(Bloomberg) — AMC Entertainment Holdings Inc. won court approval for a share conversion plan that had sparked a lawsuit from shareholders and cast a cloud over the movie theater chain’s efforts to secure new financing.
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The settlement, approved Friday, includes additional shares for individual investors, thousands of whom had opposed it, citing, among other things, the dilution of their shares. Many of them fueled the pandemic-era “meme stock” rally that saved AMC from filing for bankruptcy.
Delaware Chancery Court Judge Morgan Zurn’s ruling concludes a long and acrimonious legal battle over AMC’s preferred equity units, or APEs, pitting the company’s top executives against a portion of that retail investor base. Last month, Zurn surprised the market by rejecting an earlier draft of the settlement, which caused the value of AMC’s regular stock to soar and APEs to plummet. She felt the original deal waived too many possible claims against the company.
Read the judge’s verdict here
AMC shares fell as much as 34% in post-exchange trading, while preferred stock rose more than 29%.
Compensate for the dilution
In a 110-page opinion, Zurn concluded that the settlement was reasonable, finding that while plaintiffs’ claim of breach of fiduciary duty was well founded, a remedy for that claim was “challenging to identify”. She noted that the revised pact included “additional common stock granted to current common stockholders to offset the dilutive effects.”
The settlement is valued at as much as $120 million, depending on AMC’s volatile share price. It wasn’t immediately clear when the APE conversion would take place, but AMC officials have said they hope to raise new funding by the middle of this month. Zurn said approval of the deal paves the way for the company to act and has indicated it intends to do so “as soon as possible”.
The case began when a pension fund and other shareholders challenged a plan to let APE holders — many of them arbitragers betting on the stock conversion — vote on AMC’s recapitalization proposals. Hedge fund Antara Capital LP owns approximately 30% of the APEs. More than 2,800 shareholders opposed the APE investor vote.
In rejecting the earlier version of the settlement, Zurn cited sections that would have waived claims from holders of common stock, including those who also own APEs. The resubmitted settlement included a more limited release, waiving only claims “involving ownership of common stock.”
The role of the meme stock investors has made the case unusual, especially as the focus of the legal process is on the accord. Writing to the court to oppose the share conversion plan, some raised concerns about dilution, while others cited market manipulation theories that have spread online.
AMC created the APEs last year to get around a stock cap it couldn’t lift without the backing of retail investors. The settlement sought to address their objections by handing out one additional Class A share for every 7.5 owned, a ratio that brought the value of the pact to approximately $110 million to $120 million.
Announcing the revised deal last month, AMC Chief Executive Officer Adam Aron stressed the “critical” importance of getting the deal approved and converting the APEs so the company can raise new equity.
The main objector to the deal, a retailer named Rose Izzo, has tried to derail it, take over the case and resume the lawsuit on behalf of others in her camp who feel “stabbed in the back” by AMC and its leaders, her lawyer said.
Chancery and Barbie
Izzo had asked Zurn to suspend any share conversion to allow time for an appeal if the court approved the settlement. Given the success of blockbusters Barbie and Oppenheimer and AMC’s strong financial results in the second quarter, the company’s “exaggerated concerns and unreasonable demands ring hollow,” she said in a lawsuit.
Shares of AMC have been on a wild ride as some traders and hedge funds, as part of their arbitrage bets, have increased their APE positions and shorted AMC shares. They have bet that they can pocket the spread once the conversion goes through and closes the price difference between the two. Zurn’s earlier ruling against the conversion proposal forced them to scale down that bet to limit their risk, boosting the stock.
Litigation on other fronts continues. AMC has sued its underwriters for refusing to fund the settlement, and another holder of the common stock is seeking an injunction requiring the company to hold its first annual meeting and board election in more than 13 months. Antara faces a securities lawsuit in federal court to recover alleged short swing profits.
The case is AMC Entertainment Holdings Inc. Shareholder Litigation, 2023-2015, Delaware Chancery Court (Wilmington).
–With help from Jennifer Kay and Yiqin Shen.
(Adds standard response in the first part and the judge’s reasoning in the second part.)
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