I've been following the litigation involving AMC Entertainment quite closely, mainly because I've been advising several investment funds about various aspects of the litigation. But also because it's just a fascinating case.
Let me explain. No, there is too much. Let me sum up. AMC had a blank check preferred stock provision in its articles of incorporation, which the board of directors used to create AMC Preferred Equity units. The ticker name APE was a play on the meme investors who referred to themselves as “apes.” Each APE has 100 votes. The APEs were intended to vote in common with the common shares rather than as a separate class. Some AMC common shareholders objected, arguing that the that the “scheme” violated DGCL § 242 by treating the APEs and the common as a single voting class and that the board had violated its fiduciary duties under Blasius. (For a more detailed statement of the facts and analysis of the legal issues see this post.)
Today's post relates to developments as to the 242 issue. The Delaware House recently passed amendments to DGCL 242. Currently DGCL § 242(b)(1) provides that:
If ... a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class has been voted in favor of the amendment, a certificate setting forth the amendment and certifying that such amendment has been duly adopted in accordance with this section shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title.
So amending the articles, with a limited set of irrelevant exceptions set out in § 242(a), requires the vote of a majority of the outstanding shares and, if class voting is triggered, by a majority of the outstanding shares of each class.
In turn, § 242(b)(2) provides that:
The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.
The problem AMC faced is that retail shareholders don't vote. Indeed, there's empirical evidence that typically only about 30% of the shares held by retail investors are voted. You can't assume that unvoted shares are opposed to the proposal at issue. There are lots of reasons why shareholders might not vote, rational apathy not being the least of them. So companies like AMC with a large retail shareholder base often have trouble even achieving a quorum, let alone getting a majority of the outstanding shares to vote in favor of a proposal.
The Delaware legislature is now considering legislation that would address the problem. As Richards, Layton and Finger explain:
Section 242 will be revised to (i) eliminate the need to obtain the default vote of stockholders for charter amendments effecting specified types of forward stock splits and associated increases in the authorized number of shares, and (ii) reduce the minimum stockholder vote required to authorize a charter amendment increasing or decreasing the authorized shares of a class, or effecting a reverse split of the shares of a class, in circumstances where the shares of such class are listed on a national securities exchange immediately before the amendment becomes effective and meet the listing requirements of such exchange after the amendment becomes effective.
As I have noted before, Matt Levine and Chancery Daily have been my go to resources in following this very interesting case. Today Chancery Daily (or Chance, as the cognoscenti refer to her),offered up a long post on her substack page criticizing that legislation.
As I read her column, Chance is making three major arguments:
- That companies will be able to amend their certificates to effect certain transactions by a vote of less than a majority of the outstanding.
- AMC might avail itself of the new legislation to take a new vote, assuming it can wriggle out from under the status quo order.
- Somehow all of this will encourage federal preemption.
Built into at least # 1 and 3 is a concern that, as she put it on Twitter, "the leg doesn’t grok the scope." Or, as she put it on the Substack post: "the House of Representatives are about to vote on something I’m not sure they fully understand the impact of." She also notes that the Delaware legislature seems to vote on corporate law matters "by force of habit."
Let's start with the question of whether the Delaware legislature needs to know what it is doing. (I'm assuming arguendo that Chance's concerns about the legislature being uninformed are sound.)
I am only slightly being facetious when I ask whether the Delaware legislature ever knows what it's doing when they amend the DGCL. The process by which the DGCL is amended is well known:
"Delaware's flexible incorporation statute boasts an amendment process that is remarkably efficient--a committee of the Delaware bar drafts amendments that pass through the Delaware legislature relatively quickly." Kushal R. Desai, Lee v. Minner: The End of Non-Citizen Exclusions in State Freedom of Information Laws?, 58 Admin. L. Rev. 235, 242 (2006).
