AMC Makes a Comeback (In re Match)

Trust me, it'll all make sense.

Our piece concerning the upcoming oral argument in In re Match Group, Inc. Derivative Litigation, No. 368, 2022, hearing (Del. Dec. 13, 2023) has been published on Columbia Law School’s Blue Sky Blog! Check it out there ICYMI. And if you missed my prior Substack adding some more commentary, it’s here.

I’m not sure that I have stopped thinking about the Match case and its implications for longer than a few hours at a time over the past few weeks. Tomorrow morning — Wednesday, December 13 — the oral argument will take place at the Delaware Supreme Court. The Supreme Court is kind enough to livelivestream all their arguments, so you can watch it as it happens, here. Ten o’clock in the morning, Eastern time — that's when it goes down.

Of course, I’ll be around to give you the debrief after it happens, as well. And if you’re just hankering for some more reading material in the interim, here are links to all of the relevant documents. But before you go and click away to do that, I still have some things to say below. Don’t miss, keep scrolling.

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, open. br. (Del. Nov. 17, 2022; pub. Dec. 2, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, ans. br. (Del. Dec. 19, 2022; pub. Jan. 3, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, ans. br. (Del. Dec. 29, 2022; red. Jan. 12, 2023)

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, reply br. (Del. Jan. 12, 2023; red. Jan. 27, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, supp. open. br. (Del. July 12, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, supp. ans. br. (Del. Aug. 24, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, amicus br. (Del. Sept. 5, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, amicus br. 1 of 2 (Del. Sept. 7, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, amicus br. 2 of 2 (Del. Sept. 7, 2023) 

In re Match Group, Inc. Derivative Litigation, No. 368, 2022, supp. reply br. (Del. Sept. 29, 2023) 

Ok, so, there is a reason – one that some of you might even recall – that the Match case is of such significant concern to me. Is anyone here old enough to remember when we discussed the Linda Lao v. Dalian Wanda Group Co., Ltd., et al. and AMC Entertainment Holdings, Inc., C.A. No. 2019-0303-MTZ, tr. ruling (Nov. 30, 2022) case back during the AMC era? I talked about it on a three-hour rambling YouTube video, and I mentioned it on a couple of podcast interviews that I did back then, because it informed my view of Adam Aron coming into “the” AMC case earlier this year. Whether you remember it or not, sit back, because this is going to take some explaining, but I promise it’ll be worth it.

AMC – before it became the definition of a meme stock for the people – was previously a subsidiary of the Chinese conglomerate, Dalian Wanda Group, until it wasn’t. I’ll let VCZ’s oral ruling explain the background of how the company as you know it now began to come out from under the control of Wanda:

In mid-2017, the Chinese government began pressuring Chinese companies, including Wanda, to decrease their leverage and repatriate cash. This prompted Wanda’s chairman and controller, Wang Jianlin, to express to AMC’s CEO, Adam Aron, a desire to liquidate a portion of its AMC stock to help pay down other debts….

Aron and Goldman Sachs, AMC’s financial advisor, began searching for a potential buyer for Wanda’s stock. These efforts were deliberately concealed from the company’s board. Following that process, Silver Lake emerged as the only interested party. Aron and Goldman Sachs then facilitated negotiations between Silver Lake and Wanda. Initially, in May 2018, Silver Lake and Wanda contemplated Silver Lake buying all of Wanda’s AMC shares or enough shares to provide Silver Lake with control of AMC.

In July of 2018, rather than purchasing shares directly from Wanda, Silver Lake expressed its desire to enter into a transaction involving AMC repurchasing shares from Wanda. It was around this time that Adam Aron informed the board and requested that a special committee be formed to evaluate the transaction.

On July 23rd, 2018, AMC’s board formed a special committee consisting of three directors, all of whom are defendants in this action. The special committee retained Moelis as its financial advisor and Skadden Arps as its legal advisor.

The special committee proceeded to negotiate with Wanda, though Adam Aron often served as an intermediary. [It was shown] that when serving as this intermediary, Aron demonstrated divided loyalties and at times negotiated against or around the special committee in a manner that appears to be for Wanda’s benefit.

AMC and Silver Lake agreed to a transaction by which AMC would issue $600 million in unsecured convertible notes to Silver Lake. AMC would then use the proceeds to acquire and cancel over 24 million shares of AMC common stock held by Wanda and then pay a special dividend of $1.55 per share to all company stockholders. This transaction allowed Wanda to maintain voting control of AMC, but it would also increase AMC’s leverage…

Plaintiff filed her complaint in April 2019, asserting direct and derivative breach of fiduciary duty claims against Aron, three AMC directors, and Wanda. Plaintiff also asserted claims for aiding and abetting against Silver Lake. Specifically, plaintiff alleged that the debt issuance and share repurchase were undertaken not for the benefit of AMC, but for Wanda’s liquidity needs, and that the special committee’s process leading up to the transaction was deficient. Plaintiff also alleged that these conditions gave rise to an unfair price, both with regard to the repurchase price and the terms on which the convertible debt was issued…

On July 18th, 2019, AMC formed a special litigation committee for purposes of responding to the complaint. The special litigation committee was comprised of [two new independent directors, who had both joined the board mid-2019].

