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In a contorted legal case, a Delaware judge today struck down a settlement that would have helped AMC Entertainment move ahead with steps to raise cash and shore up its stock.
“To cut to the chase, the settlement cannot be approved as submitted,” Judge Morgan Zurn of Delaware Chancery Court wrote in a 69-page opinion released today. Her ruling followed several days of hearings earlier this summer in a suit initially brought by a group of AMC investors who challenged the company’s plans to convert preferred equity into common stock. The exhibitor and the shareholders subsequently reached a settlement in the case but that required the judge’s approval.
Long and short: If AMC has to raise cash in a pinch, it will need to sell AMC Preferred Equity units, or APEs, which are worth much less than its common stock. The APEs fell 14% to $1.54 in late trading today. AMC common shares surged 63% to $7.17 after what could, however, become a problematic ruling for the chain.
AMC avoided bankruptcy during and after Covid as retail investors piled into the stock with gusto. And the box office has made major strides, including this great looking weekend. CEO Adam Aron told Deadline in April that he viewed today’s ruling as “the icing on the cake” of a turnaround. “I will be more confident after this, after 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 will need to or not depends on what … the box office is this year,” Aron told Deadline then.
Now, there’s added risk that an actors’ strike could pressure the release schedule as soon as the fourth quarter for big films that need the traction of press tours by name actors. If it goes into the fall and beyond, the 2024 box office will feel it.
Zurn said parties to the case “cited AMC’s financial situation” as they “sought to present their settlement for approval on a compressed timeframe.”
Aron created APEs as a workaround last summer after stockholders repeatedly balked at authorizing AMC to issue new shares, which would dilute their holdings. AMC did not require their authorization to issue APEs, so potentially a great idea. But the company waited at bit and the price of the APEs, which are traded on the NYSE, started to drop, falling below a dollar. So this year, AMC said ‘never mind.’ It proposed eliminating APEs by converting them into common shares, issuing new common shares, and a ten-for-one reverse stock split to boost the value of the volatile common stock.
The plan was approved by a majority of shareholders at a special meeting. The judge today noted possible inequity in the vote due to different features of the APEs vs the common shares.
Shareholders led by Allegheny County Employees’ Retirement System sued AMC in Chancery Court before the vote to block the proposal but then reached a settled with the theater chain soon after. Zurn said today the settlement failed to address the interests of both AMC common stockholders 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 negotiated a deal for the class that falls within a range of reasonable results that a disinterested person could accept, and (2) the representative plaintiffs satisfied the requirements of due process such that the settlement can bind absent class members to the deal the representative plaintiffs negcotiated,” she wrote in her opinion.
The case included a comment period open to all AMC shareholders — such a large group that Zurn needed to hire a Special Master to handle them.
“AMC’s stockholder base is extraordinary. It includes a great number of human owners who care passionately about their stock ownership and the Company. Many of them are connected to each other online. When notice went out to AMC stockholders, the reaction was unprecedented. The Court received more than 3,500 communications from approximately 2,850 purported stockholders.” She said disparate treatment for the two classes of equity holders was not raised by any of them, she said. Issues raised included “theories about synthetic shares, Wall Street corruption, dark pool trading, insider trading, and RICO violations, and a request for a share count.” But “the Court’s role is limited to considering settlement specific issues.”
It’s not clear what happens next. An AMC didn’t immediately respond to a request for comment.