(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.
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.”
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.
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.
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 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 first and third paragraphs and additional details about the court ruling in fifth and sixth.)