AMC Entertainment Holdings Inc and shareholder lawyers are hoping for an easy court approval of their proposed $100 million class action settlement. This settlement will resolve class action claims by meme stock investors in AMC common shares who sued to block the company from proceeding with a novel equity restructuring.
The proposed settlement was announced in a press release and a U.S. Securities and Exchange Commission filing. However, to avoid a formal process for deciding whether the deal is fair to AMC common shareholders, AMC and the plaintiffs will have to convince Delaware Chancery Court judge Morgan Zurn to forego it. Meme stocks are typically traded by retail investors who participate in online stock trading forums. If the proposal is approved, court approval will be an afterthought.
Investors who supported AMC during the pandemic alleged that they were not being fairly treated in the equity restructuring that involves the conversion of deeply discounted AMC preferred shares to common stock. Despite shareholders approving the restructuring, plaintiffs lawyers argued that the vote was corrupted and obtained a status quo order to freeze the preferred share conversion until the court ruled on their motion to enjoin the equity restructuring. A new $100 million class action settlement has now been proposed that allows the share conversion to proceed and enables common stock owners to receive consideration for combining their shares with lower-priced preferred shares. Under the settlement, common stock holders will receive one additional new share for every 7.5 shares they owned before the restructuring, potentially valued at up to $118 million according to plaintiffs lawyers.
The proposed $100 million class action settlement for AMC Entertainment Holdings Inc would allow for the conversion of shares and award of new stock to occur immediately. This means that pre-conversion common stock owners would receive their newly issued shares in a matter of days, without having to wait for the class action approval process to unfold. The only obstacle to this speedy resolution is the status quo order that was signed by Delaware Chancery Court judge Morgan Zurn. The plaintiffs’ lawyers from various firms, including Bernstein Litowitz Berger & Grossmann, Grant & Eisenhofer, Fields Kupka & Shukurov, Saxena White, and Friedman Oster & Tejtel, have filed a motion requesting that Zurn lifts the order and allows common shareholders to receive their recovery right away.
According to an unopposed motion filed by plaintiffs’ lawyers, the proposed $100 million class action settlement for AMC Entertainment Holdings Inc is a “win, win, win” situation for all parties involved. The motion urges Delaware Chancery Court judge Morgan Zurn to lift the status quo order preventing AMC from proceeding with the conversion of its two publicly traded securities and to allow the share conversion to proceed immediately. AMC has expressed its support for this request, citing the conversion as a means to raise capital and reduce debt. If Zurn grants the motion, only two issues will remain in the class action approval process: whether AMC should be granted a release from additional claims by common shareholders, and how much money should be awarded to shareholder lawyers. All other aspects of the deal, including the combination of AMC’s common and preferred shares and the award of extra shares to common shareholders, will be completed.
It is unusual for a class action settlement to be completed before court approval, as such settlements usually require court oversight to ensure fairness to all class members. Typically, plaintiffs’ lawyers are required to notify class members of the settlement and provide an opportunity for them to object. The judge must then review the settlement to ensure that it is equitable to all parties. While there have been cases in Delaware where shareholders’ benefits have preceded court approval, these have not been under the same circumstances as the AMC case. Previously, shareholder lawyers would file class actions after M&A deals were announced, alleging that important information was omitted from proxy disclosures. These cases usually resulted in defendants agreeing to make additional disclosures to settle the matter.
In a rare move, a Delaware judge may allow AMC Entertainment Holdings Inc to proceed with a $500m stock sale and restructuring before final court approval of a related class action settlement. This settlement stems from investors accusing the company of short-changing them in the equity restructuring. The case has received significant attention from the media and legal commentators because it could set a new precedent in Delaware for allowing companies to receive the benefits of settlements before full court approval.
AMC’s settlement with shareholders involves converting preferred shares into common shares, which the investors allege will dilute the value of their holdings. The conversion would allow AMC to raise new capital and pay down debt. The company’s common shareholders voted in favor of the restructuring last month, but plaintiffs’ lawyers obtained a “status quo order” to freeze the preferred share conversion until the court ruled on their motion to block the equity restructuring. The proposed settlement now calls for the share conversion to proceed, with common stock owners receiving one additional new share for every 7.5 shares they owned before the restructuring. The total value of the new shares could be as high as $118m.
Plaintiffs’ lawyers filed a motion on Monday asking Vice Chancellor Morgan Zurn to lift the status quo order and allow the common shareholders to receive their newly issued shares immediately. The motion claims that the settlement is a “win-win-win” for all parties, including the common stockholders who will receive their recovery without delay. The motion also notes that AMC supports the plaintiffs’ request to lift the status quo order, which would allow the company to complete the share conversion and pay down debt. If the motion is granted, the only remaining issues in the class action approval process will be whether to grant AMC a release from additional claims by common shareholders and how much money to award to shareholder lawyers.
It is unusual for class action settlements to be approved before court approval, as they affect class members who may not be aware that their rights are affected. The approval process requires plaintiffs’ lawyers to notify class members of the settlement and give them the opportunity to object. Judges then scrutinize the settlement to ensure that it’s fair to all class members. While there are Delaware cases in which shareholders received benefits before court approval, they are not precisely the same as the AMC case. The motion filed by the plaintiffs’ lawyers did not identify any other class actions in which investors received tangible recovery before the deal was approved by the court.
The proposed settlement could set a new precedent in Delaware, where plaintiffs’ lawyers previously filed class actions after M&A deals were announced. These cases typically settled with defendants agreeing to make additional proxy disclosures. Delaware authorities cracked down on those disclosure-only settlements several years ago, and they have since dried up.
Plaintiffs’ lawyer Mark Lebovitch likened the AMC settlement to the resolution of M&A challenges in which shareholders obtained injunctions pausing proposed deals. Those injunctions often resolved with defendants performing their settlement obligations before a final approval hearing. Lebovitch said that lifting the AMC status quo order would be a boon for the common shareholders who sought to block the share conversion.