AMC Entertainment Holdings Inc. faced a setback in its efforts to convert its APE preferred units into common stock as a Delaware judge, Vice Chancellor Morgan T. Zurn, blocked the conversion on Friday. The ruling sparked a surge in AMC’s class A shares, which rose up to 100% in after-hours trading.
The judge rejected a proposed settlement worth over $100 million that would have allowed the conversion to proceed while also providing extra stock to mitigate the dilution of ordinary shareholders. AMC’s shares closed at $4.40, but shot up to $8.80 in after-hours trading. On the other hand, the APE units plummeted 63% to $0.67.
Vice Chancellor Zurn made it clear that her ruling did not address the various market manipulation theories presented in letters from nearly 3,000 stockholders. The court’s task was solely to approve or reject the proposed settlement, which was ultimately rejected.
This ruling sends the case, as well as the company’s recapitalization efforts, back to square one. AMC has been eager to convert the APEs and issue additional shares as it navigates rising interest rates that have complicated its loan financing.
The legal battle over the APEs, which are AMC Preferred Equity units, has been ongoing since February. The case has pitted AMC against many of the amateur investors who participated in the “meme stock” rally that saved the struggling theater chain during the pandemic. AMC issued the APEs last year, including a 30% bloc to Antara Capital LP, and has been attempting to convert them ever since.
Retail investors have been divided on the issue. While 70% of common stockholders who voted on the original APE conversion plan supported it, many others opposed the move as it would dilute their shares. More than 2,800 retail investors wrote letters opposing the settlement, and four attended the settlement hearing in June to voice their objection.
The shareholder lawsuit, led by a pension fund and an individual shareholder, alleges that AMC engaged in illegal corporate engineering to sideline its investor base. The lawsuit specifically focuses on a “mirror voting” clause that requires a stock depositary company to vote preferred shares proportionately based on the actual APE votes cast. Antara’s 30% vote in favor of the conversion greatly influenced the outcome, according to the suit.
Vice Chancellor Zurn’s decision centered on the overbroad scope of the proposed settlement, stating that it would release legal claims by common stockholders, including claims involving APEs they might hold. This raised concerns for investors who hold both types of securities as a hedge. The judge also highlighted the “antagonism” between the common stock and the APE units.
During the settlement hearing, Vice Chancellor Zurn expressed doubts about whether Delaware’s corporate laws permit shareholder settlements to waive claims on an investor-by-investor basis rather than a share-by-share basis. The pension fund involved in the case holds APE units but is acting as a lead plaintiff in its capacity as a common stockholder.
AMC is represented by Richards, Layton & Finger PA and Weil, Gotshal & Manges LLP, while the pension fund and investor leading the litigation are represented by Bernstein Litowitz Berger & Grossmann LLP, Grant & Eisenhofer PA, Fields Kupka & Shukurov LLP, and Saxena White PA. Most of the retail investors are representing themselves, although one is represented by Halloran Farkas & Kittila LLP.
The case is ongoing and is referred to as In re AMC Ent. Holdings Inc. S’holder Litig.