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A yearslong corporate tug-of-war over stock structure and shareholder payouts is nearing its finale.

Toy giant Funko Inc. and a class of its public investors have agreed to a Funko $5.4M settlement to resolve litigation in Delaware Court of Chancery accusing private equity backers and top brass of draining value from Class A stockholders through the company’s Up-C structure.

The proposed deal, filed Wednesday, would extinguish all claims in the case if approved by the court. Beyond the $5.4 million cash payment, the agreement calls for sweeping mutual releases designed to end the dispute “fully, finally and forever,” according to the stipulation.

The defendants deny any wrongdoing, fault or liability, and the settlement expressly states it is not an admission of misconduct.

How the Up-C Structure Sparked a Shareholder Storm

Funko, headquartered in Everett, Washington, went public in 2017 using an umbrella partnership C corporation, or Up-C, structure. Under that blueprint, operating assets remained housed in Funko Acquisition Holdings LLC, while Funko Inc. became the publicly traded parent entity.

Public investors bought Class A shares in the corporation. Meanwhile, pre-IPO owners kept economic interests in the operating LLC and retained voting power through Class B shares — a split design that later became the heart of the dispute.

In January 2021, a Class A shareholder launched a books-and-records demand, probing what he described as a “double dip.” His theory: pre-IPO owners — including former CEO Brian Mariotti, Acon Investments and Fundamental Capital LLC — collected tax distributions directly from the operating LLC while excess cash Funko Inc. received was not passed along to Class A investors.

According to the complaint, when those insiders later swapped LLC units for Class A shares, they allegedly reaped the benefit twice from the same stream of distributions — once as LLC owners and again as public shareholders.

The formal class action followed in January 2022, asserting breaches of fiduciary duty against alleged controlling stockholders, directors and officers. Defendants sought dismissal, but in December 2023, the Chancery Court rejected those efforts, allowing the case to advance. Erik Lynch later stepped in to replace the original plaintiff and pressed forward.

Recapitalization, Share Swaps and a $263 Million Exit

In May 2022, Funko executed a $74 million recapitalization. The company repurchased 4,251,701 LLC units and carried out a reverse unit split, canceling roughly 1,034,000 units held by pre-IPO owners.

Soon after, Acon exchanged 12,520,559 LLC units for Class A shares and sold them to The Chernin Group at $21 per share — a transaction worth approximately $263 million.

Defense counsel argued the recapitalization wiped out any potential injury and left Class A shareholders unharmed.