"Amendments to the DGCL are typically considered annually. As a practical matter, the Delaware legislature is not heavily involved in their drafting. Instead, the Corporation Law Section of the Delaware State Bar Association and its governing body, the Council, play the primary role in the drafting of amendments. Comprised of prominent practitioners of Delaware corporate law, the Council meets monthly between legislative sessions to discuss and draft potential amendments. These discussions are private, although members of the Council receive and filter suggestions from clients and non-Delaware co-counsel, calling upon their collective experience and the views of Delaware's judiciary when available.Amendments require approval of the full Corporation Law Section and the Executive Committee of the Delaware Bar Association before they are presented to the Delaware legislature. Amendments generally receive quick legislative attention and tend to pass unanimously." Jonathan G. Rohr, Corporate Governance, Collective Action and Contractual Freedom: Justifying Delaware's New Restrictions on Private Ordering, 41 Del. J. Corp. L. 803, 826–27 (2017).
"The Delaware legislature knows that it wants the very best corporate law in the country; therefore, it defers to the experts on the Council for precisely how to achieve this." Guhan Subramanian, Delaware's Choice, 39 Del. J. Corp. L. 1, 48 (2014).
This process occasionally produces botch jobs, such as § 102(b)(7), which got railroaded through the legislature in response to Van Gorkom. But in general having the legislature rubberstamp the Bar seems to have worked out reasonably well.
Should we care that the legislation will lower the vote for certain amendments to the certificate of incorporation? The change would not be a dramatic departure from the mainstream of US corporate law. Since amendments adopted in 1999, the MBCA has provided that amendments to the articles "will be approved if more votes are cast in favor of the amendment that against it." MBCA § 10.03(c) cmt. Previously, the MBCA "required approval by a majority of votes cast, with no minimum quorum, for some amendments, and approval by a majority of the votes entitled to be cast by a voting group, for others." Committee on Corporate Laws, Changes in the Model Business Corporation Act-Fundamental Changes, 54 Bus. Law. 685, 720 (1999).
Finally, I am not convinced that any of this would lead to federal intervention. As I discussed in my book, Corporate Governance after the Financial Crisis, federal intervention in corporate governance usually takes place only in the wake of a major stock market crash or other financial crisis.
In ordinary times, Washington typically has more important issues on its plate than corporate governance. In a bubble period, moreover, federal regulatory action is even less likely because interest groups like shareholders and consumers may be lulled into inaction by the seemingly ever-rising value of their portfolios. At the same time, however, the stage is being set for a post-bubble burst of regulation. In the euphoria associated with a bubble, regulators and private gatekeepers tend to let their guard down, potential fraudsters see an explosion of opportunities, and investors become both more greedy and trusting. The net effect is a boom in fraud during bubbles, especially toward the end, when everybody is trying to keep the music going. When the bubble inevitably bursts, investigators reviewing the rubble begin to turn up evidence of speculative excess and even outright, rampant fraud. Investors burnt by losses from the breaking of the bubble and outraged by evidence of misconduct by corporate insiders and financial bigwigs create populist pressure for new regulation.
It is in the post-bubble environment, “when scandals and economic reversals occur” and “when corporate transactions grab the attention of the American public and the U.S. Congress,” that Congress often acts. Because the venue for post-bubble regulatory action shifts from Dover to Washington, interest groups frozen out of the Delaware process participate meaningfully in the legislative or rulemaking processes. Because such periods typically involve an upswing in populist anger and accompanying intense public pressure for action, they offer “windows of opportunity to well-positioned policy entrepreneurs to market their preferred, ready-made solutions when there is little time for reflective deliberation.” Larry Ribstein and Roberta Romano have independently demonstrated that this pattern is a reoccurring phenomenon in American law, going back even before the New Deal. Indeed, according to Stuart Banner, the same pattern of boom, bust, and regulation can be seen far back into the nineteenth century. Banner contends that the reason for the association is that deep-seated popular suspicion of speculation comes in bad financial times to dominate otherwise popular support for markets, resulting in the expansion of regulation. That is to say, financial exigencies embolden critics of markets to push their regulatory agenda. They are able to play on the strand of popular opinion that is hostile to speculation and markets because the general public is more amenable to regulation after experiencing financial losses.
These quibbles aside, Chance remains the essential go to source for commentary on the DGCL as it plays out in Chancery.
