(Bloomberg Law) — AMC Entertainment Holdings Inc. was blocked by a Delaware judge Friday from converting its controversial APE preferred units into common stock, a ruling that sent the company’s class A shares surging up to 100% in after-hours trading.
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Vice Chancellor Morgan T. Zurn rejected a nine-figure settlement that would have let the conversion proceed while handing out extra stock to mitigate the dilution of ordinary shareholders.
The agreement’s precise value, which is upwards of $100 million, had fluctuated with the company’s stock price. AMC shares were trading at $8.80 after closing at $4.40. The APE units, meanwhile, sank as much as 63% to $0.67.
Zurn, writing for Delaware’s Chancery Court, stressed that her ruling didn’t concern the myriad market manipulation theories—”about synthetic shares, Wall Street corruption, dark pool trading, insider trading, and RICO violations”—raised in letters sent to her by nearly 3,000 stockholders.
“At this juncture, the court’s only task is to approve or reject the proposed settlement,” the judge wrote. “To cut to the chase, the settlement cannot be approved as submitted.”
Mark Lebovitch, one of the lead attorneys for the investors who negotiated the settlement, said his clients “are carefully considering the court’s detailed opinion and are considering all of their options.”
The ruling sends the case—and the company, which is anxious to recapitalize—back to the drawing board. AMC has been eager to convert the APEs and issue additional shares as it contends with rising interest rates that have complicated its loan financing.
“When a judge says it’s time to slow down the process to make sure you get it right, you’d be an idiot not to pick up on the signal that the settlement needs some work,’’ said Larry Hamermesh, a retired University of Pennsylvania professor recognized as an expert in Delaware corporate law. “I expect we’ll see some revisions to the details” of the plan, he added.
Bitter Legal Battle
Most investors and analysts had expected Zurn to end the bitter legal battle over the APEs—AMC Preferred Equity units—which have been the subject of fierce litigation since February. The case has pitted AMC against many of the 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 APEs last year, including a 30% bloc to Antara Capital LP, and has been trying to convert them ever since. Each unit represents 1/100th of a preferred share theoretically worth 100 class A shares, so they’re supposed to be equivalent to common stock. But they have tended to trade at a steep discount due to uncertainty about the conversion.
Roughly 70% of the common stockholders who voted on the original APE conversion plan in March—before the agreement was reached—were in favor, though a relatively small number of them participated. The APEs also supported the proposal by a 9-to-1 margin.
But many other retail investors either oppose a move that would dilute their shares or just don’t vote on company proposals. More than 2,800 of them wrote to the court to speak against the settlement, and four showed up at the settlement hearing in June—one with counsel—to formally object.
The shareholder lawsuit, led by a pension fund and individual shareholder, accuses AMC of an illegal corporate engineering scheme aimed at sidelining its investor base. The suit focuses in particular on a “mirror voting” clause requiring a stock depositary company to vote all of the preferred shares proportionately based on the actual APE votes cast.
That policy, combined with Antara’s 30% vote in favor of the deal, let the company manipulate the outcome, the suit says. The hedge fund—which emerged as a villain in the eyes of many retail investors—has said it’s gotten threatening phone calls from people claiming to be AMC stockholders.
‘Antagonism’
Zurn’s decision Friday focused on the settlement’s scope, which she characterized as overbroad. The deal would release any legal claims held by common stockholders, including claims involving APEs they might also hold, the judge noted. Many AMC investors hold both types of securities as a hedge.
The pension fund and investor leading the case, “as common stockholders representing common stockholder class members, cannot release direct claims appurtenant to the preferred units,” Zurn wrote. “This is so even if some common stockholder class members happen to also hold preferred units.”
The settlement payment—extra common stock—also can’t form the basis for releasing claims based on the APEs, given that it actually comes out of their pockets, the judge said. She cited the “antagonism” between the two different types of securities.
“Fundamentally, in voting and value, what is bad for the common is good for the APE,” Zurn wrote. “Awarding more shares to common stockholders necessarily comes at the expense of preferred units.”
The judge flagged similar concerns during the settlement hearing in late June, expressing skepticism that Delaware’s corporate laws allow shareholder settlements to waive claims on an investor-by-investor rather than share-by-share basis.
Although the pension fund involved in the the case also holds APE units, it “is a lead plaintiff only in its capacity as a common stockholder,” Zurn said.
Bernstein Litowitz Berger & Grossmann LLP, Grant & Eisenhofer PA, Fields Kupka & Shukurov LLP, and Saxena White PA are counsel for the pension fund and investor leading the litigation. AMC is represented by Richards, Layton & Finger PA and Weil, Gotshal & Manges LLP. The retail investors are mostly representing themselves, 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, 7/21/23.
—With assistance from Jennifer Kay in Philadelphia.
To contact the reporters on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com; Jef Feeley in Wilmington, Del., at jfeeley@bloomberg.net
To contact the editors responsible for this story: Carmen Castro-Pagán at ccastro-pagan@bloomberglaw.com; Rob Tricchinelli at rtricchinelli@bloombergindustry.com
(Updates with Lebovitch comments in paragraph six and Hamermesh comments in paragraph eight.)
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