By Anne Sherry, J.D.
The Delaware Court of Chancery approved a settlement between AMC and a class of common stockholders. The court had rejected an earlier version of the settlement, which purported to release claims that didn’t belong to the plaintiffs. The parties excised the offending terms, and the court found the resulting agreement to be reasonable (In re AMC Entertainment Holdings, Inc. Stockholder Litigation, August 11, 2023, Zurn, M.).
Planet of the APEs. The settlement concerns a voting mechanism that AMC’s board implemented to address a dilemma inherent in AMC’s meme-stock status. The company wanted to issue new shares to sell into the demand but couldn’t obtain a quorum for stockholder approval because most of its shareholders are retail investors, who tend not to vote. The company’s solution was to create preferred stock units (“APEs”) that voted automatically. Two plaintiffs sued on behalf of a class of common stockholders, arguing that the issuance of the APEs diluted the voting rights and economic value associated with the common stock.
The Lives of Others. The parties 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.” The chancery court rejected this settlement as unreasonable because the common-stockholder plaintiffs lacked the authority to release APE claims.
Settlement 2: Electric Boogaloo. To address the court’s concerns, the parties revised the settlement to excise the offending portion of the release pertaining to APE claims. This cut met with the court’s approval.
The court determined to certify the class as a non-opt-out class. In doing so, the court rejected an objector’s argument that because other class members do not support the settlement, the representative plaintiffs are inadequate. There was no support for such a proposition in the case law, and even here where more stockholders spoke up against the settlement than spoke up in favor of it, the volume of objections does not demonstrate their merit.
The court did consider the merit of these objections in its reasonableness assessment, and it ultimately overruled the objections and concluded that the settlement was reasonable. In exchange for the “get” of a slightly larger share of AMC ownership at the expense of the APE unitholders, the class released claims, including a meritorious fiduciary duty claim and a meritless statutory claim. While the plaintiffs’ fiduciary duty claim had merit—the plaintiffs’ allegations would have warranted enhanced scrutiny under Blasius Industries, Inc. v. Atlas Corp. (Del. Ch. 1988)—it would have been difficult to craft a remedy for the claim that was equitable and beneficial to the class overall. The release of the claims was sufficiently supported by the settlement consideration.
The court also found that notice was adequate under the circumstances of the case. AMC’s retail stockholder base “has a reputation for their online activity,” and the company published notice on its website, on what was then Twitter, via a Form 8-K, over PR Newswire, and on Depository Trust Company’s Legal Notice System. “In addition,” the court wrote, “in this high-profile case, these electronic disclosures were amplified in the press and on social media.”
Postcard notice, however, was “far from perfect”: the mailing left out about a million beneficial owners, and the postcard itself directed recipients to a broken URL. “Future settling parties should not use this case as a model for distributing postcard notice,” the court noted, but notice was overall adequate. Electronic notice was comprehensive, and record holders received their postcards, putting them on notice of the settlement despite the broken URL; beneficial owners are not entitled to actual notice.
Finally, the court considered the plaintiffs’ request for $20 million in attorney’s fees and awarded a reduced fee of 12 percent of the settlement consideration. The fact that this was an early-stage settlement gave the court a starting point of 13 percent, from which it adjusted upwards due to the complex and challenging nature of the case, and downwards due to repeated “missteps” by plaintiffs’ counsel, to arrive at 12 percent. The fee and expenses are capped at $20 million per the parties’ agreement, and the lead plaintiffs are to receive $5,000 incentive awards to be paid out of the attorney’s fee award.
The case is No. 2023-0215-MTZ.