The SLC investigated the allegations in the complaint for 18 months, slowed at times like the rest of the world when the global pandemic hit. It retained six experts, reviewed over 40,000 documents, and conducted 21 interviews. The SLC did not receive documents or testimony from Wanda nor its controller, Wang due to a lack of cooperation.

Plaintiff did not sit idly by while the SLC investigated. For example, the SLC initially did not recognize WeChat messages as a potential source of documents. Plaintiff identified and pressed this oversight, and those messages ended up being a central focus of the SLC report.

On January 8th, 2021, the SLC issued its report spanning over 350 pages and including more than 200 exhibits. The SLC concluded that the director defendants did not breach their fiduciary duties. The SLC further found that Silver Lake did not aid and abet any breaches of fiduciary duty. The SLC could not conclude that Aron and Wanda did not breach their fiduciary duties, but nevertheless, did not believe pursuing litigation against them would be in AMC’s best interest.

As to Adam Aron, the SLC stated that it did not believe the company was likely to recover any damages given its findings that Aron’s conduct, while suboptimal, did not infect the SLC’s process or the transaction price.

The litigation ensued, and eventually settled during briefing on a motion to dismiss. In approving a settlement, the Court must evaluate the “give” and the “get” of the proposed settlement, and in so doing, can give a bit of insight into the merits of the claims brought…

The SLC failed to identify Adam Aron’s WeChat messages as a relevant source of documents, despite those documents [later] becoming a key aspect of its report. The SLC also did not disclose that they were missing six weeks of Aron’s WeChats, nor that Aron tried to divert the SLC from pursuing electronic communications [discovery]. Additionally, . . . the SLC failed to obtain documents from Wanda or Wang.

Those issues, among others, certainly cast doubt on the adequacy of the SLC’s investigation, making it possible plaintiff could prevail…

I also agree with plaintiff that she would have likely been able to establish Aron’s, Wang’s, and Wanda’s liability if she had gotten past the motion to dismiss. Wanda was AMC’s controlling stockholder, meaning it owed AMC the duty of loyalty. Because the company was repurchasing Wanda’s shares, Wanda stood on both sides of the stock repurchase. This is sufficient to invoke entire fairness review unless the transaction was cleansed, which it was not.

And the defendants may well have struggled to show this transaction was fair. Entire fairness entails two components: fair dealing and fair price. The SLC report [informed by the discovery of WeChat messages at the behest of plaintiff] demonstrates that the dealings fell far short of fair. Aron, [the CEO], demonstrated clearly divided loyalties that members of the special committee described as “disappointing,” “disturbing,” and “beyond fathom.” The special committee was far from an effective bulwark against his overreaching. With such poor dealing, it would not be surprising for a court to eventually find that the price was unfair. Aron’s bragging about saving Wanda $25 million at the minority [stockholder]’s expense contributes to this problem.

Let me just reiterate that last bit, because all the rest was just to get you to this point. Adam Aron was bragging about saving Wanda (AMC’s controlling stockholder) $25 million dollars in a transaction where AMC was Wanda’s counterparty. Do you know what it means if the controller is doing a self-interested transaction with the company, and the CEO saves the controller $25 million? Do you know where that money comes from, in large part? At least half of it comes from the minority stockholders -- you know, the ones to whom fiduciary duties were owed in the transaction.

AMC’s own special committee – once litigation revealed facts they did not previously know – described Aron and Wanda’s conduct as “disappointing,” “disturbing,” and “beyond fathom.” Now, I know a lot of you reading this may not have read many transcripts of directors’ depositions in your life, but those are Very Strong Words™️ — particularly in that context.

Why on Earth am I telling you all of this? Just to relive the heady days of AMC? No. No, thank you. I’m telling you this because – if the IAC Defendants’ suggestion in the Match case is adopted by the Delaware Supreme Court, the Wanda Group case would have become a “business judgment rule” case, which means that it would have been dismissed on the pleadings before any of these “disappointing,” “disturbing,” and “beyond fathom”-type facts were revealed.

Being able to invoke business judgment rule protection effectively neuters the courts’ ability to review the fairness of the transaction. And you know what does not happen once the judiciary has been declawed of its only incisive means of reviewing the fairness of such conflicted transactions? Imagine it’s like It’s a Wonderful Life (Corporate Law Edition) – in the alternate universe, when there are no petals from ZuZu in your pocket, there’s no plaintiff to bring this case, which means there’s no Special Litigation Committee in the first place, never mind a Special Litigation Committee that is pushed by the plaintiff into demanding discovery that shows that the controller was – in fact – consciously extracting value in the transaction at the expense of the minority (with the gleeful help of the CEO).

