Two quick hits this week.
First, I posted over at FT Alphaville on the Kirschner v. JP Morgan case, pending before the Second Circuit. The court is being asked to decide whether syndicated loans are securities, and my post addresses what’s at stake for the parties. Help yourself.
Second, VC Zurn rejected the first attempt at a settlement of the AMC class action over the creation of the APE preferred shares. As I’m sure any reader of this blog knows, after AMC became a meme stock, it sought to sell more shares, but it needed a charter amendment to authorize an increase. Retail holders of AMC stock refused to vote in favor – likely because retail simply doesn’t vote at all. AMC thought it had a clever way around that, through the issuance of a new form of preferred shares, called APEs, that could vote alongside the common and would convert into common once additional common shares were authorized. Many APEs were publicly traded, but some were placed with a hedge fund, Antara Capital, that was contractually obligated to vote in favor of the charter amendment. As a practical matter, then, the issuance of the APE shares assured there would be sufficient votes to pass the charter amendment authorizing additional common shares that the common shareholders had rejected. The AMC common shareholders sued, and the parties proposed to settle by issuing new shares to the common holders, which would mitigate the dilutive effect of the APE issuance.
VC Zurn rejected the settlement because it proposed to release all claims held by the common shareholders, not only relating to any breaches of duty with respect to the common, but also with respect to any breaches of duty to the APE holders, to the extent that any common shareholders also held APEs. I.e., if you held only APE shares, you weren’t covered by the settlement, but if you held both common and APE, the settlement purported to release any claims concerning both holdings. VC Zurn thought the release of APE claims was a bridge too far, but her reasoning was fascinating.
As I understand it, she offered two rationales. The first was relatively mundane, and essentially was about due process in the class action context. The claims asserted in the action were only about breaches of duty to common shareholders, not to APE shareholders. The class reps were not appointed as representatives of the APE shareholders, and because the settlement itself – a share issuance that was dilutive to APEs – would be adverse to APE holders, class members might be differently situated with respect to APE shares (i.e., some might hold more APEs relatively to their common shares, some might hold fewer). Under these circumstances, she held the claims alleged in the complaint were too distant from the claims being settled.
The second rationale was more interesting. Here is what she said:
APE direct claims require not only proof of different facts than the claims asserted on behalf of the class of common stockholders: APE direct claims are appurtenant to a different security than common stock. APE direct claims can be brought only by APE unitholders. The class of common stockholders cannot release APE claims.
Under Delaware law, direct claims for violating voting rights associated with stock ownership are appurtenant to the share of stock that carries the voting power; they are not personal rights belonging to the stockholder who happens to own the shares….Any direct claims arising out of the rights appurtenant to the APE units are property rights associated with the APE units. They are not personal rights of the unitholder…
Get it? The rights attach to the shares. The fact that a particular investor at a particular time may be holding those shares does not make them the investor’s rights; the rights are share rights. The investor is the human avatar for the real object of interest, the shares. Therefore, a class action of common shareholders can release claims associated with those shares, but not claims associated with another security, even if held by the same investors, because that other security is not in fact before the court. It has not made an appearance, through its human host, in the courtroom.
That idea – where the rights of the shares are abstracted away from the actual for real investors who hold them, to the point where the desires of the human investors have no role to play – has been a sub rosa theme in corporate case law for a while. In Revlon, for example, the directors were deemed to have violated their fiduciary duties to the common stockholders by seeking a sale that would protect the value of corporate notes – even though, as Daniel Greenwood has pointed out, many of the noteholders were in fact stockholders and very possibly would have wanted a sale that balanced the value of those two securities. But, I think more recently, Delaware’s rhetoric on this has become more overt – which, by the way, is something I talk about in my paper, Every Billionaire is a Policy Failure, addressing with Elon Musk’s takeover of Twitter. (See what I did there? With the plug?).
Anyway, none of that bodes particularly well for the claims in McRitchie v. Zuckerberg, which is a putative class action in which Meta shareholders claim that the Board violated its fiduciary duties by maximizing Facebook’s wealth while externalizing costs on to the rest of society, to the detriment of diversified holders of Meta stock. But we’ll see what VC Laster has to say.