In Re AMC Entertainment Holdings, Inc. Stockholder Litigation
--- A.3d ---, 2023 WL 5178972 (Del. Ch. Aug. 11, 2023) (2023)
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Rule of Law:
A class action settlement is fair, reasonable, and adequate when the proposed class is properly certified, notice to the class is sufficient, the settlement's 'give' (value of released claims) is reasonably balanced against its 'get' (consideration received), and attorney's fees are appropriate, even if the underlying fiduciary duty claims would be subject to Blasius enhanced scrutiny.
Facts:
- AMC Entertainment Holdings, Inc. (AMC) faced repeated stockholder opposition to proposals to increase its authorized shares of common stock.
- AMC amended its bylaws to reduce the quorum requirement from a majority to one-third of outstanding stock, citing difficulties in obtaining quorum due to a large retail investor base.
- AMC's Board of Directors created and issued AMC Preferred Equity (APE) units in July and August 2022, which were structured as preferred stock.
- AMC entered into a Deposit Agreement with Computershare in August 2022, which provided that any uninstructed APE units would vote proportionally with instructed APE units.
- In December 2022, AMC entered into the Antara Transaction, an agreement that secured Antara Capital LP's (Antara) promise to vote its substantial APE holdings in favor of proposals to increase common stock and convert APEs into common stock.
- These actions by AMC's Board effectively diluted the common stockholders' voting power and ensured the passage of the proposals to recapitalize the company despite prior common stockholder opposition or non-votes.
Procedural Posture:
- Common stockholders of AMC Entertainment Holdings, Inc. (e.g., Allegheny County Employees’ Retirement System and Anthony Franchi) brought direct claims on behalf of a putative class of common stockholders, alleging breaches of fiduciary duty and violations of 8 Del. C. § 242(b).
- These actions were consolidated in the Court of Chancery of the State of Delaware under the lead case name 'IN RE AMC ENTERTAINMENT HOLDINGS, INC. STOCKHOLDER LITIGATION'.
- Plaintiffs and defendants (AMC and its directors) subsequently reached a proposed settlement agreement.
- The parties submitted the initial proposed settlement terms to the Court of Chancery for approval.
- On July 21, 2023, the Court of Chancery issued a first opinion, declining to approve the settlement because it contained an unsound release provision concerning claims appurtenant to APE units.
- The day after the July 21 Opinion, the parties amended the problematic release provision and filed a joint letter requesting the Court to consider and approve the revised settlement.
- An objector, Rose Izzo, filed a motion for clarification or, alternatively, for a stay pending appeal if the proposed settlement were approved.
- The Court granted the parties' request to stay proceedings against the defendants pending its consideration of the revised settlement and requested supplemental briefing on the impact of Coster v. UIP Companies, Inc. on Plaintiffs' fiduciary duty claim.
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Issue:
Is the proposed class action settlement, which includes class certification, notice to the class, a revised release of claims in exchange for additional common stock, and a request for attorney's fees and incentive awards, fair, reasonable, and adequate under Delaware law?
Opinions:
Majority - Vice Chancellor Zurn
Yes, the proposed class action settlement is fair, reasonable, and adequate under Delaware law. The Court certified the class under Rules 23(a), 23(b)(1), and 23(b)(2), finding numerosity, commonality (common legal questions about fiduciary duties and statutory violations), typicality (plaintiffs' claims arise from the same conduct and legal theory), and adequacy of representation (plaintiffs' interests are aligned with the class, and counsel is competent). Discretionary opt-out rights were deemed unnecessary because the claims and relief are class-wide and an opt-out would further delay the settlement and potentially harm AMC. Notice of the settlement, provided through comprehensive electronic means and supplemental postcard mailings (despite some imperfections), was sufficient to afford due process, as evidenced by the high volume of stockholder responses. Regarding the reasonableness of the settlement's terms, the Court weighed the 'give' (claims released) against the 'get' (consideration received). The released claims included a Section 242(b)(2) statutory claim, which the Court found meritless under Hartford Accident & Indem. Co. v. W. S. Dickey Clay Mfg., as the APE issuance and conversion did not adversely affect the 'peculiar legal characteristics' of the common stock. However, the breach of fiduciary duty claim, based on the Board's actions to create and weaponize APEs to overcome common stockholder opposition, was found to have value and would likely trigger Blasius enhanced scrutiny. The Court clarified that Blasius can apply outside the corporate control context when directors act with the primary purpose of impeding stockholder voting power, requiring the directors to show their actions were reasonable in relation to a legitimate objective. While the defendants might have been able to show their actions were reasonable to prevent AMC's bankruptcy, the claim's value was discounted due to the unlikelihood of a preliminary injunction given the potential harm to AMC's financial viability. In exchange, common stockholders received 6,922,565 shares of common stock, representing a 2.87% increase in equity ownership, which ameliorates some dilution and supports AMC's long-term survival by enabling future capital raises. The Court found this 'get' to be a significant benefit. Finally, the Court awarded Plaintiffs' counsel 12% of the value of the Settlement Shares, capped at $20 million, as a fee. This percentage reflected the early stage of the settlement and the litigation's complexity, but was adjusted downwards due to counsel's 'missteps' in litigation management and candor. Modest $5,000 incentive awards for each representative plaintiff were approved, to be paid from the counsel's fee award, recognizing their efforts and exposure. The Court denied a request for a stay pending appeal, finding a low likelihood of success on appeal and significant harm to AMC and its stockholders if the settlement's implementation were delayed.
Analysis:
This decision significantly clarifies the application of Blasius enhanced scrutiny in Delaware, affirming its relevance even outside traditional corporate control contests where directors act with the primary purpose of impeding the stockholder franchise. It reiterates the Court of Chancery's rigorous role as a fiduciary in approving class action settlements, particularly concerning the careful balance of claims released against the benefits received. The opinion underscores the unique challenges of litigating and settling cases involving highly engaged retail investor bases, highlighting the need for scrupulous procedural compliance and candor from counsel. Future cases will likely cite this decision for its nuanced discussion of franchise interference, settlement reasonableness, and considerations for attorney fee awards in complex, high-profile litigation.
