Delaware Business Litigation Report

Court of Chancery Imposes Class Certification with Hedge Fund as Class Representative

Regal Entertainment Group v. Amaranth LLC, C.A. No. 1226-N, 2006 WL 948257 (Del. Ch. Apr. 12, 2006). Plaintiff, Regal Entertainment Group, asked the Court of Chancery to grant its motion for certification of defendant class. Plaintiff is the issuer of a series of convertible notes under an indenture and defendant Amaranth is one of the largest holders of these notes. After a public dispute regarding Regal's method of calculating the number of shares of common stock upon conversion, Regal filed a lawsuit against Amaranth seeking a declaration that its calculation was correct. Amaranth counterclaimed that its calculation of conversion was correct. The only objection that Amaranth raised to the motion for certification was that its status as a hedge fund should relieve it of the obligation to serve as the representative of a defendant class. The court granted Regal's motion for class certification finding that Amaranth is well-positioned to represent the class as it seeks to advance an interpretation of the calculation provisions of the indenture contrary to Regal's, which affects all noteholders.

In arguing that it could not adequately represent the defendant class, Amaranth argued that it employed certain investment strategies by which its interests may not be aligned with all of the approximately ninety members of the putative class. Because Amaranth could sell the notes in question, Amaranth argued that it should not suffer the burden of serving as the class representative. More particularly, Amaranth alleged that it has a fiduciary obligation to its investors to sell its large position in the Regal notes if that was in the best interests of the investors. Furthermore, Amaranth argued that it takes complex investment positions, and that as to Regal, owns not only the notes, but a short position in Regal's common stock and interest in swap agreements relating to the notes. For that reason, Amaranth claimed it lacked the typicality of interest required for a class representative under Rule 23. Although the court recognized that some courts have refused to appoint hedge funds as class representatives, Amaranth's arguments did not come close to justifying denial of Regal's motion for class certification. As to the question of adequacy, the court found that Amaranth was extremely well-positioned to serve as an adequate class representative because it owned an extremely large position in the notes and was the noteholder that chose to publicly contest Regal's computation method, thereby forcing the lawsuit. The fact that Amaranth might sell its notes or at some later time engage in behavior that disqualifies it, does not distinguish it from most class representative in cases when class representative status is tied to the ownership of a class of securities. The court concluded that Amaranth would be an adequate class representative as it is ideally situated to represent the noteholders in arguing their side, it has a large stake in the result, and has aggressively advocated a position contrary to that of Regal. As such, the court granted Regal's motion for certification of the defendant class. 

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