AMC Entertainment’s $100M settlement mess is a cautionary tale: Judge wants opinion

(Reuters) – Guess who isn’t happy with a proposed $100 million shareholder class action settlement try to avoid Court review of its most important provision?

The judge in charge of hearing the case is that person.

On Wednesday night, Morgan Zurn, Associate President of the Delaware Chancery Court reject Agreed to a plan that would allow movie theater operator AMC Entertainment Holdings to settle its lawsuit Novel Equity Restructuring There is no need to wait for a judge to formally approve the settlement.

Zurn said AMC and shareholders who sued the company but now want to settle haven’t convinced her to waive the procedural safeguards of a class-action settlement.

She said Delaware rules and case law require judges to evaluate proposed shareholder class action settlements to ensure they are fair to all investors, not just the ones filing the lawsuit. In nearly every case, Zurn said, both parties rushed to wrap up the settlement once they came to an agreement.

But she said the unique circumstances of AMC’s proposed deal did not justify a departure from the usual process for approving class-action settlements.

It’s unclear what that means for the proposed settlement, which depends on accelerating the process. Neither an AMC spokesman nor AMC’s legal counsel, John Neuwirth of Weil, Gotshal & Manges, responded to my inquiries.in a record On Thursday, the company said at the SEC that it was evaluating its next steps.

Shareholder attorney Mark Lebovitch of Bernstein Litowitz Berger & Grossmann declined to comment on Zurn’s ruling.

Based on my reading of Wednesday’s opinion, it seems unlikely that Zurn would allow a deal that would attempt to implement the main terms of the settlement—notification to all affected shareholders, an opportunity for class members to object, and the A court ruling on the overall fairness of the settlement.

AMC and the settlement plaintiffs seek to do just that in their agreement announced this week. Under the terms of the deal, which is now on hold, AMC would immediately complete the conversion of its heavily discounted preferred stock into common stock, which is currently trading at a much higher price.Owners of pre-conversion common stock – who claim They were shorted on preferred stock conversions – thereafter receiving one newly issued share shortly thereafter for every 7.5 shares they held prior to the conversion. Lawyers for the plaintiffs in the proposed settlement with AMC said the new shares would be worth as much as $118 million.

Both sides want to move quickly. AMC is eager to complete the equity restructuring in order to raise funds and pay down debt. Meanwhile, attorneys for the plaintiffs told Zurn in a statement sports The fast-track issuance of new shares to pre-merger common shareholders will lock in the value of those new shares, the Monday filing said.

But AMC and plaintiffs are limited status quo order Zurn signed in February. The order prohibits AMC from completing the share conversion until a Delaware judge hears and rules on plaintiffs’ motion to prohibit the reorganization.

In Monday’s motion, shareholders asked Zurn to lift the status quo order so that the share conversion and new share offering could proceed immediately.

The judge denied the motion in Wednesday’s ruling.

Zurn didn’t even bother to hold a hearing on whether to lift the status quo order before denying the request.

Her vitriolic ruling served as a reminder of the dangers of assuming that judges will abdicate the power to decide whether collective deals go through. As I reported earlier this week, if the settlement proceeds the way AMC and the plaintiffs propose, there are only two issues that remain unresolved in the class action approval process: the release of additional shareholder claims against AMC and the plaintiffs’ attorneys’ fees . The rest of the deal has already become a fait accompli.

Lawyers for the plaintiffs told me earlier this week that Delaware courts routinely approve class-action settlements, in which members of the class benefit before the courts rule on the fairness of the deal.In fact, Zurn cited one of those cases in his Wednesday decision in 1989 Barkan v. Amsted IndustriesThe Delaware Supreme Court affirmed the Chancery Court’s approval of a merger settlement in which shareholders received the benefit of a higher deal price before a Chancery Judge stepped in.

But Zurn said longstanding precedent discourages settlements that bypass Delaware’s class action rules to quickly benefit companies and investors.She noted that, as early as 1970, a justice rejected Chickling v Giles Approved the settlement of a shareholder derivative action brought over control of American Cement Corp as both parties enforced the terms of the agreement prior to court approval. The judge said he would not sign off on a fait accompli that circumvented his powers.

Recently, in a 2006 case Zurn cited former vice-chancellor Stephen Lamb as saying he refused to approve a class action settlement based on supplemental proxy disclosures from companies sued in the shareholder takeover challenge. By the time shareholder lawyers requested settlement approval, the defendants had issued new disclosures and the deal was closed, Lamb said. That timing meant he didn’t have an opportunity to decide whether the settlement was fair to the shareholder class, he said.

A cornerstone of this precedent, Zurn said, is the court’s obligation to keep an eye out for investors who were not actively involved in litigation but whose rights are threatened in any class settlement.She noted that the Delaware Supreme Court in 2012 in About Celera Corporation Reminds AMC and plaintiffs’ attorneys of “court-approved [should] prior to the completion of any settlement” to safeguard the rights of absent investors.

AMC shareholders have been unusually outspoken in Zurn’s AMC case file, which includes letters to the judge from at least six common shareholders who are not parties to the case but are angry about AMC’s planned share consolidation. Two of the letters were handwritten.

Zurn has an obligation to protect their interests. She clearly takes that responsibility seriously.

read more:

U.S. court rejects AMC’s request to expedite stock conversion

Column – AMC Entertainment’s $100M meme stock settlement hinges on unusual procedure

AMC shares plunge, ‘APE’ jumps after lawsuit deal

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