Delaware Judge Strikes Down Settlement That Would Help AMC Entertainment Raise Cash
In a surprising twist of events, a Delaware judge has struck down a settlement that would have enabled AMC Entertainment to raise capital and stabilize its stock. Judge Morgan Zurn of Delaware Chancery Court ruled that the settlement cannot be approved as submitted in a 69-page opinion released earlier today.
The case initially stemmed from a group of AMC investors who challenged the company’s plans to convert preferred equity into common stock. The shareholders and the exhibitor eventually reached a settlement, but it required the judge’s approval. However, Judge Zurn rejected the settlement, throwing a wrench in AMC’s efforts to secure funds.
As a result of the ruling, if AMC needs to raise cash quickly, it will have to sell its AMC Preferred Equity units (APEs), which are valued significantly less than its common stock. Following the news, the APEs fell 14% to $1.54 in late trading, while AMC common shares surged 63% to $7.17. It remains to be seen how this ruling will impact the chain in the long run.
AMC has managed to avoid bankruptcy during and after the COVID-19 pandemic, thanks to the support of retail investors. The company has also made significant progress at the box office recently. CEO Adam Aron viewed the ruling as “the icing on the cake” of their turnaround, expressing confidence in their ability to raise capital if needed. However, with the added risk of a potential actors’ strike in the fourth quarter, big films may face challenges in their release schedules, potentially impacting the 2024 box office.
Judge Zurn noted that the parties in the case rushed to present the settlement for approval due to AMC’s financial situation. The settlement proposal aimed to eliminate APEs by converting them into common shares, issuing new common shares, and implementing a reverse stock split. While approved by a majority of shareholders at a special meeting, the judge found possible inequity in the vote due to the different features of APEs compared to common shares.
The shareholder group that initially sued AMC reached a settlement before the vote, but Judge Zurn concluded that the settlement failed to address the interests of both AMC common stockholders and APE holders. Under Delaware law, the court must review all class action settlements to ensure that the representative plaintiffs negotiated a fair deal for the class and satisfied the requirements of due process.
During the comment period of the case, which was open to all AMC shareholders, Judge Zurn received an unprecedented number of communications from purported stockholders. Despite various issues raised, such as theories about synthetic shares and insider trading, none of the shareholders raised concerns about disparate treatment between equity holders.
The future of AMC remains uncertain in light of this ruling. As of now, the company has not provided further comments or statements regarding the court’s decision.