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Chancery Approves Revised Class Action Settlement After Denying Initial Proposal Due to Overly Broad Release

In re AMC Entm't Holdings, Inc. S'holder Litig., Consol. C.A. No. 2023-0215-MTZ (Del. Ch. July 21, 2023)
In re AMC Entm't Holdings, Inc. S'holder Litig., Consol. C.A. No. 2023-0215-MTZ (Del. Ch. Aug. 11, 2023)
The board of directors of a company in financial distress sought to raise capital by issuing more common stock. Existing common stockholders did not approve the proposed measure. The board then issued new preferred stock with sufficient voting power to ensure the passage of board proposals to issue new common shares. Stockholders filed a class action, alleging that the board violated the Delaware General Corporation Law in creating the preferred stock and breached its fiduciary duties by diluting the common stock's voting power.

The parties reached a settlement in which the company agreed to distribute additional shares of common stock to existing common stockholders to reallocate ownership from the preferred stockholders. In exchange, the plaintiffs agreed to a broad release of claims. The Court denied the proposed settlement because the proposed release included claims on behalf of the preferred stockholders, even though the plaintiffs had brought claims solely on behalf of a purported class of common stockholders. Thereafter, the parties narrowed the proposed release to exclude preferred stock claims and submitted the revised settlement for Court approval.

The Court approved the class as a non-opt-out class primarily because the action sought class-wide relief. Even though the Court noted certain defects in the postcard notice, the Court found the notice was sufficient to satisfy due process because those defects were offset by comprehensive electronic notice and high-profile coverage. In finding the settlement reasonable, the Court assigned some value under enhanced scrutiny to the plaintiffs' Blasius claims that the defendants had utilized corporate machinery to thwart the common stockholder franchise but recognized that the defendants might have been able to establish that their actions were reasonable (staving off bankruptcy) and that a preliminary injunction might not have issued (due to the balancing of equities disfavoring the possibility of putting the company into a financial crisis). The Court compared this value to the 2.87 percent increase in ownership that the common stockholders would receive for releasing the claim, and it deemed the settlement to be reasonable. Finally, the Court awarded the plaintiffs' counsel fees equal to 12 percent of the settlement consideration because, while the action involved complex issues, the settlement occurred in the early stages of litigation, and a downward adjustment was also appropriate due to certain errors and omissions by the plaintiffs' counsel during the prosecution of the action.

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