(Bloomberg) — AMC Entertainment Holdings Inc. Court approval of the stock conversion plan spurred a lawsuit against shareholders and cast a cloud over the movie theater chain’s efforts to secure new funding.
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The settlement, approved on Friday, includes additional shares for individual investors, which thousands have opposed, citing dilution of their stakes among other concerns. Many of them fueled the pandemic-era “meme stock” rally that saved AMC from bankruptcy.
The ruling by Delaware Chancery Court Judge Morgan Zorn concludes a long and bitter legal battle over AMC’s preferred stock units, or APEs, that pitted the company’s top executives against a portion of its retail investor base. Last month, Zurn surprised the market by rejecting an earlier version of the settlement, sending the value of AMC’s common shares up and APEs down. It found that the original deal waived a lot of the potential claims against the company.
Read the judge’s opinion here
Shares of AMC were down as much as 34% in after-market trading, while blue-chip shares were up more than 29%, narrowing the spread between the two to about $1.50.
In a 110-page opinion, Zorn concluded that the settlement was reasonable, and found that while the plaintiffs’ claim of breach of fiduciary duty had merit, the compensation for that claim was “a challenge to determine.” It noted that the amended agreement included “additional shares of common stock granted to existing common stockholders to offset the diluting effects.”
Zurn’s primary task was to determine whether the settlement was fair given the strength or weakness of shareholder claims. It concluded that their main legal theory was relatively strong but not certain, and that the risk of loss made the settlement a fair deal.
“Where the plaintiff establishes that the directors acted with the essential purpose of impeding the exercise of the shareholder’s voting right,” the judge wrote, the company’s board members must “demonstrate that their actions were reasonable.” She said that AMC actually did not convince her of this, but that she “might have been able to prevail” if she had gone to trial.
The value of the settlement has been estimated at up to $120 million, depending on AMC’s volatile share price. It wasn’t immediately clear when APE’s conversion would take place, but AMC officials said they hope to raise new funding by the middle of this month. Zorn said approval of the deal clears the way for the company to operate and that it has indicated it intends to do so “as quickly as possible.”
The case began when a pension fund and other shareholders challenged the plan to allow APE holders — many of whom are observers betting on a stock shift — to vote on proposals to recapitalize AMC. Hedge fund Antara Capital LP owns approximately 30% of APEs. More than 2,800 shareholders opposed giving APE investors the right to vote.
In rejecting the earlier version of the settlement, Zurn cited divisions that would have waived any claims by common stock holders, including those who also own APE. The re-introduced settlement included a narrower disclaimer, waiving only claims “which relate to ownership of the common stock”.
The role of the meme stock investors has made the case unusual, especially since the focus of the legal action has shifted to the agreement. In writing to the court opposing the stock conversion plan, some have expressed dilution concerns, while others have cited market manipulation theories that have proliferated online.
AMC created APEs last year to get around a stock limit that could not be raised without the support of retail investors. The settlement intended to address their objections by distributing one additional Class A share for every 7.5 held, a ratio that valued the agreement at about $110 million to $120 million.
When announcing the revised agreement last month, AMC CEO Adam Aron stressed the “critical” importance of getting approval for the deal and converting APEs so the company can raise new capital.
The lead objector to the agreement, a retailer named Rose Izzo, sought to derail her, take the case and appeal the fight in court on behalf of others in her camp who felt “stabbed in the back” by AMC and its leaders, her attorney said.
Chancery and Barbie
Izzo asked Zurn to put any stock transfer on hold to allow time to appeal if the judge approved the settlement. Given the success of Barbie & Oppenheimer’s business and AMC’s strong second-quarter financial results, “exaggerated fears and unreasonable demands ring hollow,” she said in the lawsuit.
AMC shares have been in for a rough ride because some traders and hedge funds, as part of their arbitrage bets, have been adding to their APE positions and going short AMC shares. They were betting that they would be able to capture the spread once the transfer went through and narrow the price gap between the two. Zurn’s previous ruling against the conversion proposal forced them to start scrapping that bet to reduce their risk, which boosted the stock.
Litigation continues on other fronts. AMC sued its insurance companies for refusing to fund the settlement, and another holder of common stock is seeking a court order requiring the company to hold its first annual meeting and elect a board of directors in no more than 13 months. Antara is facing a securities lawsuit in federal court seeking the return of its alleged short-term dividend.
The case is AMC Entertainment Holdings Inc Shareholder Litigation, 2023-2015, Delaware Chancery Court (Wilmington).
– With assistance from Jennifer Kay and Yaqin Shen.
(Adds context to the stock reaction in the first section and more of the judge’s reasoning in the second.)
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