74.2 million shares issued of Class B non-voting shares. As of December 31, 2016, there were 17.0 million shares of the Company’s Class B non-voting shares that had not been issued to the former holders of 25.0 million of former Starz Series A common stock who are exercising their right to judicial appraisal under Delaware law (see Note 2 and Note 16).

The Company had 500 million authorized Class A voting shares and 500 million authorized Class B non-voting shares at December 31, 2016 (500 million authorized common shares at March 31, 2016). The table below outlines common shares reserved for future issuance:



	December 31, 2016	March 31, 2016
	(Amounts in millions)
Stock options outstanding, Class A voting shares average exercise price $25.93, Class B non-voting shares average exercise price $18.82 (March 31, 2016 - common shares average exercise price $24.55)	36	15
Restricted stock and restricted share units — unvested	3	2
Common shares available for future issuance under Lionsgate plan	1	2
Common shares available for future issuance under Starz plan	12	—
Shares issuable upon conversion of January 2012 4.00% Notes at conversion price of $10.21 per share (March 31, 2016 - $10.26)	4	4
Shares issuable upon conversion of April 2013 1.25% Notes at conversion price of $29.19 per share (March 31, 2016 - $29.32)	2	2
Shares reserved for future issuance	58	25

The Company's 2012 Performance Incentive Plan was amended on October 3, 2016 (the "2012 Plan") to provide for the issuance of up to 31.6 million (an increase of 4 million) common shares of the Company, stock options, share appreciation rights, restricted shares, stock bonuses and other forms of awards granted or denominated in common shares or units of common shares of the Company, as well as certain cash bonus awards to eligible directors of the Company, officers or employees of the Company or any of its subsidiaries, and certain consultants and advisors to the Company or any of its subsidiaries. At the effective time of the closing of the merger, Starz had outstanding equity awards under the Starz Transitional Stock Adjustment Plan, Starz 2011 Incentive Plan, Starz 2011 Nonemployee Director Plan and Starz 2016 Omnibus Incentive Plan (collectively, the “Starz Plans”). In accordance with the Merger Agreement, at the effective time of the closing of the merger, Lions Gate assumed the Starz Plans and the restricted stock unit awards, unvested stock options and restricted stock awards, in each case, granted under the Starz Plans (collectively, the “Assumed Awards”). As a result of this assumption, at the effective time of the closing of the Merger, the Assumed Awards were converted into corresponding awards relating to Class B non-voting shares, after giving effect to appropriate adjustments to reflect the consummation of the merger. There are currently 30.3 million Class B non-voting shares issuable in connection with the Assumed Awards held by Starz employees and awards to be granted under the Starz Plans following the merger.

(b) Share-based Compensation

The Company recognized the following share-based compensation expense during the three and nine months ended December 31, 2016, and 2015:



	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2016			2015			2016			2015
	(Amounts in millions)
Compensation Expense:
Stock options	$	13		$	6		$	29		$	26
Restricted share units and other share-based compensation	9			7			23			21
Share appreciation rights	—			—			—			1
	22			13			52			48
Immediately vested restricted share units issued under annual bonus program⁽¹⁾	7			—			20			—
Impact of accelerated vesting on equity awards⁽²⁾	—			—			2			—
Total share-based compensation expense	$	29		$	13		$	74		$	48

Tax impact⁽³⁾	(10		)	(5		)	(26		)	(17		)
Reduction in net income	$	19		$	8		$	48		$	31

___________________


(1)	Represents the impact of immediately vested stock awards granted as part of our annual bonus program, and issued in lieu of cash bonuses.


(2)	Represents the impact of the acceleration of certain vesting schedules for equity awards pursuant to certain severance arrangements.


(3)	Represents the income tax benefit recognized in the statements of operations for share-based compensation arrangements.

The following tables sets forth the stock option and restricted share unit activity during the nine months ended December 31, 2016. The activity prior to the December 8, 2016 consummation of the Starz Merger and related reclassification of Lionsgate stock discussed above is presented in the table below:



	Stock Options		Weighted-Average Exercise Price	Restricted Share Units		Weighted-Average Grant-Date Fair Value
Outstanding at March 31, 2016	16,093,896		$23.83	1,647,432		$31.74
Granted	5,997,539		$22.73	1,537,632		$20.89
Options exercised or RSUs vested	(2,145,852	)	$9.78	(1,789,908	)	$25.01
Forfeited or expired	(552,067	)	$32.39	(164,592	)	$30.18
Outstanding at December 8, 2016 before share reclassification	19,393,516		$24.80	1,230,564		$28.18
Reclassification of common stock to newly issued Class A voting shares and Class B non-voting shares	(19,393,516	)		(1,230,564	)
Outstanding at December 8, 2016 after share reclassification	—			—

Immediately prior to the consummation of the Starz Merger and in accordance with the reclassification of Lionsgate stock discussed above, each outstanding share-based equity award (i.e., stock options and restricted share units) of Lionsgate was also adjusted to reflect the reclassification of the underlying stock of each award. Upon the closing of the Starz Merger, each outstanding share-based equity award (i.e., stock options, restricted stock, and restricted stock units) of Starz was replaced by a Class B non-voting share-based equity award (“Lions Gate replacement award”) with terms equivalent to the existing awards based on the exchange ratio set forth in the Merger Agreement. The stock option, restricted stock and restricted share unit activity from the December 8, 2016 consummation of the Starz Merger and related reclassification of Lionsgate stock discussed above, through December 31, 2016 is presented in the table below:



	Stock Options						Restricted Stock and Restricted Share Units
	Class A Voting Shares		Weighted-Average Exercise Price	Class B Non-Voting Shares		Weighted-Average Exercise Price	Class A Voting Shares		Weighted-Average Grant-Date Fair Value	Class B Non-Voting Shares		Weighted-Average Grant-Date Fair Value
Issuance of Class A voting shares and Class B non-voting upon reclassification of common stock at December 8, 2016	9,528,634		$25.53	9,528,634		$24.68	615,103		$26.48	615,103		$25.70
Issuance for Lions Gate replacement awards	—		—	15,395,707		$14.68	—		—	1,861,342		$25.70
Granted	4,913		$41.95	666,740		$25.38	2,916		$26.40	109,790		$25.45
Options exercised or restricted stock or RSUs vested	—		—	(13,175	)	$20.83	(8,419	)	$26.92	(259,198	)	$25.74
Forfeited or expired	(2,600	)	$38.73	(17,823	)	$26.57	(1,718	)	$36.92	(45,830	)	$26.12
Outstanding at December 31, 2016	9,530,947		$25.93	25,560,083		$18.82	607,882		$28.18	2,281,207		$26.35

There were no excess tax benefits realized from tax deductions associated with equity awards activity for the nine months ended December 31, 2016 (2015 - none).

Total unrecognized compensation cost related to unvested stock options, and related to restricted stock and restricted share unit awards at December 31, 2016 are $72 million and $44 million, respectively, and are expected to be recognized over a weighted average period of 2.6 and 2.2 years, respectively.

On September 22, 2016, the Company announced that, as contemplated in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on August 1, 2016, as amended, its Board of Directors suspended the Company’s quarterly cash dividend beginning immediately due to its merger with Starz.

(d) Other

In connection with an amendment of an affiliation agreement with a customer and effective upon the close of the Starz Merger (December 8, 2016), Lionsgate has agreed to issue to the customer three $16.67 million annual installments of equity (or cash at Lionsgate's election). The total value of the contract of $50 million is being amortized as a reduction of revenue over the period from December 8, 2016 to August 31, 2019.