In a twisted legal case, a Delaware judge today struck down a deal that would help AMC Entertainment move forward with steps to raise money and shore up its stock.
“In conclusion, the agreement cannot be approved as presented,” Judge Morgan Zurn of the Delaware Court of Chancery wrote in a 69-page opinion issued today. Her decision followed several days of hearings earlier this summer in a lawsuit originally filed by a group of AMC investors who objected to the company’s plans to convert preferred stock into common stock. The exhibitor and shareholders subsequently reached an agreement on the matter, but this required the judge’s approval.
Long and short: If the AMC needs to raise money for some time, it will have to sell the AMC’s preferred equity units, or APEs, which are worth much less than its common stock. APEs fell 14% to $1.54 in late trading today. AMC common stock jumped 63% to $7.17 after a decision that could still be problematic for the chain.
AMC avoided bankruptcy during and after Covid as retail investors flocked to the stock with gusto. And the box office has made huge strides, including this amazing weekend. CEO Adam Aron told Deadline in April that he saw today’s decision as the “icing on the cake” of a turnaround. “I will be more confident after that, once we have the ability to implement the shareholder vote,” he added. “When you have the flexibility to raise capital if you need to, it’s really important. Whether we need it or not depends on how this year’s box office is going to be,” Aron told Deadline at the time.
Now, there is the added risk that an actors’ strike could put pressure on the release schedule as early as the fourth quarter for big films that should attract popular press tours. If it goes into the fall and beyond, 2024 tickets will feel it.
Zurn said the parties in the case “cited AMC’s financial situation” as they “requested to submit their settlement for approval in a tight timeframe.”
Aron created the APEs as a solution last summer after shareholders repeatedly objected to AMC’s authorization to issue new shares, which would dilute their holdings. AMC didn’t ask for their authorization to release APE, so a potentially great idea. But the company waited a while and the price of APEs, which are traded on the NYSE, began to fall, falling below one dollar. So this year, AMC said ‘never mind’. He proposed eliminating APEs by converting them to common stock, issuing new common stock, and a ten-for-one reverse stock split to increase the value of volatile common stock.
The plan was approved by a majority of shareholders at a special meeting. The judge today noted potential voting disparities due to the different features of APEs versus common shares.
Shareholders led by the Allegheny County Employees Retirement System sued AMC in Chancery Court before the vote to block the proposal, but then reached a settlement with the theater chain soon after. Zurn said today that the deal failed to address the interests of AMC’s common shareholders and APE holders, which are diametrically opposed.
“Under Delaware law, the Court must review all class action settlements to ensure that (1) the representative plaintiffs have negotiated a class settlement that falls within a range of reasonable outcomes that a disinterested person might accept, and (2) the representative plaintiffs have satisfied due process requirements so that the settlement can bind absent class members who do not appeal the settlement.
The case included an open comment period for all AMC shareholders – a group so large that Zurn had to hire a Special Master to handle them.
“AMC’s shareholder base is exceptional. It includes a large number of human owners who care passionately about their stock ownership and the Company. Many of them are connected to each other on the Internet. When it was announced to AMC shareholders, the reaction was unprecedented. The court received more than 3,500 communications from approximately 2,850 purported shareholders.” The different treatment of the two classes of equity holders was not raised by either of them, it said. The issues raised included “theories about synthetic stocks, Wall Street corruption, dark trading, insider trading and RICO violations, and a request for a stock count.” But “the role of the Court is limited to examining specific settlement issues”.
It is not clear what will happen next. An AMC did not immediately respond to a request for comment.