By Anne Sherry, J.D.
The Delaware Court of Chancery has rejected as unreasonable a proposed settlement of a lawsuit challenging AMC’s share class structure. A new class of stock was meant to address AMC’s difficulties in issuing new shares, but common stockholders argued that its voting mechanism disenfranchised them. Chancery concluded that the settlement released some claims that the plaintiffs cannot release (In re AMC Entertainment Holdings, Inc. Stockholder Litigation, July 21, 2023, Zurn, M.).
As a meme stock, AMC found itself in a bit of a catch-22. It wanted to issue new shares in response to the heightened retail demand for its stock. But precisely because its stockholder base is overwhelmingly retail investors, who tend not to vote, it could not obtain a quorum for stockholder approval of the issuance.
AMC devised a solution: the board approved the creation of preferred stock units (“APEs”) convertible into common stock. While APEs, like common stock, wielded one vote each, they were unlike common stock in that they voted automatically: as long as voting instructions were received for at least one APE, all the APEs would be deemed present and voting at a meeting. The transfer agent would cast votes on the uninstructed APEs’ behalf in a manner proportionate to the votes of instructed APEs.
The plaintiffs—one institutional and one individual stockholder—sued on behalf of a class of common stockholders. The class action claims that the issuance of APE units diluted the voting rights and economic value associated with the common stock. While the lawsuit was pending, AMC held a special meeting on proposals to issue new shares and effect a stock split. The proposals passed but only because of the mirrored-voting feature of the APEs and an institutional investor’s promise, secured in advance, to vote in favor.
The parties then agreed to a settlement that would reallocate the ownership of AMC’s equity between common stockholders and APE holders, with a little more going to the common stockholders to compensate for the APEs’ dilutive effect. In exchange, common stockholders would release all claims “that relate to the ownership of Common Stock and/or [APEs] during the Class Period.” In May 2023, nearly 3,000 stockholders wrote in with objections to the settlement, and it became evident that the interests of common stockholders and APE unitholders did not align.
Because the parties wanted an expedited resolution, the chancery court skipped the class-certification inquiry and moved straight to reasonableness. Ultimately, it determined that the settlement was not reasonable because the settlement purported to release APE claims, but the plaintiffs sued only on behalf of common stockholders. The claims arising out of the APE units were based on different facts and adhered to a different security, and their release was not supported by consideration.
Different factual predicate. Plaintiffs in a class action can only release claims that the class members could have asserted on the facts pleaded, the chancery court explained. If an identical factual predicate exists, a release can encompass claims not specifically asserted or even presentable in the class action. However, when a released claim is based on a property interest that differs from the interest underlying the claims asserted in the class action, the release fails for lack of an identical factual predicate.
Here, the APE claims require additional facts: those of holding APE units and harm to APE unitholder rights. The class action asserts that APEs were “weaponized” to harm the rights of common stockholders. “Fundamentally, in voting and value, what is bad for the common stockholders is good for the APE,” the court explained.
Different security. Furthermore, under Delaware law, direct claims for violating voting rights attach to the share of stock, not the stockholder who owns the shares. Even though the institutional plaintiff holds both types of shares, it is a lead plaintiff only in its capacity as a common stockholder. A common stockholder acting as a representative of common stockholders cannot pursue direct APE claims, and likewise cannot release them.
No consideration. Significantly, the proposed settlement provided no consideration for releasing APE claims. On the contrary, the settlement would compensate common stockholders to the detriment of APE unitholders.
Activision distinguished. What about In re Activision Blizzard, Inc. Shareholder Litigation (Del. Ch. 2015), which would appear to permit the release of personal claims belonging to common stockholders? The court distinguished the instant case from Activision on the basis that the APE claims are based on different facts from the common claims, the released APE claims encompass direct and derivative claims, and the proposed consideration could not support the release of the APE claims.
Another go? Following the chancery court decision, AMC CEO Adam Aron tweeted an open letter emphasizing the need for new capital. The parties have submitted a new proposed settlement in an effort to address the Vice Chancellor’s concerns.
The case is No. 2023-0215-MTZ.