AMC Entertainment Holdings Inc. saw a surge in its class A shares following a surprising court ruling on Friday. The Delaware judge prevented the company from converting its controversial APE preferred units into common stock. This decision sent AMC's class A shares soaring up to 100% in after-hours trading. The ruling rejected a proposed settlement that would have allowed the conversion to proceed while compensating ordinary shareholders with extra stock to offset dilution.
The settlement, which was valued at over $100 million, had fluctuated based on the company's stock price. AMC shares were trading at $8.80 after closing at $4.40, while the APE units plummeted as much as 63% to $0.67.
The judge, Vice Chancellor Morgan T. Zurn, clarified that her ruling did not address the various market manipulation theories raised by thousands of stockholders. The court's task was solely to approve or reject the proposed settlement. Zurn stated in her opinion, "To cut to the chase, the settlement cannot be approved as submitted."
The investors who negotiated the settlement are now considering their options in light of the court's decision. The ruling has sent the case back to the drawing board, creating uncertainty for AMC, which has been seeking to recapitalize by converting the APEs and issuing additional shares.
Larry Hamermesh, an expert in Delaware corporate law, notes that the judge's call for a slowdown indicates that revisions to the settlement are likely to be made. AMC has been eager to proceed with the conversion of APEs due to the challenges posed by rising interest rates, which have complicated its loan financing.
The legal battle surrounding the APEs has been bitter, pitting AMC against many of the amateur investors who participated in the "meme stock" rally that saved the distressed theater chain during the pandemic. These APEs were issued last year, including a significant portion to Antara Capital LP, and their conversion has been a subject of contention ever since. Each APE unit theoretically represents 1/100th of a preferred share, equivalent to 100 class A shares, but they have been traded at a steep discount due to uncertainty about the conversion process.
While a majority of common stockholders who voted on the original APE conversion plan were in favor, many retail investors oppose the move, fearing dilution of their shares or abstaining from voting altogether. Over 2,800 retail investors expressed their opposition to the settlement in letters to the court, and a few even showed up at the settlement hearing in June to formally object.
The shareholder lawsuit, led by a pension fund and an individual shareholder, accuses AMC of engaging in an illegal corporate engineering scheme that aims to sideline its investor base. The suit focuses on a "mirror voting" clause that allows a stock depositary company to vote all the preferred shares proportionately based on the actual APE votes cast. This policy, combined with Antara's significant vote in favor of the deal, has led to accusations of manipulation.
Judge Zurn's ruling primarily centered on the scope of the proposed settlement, which she deemed to be overly broad. The release of legal claims held by common stockholders, including claims relating to the APEs, was a point of concern. The judge emphasized the antagonism between the common stock and the APEs, stating that "what is bad for the common is good for the APE." She highlighted that the settlement payment, in the form of extra common stock, cannot serve as a basis for releasing claims regarding the APEs as it ultimately comes from the pockets of APE holders.
During the settlement hearing, Zurn expressed skepticism about the ability to waive claims on an investor-by-investor rather than a share-by-share basis. Although the pension fund involved in the case also holds APE units, it is considered a lead plaintiff solely in its capacity as a common stockholder.
With the court's decision pushing the case and AMC's plans for APE conversion back to the drawing board, it remains to be seen how the situation will unfold. The settlement will likely undergo revisions, and AMC's recapitalization efforts will face further delays.