(Bloomberg Act) – AMC Entertainment Holdings Inc. was blocked by a Delaware judge on Friday from converting its controversial APE preferred units into common stock, a move that sent the company’s Class A shares soaring as high as 100% in after-hours trading.
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Vice Chancellor Morgan T. Zurn rejected a nine-figure settlement that would have allowed the conversion to proceed while distributing additional shares to mitigate common shareholder dilution.
The precise value of the deal, which is over $100 million, had fluctuated with the company’s stock price. AMC shares were trading at $8.80 after closing at $4.40. APE units, meanwhile, fell 63% to $0.67.
Zurn, writing for the Delaware Chancery Court, stressed that his decision did not address the myriad of theories about market manipulation — “about synthetic stocks, Wall Street corruption, black pool trading, insider trading and RICO violations” — raised in letters sent by nearly 3,000 shareholders.
“At this point, the sole task of the court is to approve or reject the proposed settlement,” the judge wrote. “To cut to the chase, the settlement cannot be approved as submitted.”
The decision sends the case – and the company, anxious to recapitalize – back to the drawing board. AMC rushed to convert the APEs and issue additional shares as it faces rising interest rates that have complicated its debt financing.
Most investors and analysts expected Zurn to end the bitter legal battle over APEs — AMC Preferred Equity shares — which have been the subject of fierce litigation since February. The case pitted AMC against many amateur investors who participated in the “meme stock” rally that saved the distressed theater chain at the height of the pandemic.
The company issued the EPAs last year, including a 30% block to Antara Capital LP, and has been trying to convert them ever since. Each unit represents 1/100th of a preferred stock notionally worth 100 Class A shares, so they are meant to be equivalent to common stock. But they tended to trade at a steep discount due to the uncertainty surrounding the conversion.
About 70% of ordinary shareholders who voted on the initial APE conversion plan in March – before the deal was reached – were in favor, although a relatively small number participated. EPAs also backed the proposal by a 9-1 margin.
But many other retail investors oppose a move that would dilute their shares or simply won’t vote on the companies’ proposals. More than 2,800 of them wrote to the court to speak out against the settlement, and four showed up at the settlement hearing in June, including one with a lawyer, to formally oppose it.
The shareholders’ lawsuit, led by a pension fund and an individual shareholder, accuses AMC of an illegal corporate engineering scheme to sideline its investor base. The lawsuit notably relates to a “mirror vote” clause requiring a depository company to vote all preferred shares proportionally according to the actual APE votes cast.
That policy, combined with Antara’s 30% vote in favor of the deal, left the company to manipulate the outcome, the lawsuit says. The hedge fund, which has come across as a villain to many retail investors, said it received threatening phone calls from people claiming to be AMC shareholders.
Bernstein Litowitz Berger & Grossmann LLP, Grant & Eisenhofer PA, Fields Kupka & Shukurov LLP and Saxena White PA are the pension fund attorneys and the investor leading the litigation. AMC is represented by Richards, Layton & Finger PA and Weil, Gotshal & Manges LLP. Retail investors are primarily self-represented, although one is represented by Halloran Farkas & Kittila LLP.
The case is In re AMC Ent. Holdings Inc. S’holder Litig., Del. Ch., no. 2023-2015, 07/21/23.
—With help from Jennifer Kay in Philadelphia and Jef Feeley in Wilmington, Del.
To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com
To contact the editors responsible for this story: Carmen Castro-Pagán at ccastro-pagan@bloomberglaw.com; Rob Tricchinelli at rtricchinelli@bloombergindustry.com
(Updates with stock movement in the first and third paragraphs and additional details on the court’s decision in the fifth and sixth.)
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