All those facts are just … poof … gone. Known only by the controller and his cronies. There’s no available evidence to show fraud on the board at the pleading stage, so there’s no point of entry for the court. Fraud rarely willingly leaves a trail of evidence of its own doings, but that is especially the case when the ones keeping the books that are available for inspection don’t even know they are being defrauded. There’s no outside examination allowed, of a situation that was clearly ripe for extracting value from the minority.

Does that seem right to anyone? And for what would we make this tradeoff? To save on some transaction costs that litigation necessarily brings? These companies are surely not pinching pennies when it comes to hiring the most expensive lawyers to create transactions that already attempt to evade judicial review in the first place, and that’s in the current regime where the Court still has some grip. In the proposed new world order? It’s a free for all.

Cases like Wanda Group, like In re Straight Path Communications Inc. Consolidated Stockholder Litigation, C.A. No. 2017-0486-SG (consol.), memo. op. (Del. Ch. Oct. 3, 2023), and like Stewart N. Goldstein, MD v. Alexander J. Denner, et al. [Bioverativ], C.A. No. 2020-1061-JTL, memo. op. (Del. Ch. May 26, 2022) – these cases show that, left to their own devices, the self-interested drives of our (very) human nature will be the forces driving controlling stockholders. And without entire fairness review, no one will ever been any the wiser. The standards of review are put in place for a reason, and while all rules add costs, there’s been no showing that this new proposed plan benefits anyone but the controllers at the inevitable expense of the minority. And whom are rules, laws, and judicial review frequently meant to constrain? In my humble opinion, it’s those with the most power who could do the most damage if left unchecked. Thems would be the controllers, ya hear?

The Court of Chancery has previously observed, “fraus omnia corrumpit—fraud vitiates everything.” In re Dole Food Co., Inc. Stockholder Litigation, C.A. No. 8703-VCL (consol.), opinion (Del. Ch. Aug. 27, 2015). Unsurprisingly, like Wanda Group, many of Delaware’s leading fiduciary cases involve correcting and deterring fraud-on-the-board. See, e.g., Confronting the Problem of Fraud on the Board (Friedlander). But under the IAC Defendants’ proposed standard-shifting regime in the Match appeal, it is hard to imagine how Delaware courts could realistically continue to combat fraud-on-the-board in non-squeeze-out transactions (and lord knows there’s not going to be any such thing as a squeeze-out anymore if controllers can just tunnel value away into an unreviewable “non”-squeeze-out transactions).

Predatory controllers will simply withhold relevant information from the special committee (as Aron and Wanda did), knowing that they will have no obligation to seek a stockholder vote, which in turn means they’ll have no obligation to provide a full accounting of the facts in a proxy statement. Even if hardy stockholders would opt to investigate through a books-and-records demand, they will find no trace of the fraud in the formal board materials because the special committee will not know that it was misled. Query what plaintiffs’ law firm is going to be willing to foot the bill for the books-and-records demand with almost zero hope that it will turn up the truth, also.

Even if some willful stockholders are persistent and make a books-and-records demand, the investigation will likely end with the production of sanitized board level materials (they give CLEs on how to paper those things up, let’s not kid ourselves, and that’s for when the board knows something – never mind when it’s also in the dark). So, anyhoo, the fraud will go undetected.

Even the most persistent stockholder who convinces the Court to order the production of company-side emails and text messages will still come up dry, as Section 220 offers no mechanism for stockholders to obtain emails or text messages from anyone other than the company. Imagine if Aron had been smart enough not to brag about the $25 million in his own WeChat messages and the only evidence existed in internal text messages amongst people at Wanda. Or imagine if it was outside investment bankers doing the bragging. Those documents could never -- under any circumstances -- be had through a books-and-records investigation.

The status quo -- to be clear, that is the actual status quo, which entails “that entire fairness presumptively applies whenever a controller extracts a non-ratable or unique benefit” and “minority stockholders are entitled to entire fairness review” absent the dual procedural protections outlined in In re MFW / M&F Worldwide (See, e.g., In re Tilray, Inc. Reorganization Litigation, C.A. No. 2020-0137-KSJM (consol.), memo. op. (Del. Ch. June 1, 2021)) – is working. The fact that some cases are brought and do not succeed is not a sign of the failure of the judicial standards of review, far from it. It is a sign that the court exercises a vast amount of judicial restraint in seeking the truth, and sometimes, the truth is not what it seems. At times, when there is smoke, there is actually no fire. That fact -- of course -- does not mean that we should give up investigating when we smell something funny.

As they say, should a system function well, there exists no necessity for its alteration. Just kidding, no one says that. In the parlance of our times: if it ain’t broke, don’t fix it. That is, we should probably let sleeping dogs (not controlling stockholders) lie.