Judge Nix’s AMC Entertainment shareholder settlement – deadline

In a convoluted court case, a Delaware judge today threw out a settlement that would have helped AMC Entertainment move forward with steps to raise money and prop up its stock.

“To be fair, the settlement cannot be accepted as submitted,” Delaware Chancery Court Judge Morgan Zurn wrote in a 69-page opinion released today. Her ruling followed several days of hearings earlier this summer in a case originally filed by a group of AMC investors challenging the company’s plans to convert preferred stock into common stock. The exhibitor and shareholders subsequently reached a settlement in the case, but it required the judge’s approval.

Long story short: If AMC needs to raise cash in a flash, it needs to sell AMC Preferred Equity units, or APEs, which are worth much less than its common stock. APEs fell 14% to $1.54 in late trading today. AMC’s common stock rose 63% to $7.17 after what could be a problematic ruling for the chain, however.

AMC avoided bankruptcy during and after Covid as retail investors piled into the stock with gusto. And the box office has made great strides, including this great weekend. CEO Adam Aron told Deadline in April that he saw today’s ruling as the “icing on the cake” of a turnaround. “I will be more confident after this, after we have the ability to conduct the shareholder vote,” he added. “When you have the flexibility to raise capital if you need it, that’s really important. “Whether we need it or not depends on what … the box office is this year,” Aron told Deadline then.

Now there is an increased risk that an actors’ strike could push the release schedule as early as the fourth quarter for major films that need the help of press tours by named actors. If it goes to the autumn and beyond, the 2024 fund will feel it.

Zurn said the parties in the case “cited AMC’s financial situation” as they “sought to present their settlement for approval in a compressed time frame.”

Aron created APEs as a solution last summer after shareholders repeatedly refused to give AMC permission to issue new shares, which would have diluted their holdings. AMC didn’t need their authorization to issue APEs, so it was potentially a good idea. But the company waited a bit and the price of the APEs, which are traded on the NYSE, began to fall and fell below a dollar. So this year, AMC said ‘forget it.’ It proposed eliminating APEs by converting them to common stock, issuing new common stock, and a ten-for-one reverse stock split to increase the value of the volatile common stock.

The plan was approved by a majority of the shareholders at an extraordinary meeting. The judge today noted possible disparity in voting due to different features of the APEs versus ordinary shares.

Shareholders led by the Allegheny County Employees’ Retirement System sued AMC in Chancery Court before the vote to block the proposal, but then reached a settlement with the chain soon after. Zurn said today that the settlement did not take into account the interests of both AMC shareholders and APE shareholders, who are diametrically opposed.

“Under Delaware law, the court must review all class actions to ensure that (1) the representative plaintiffs negotiated a settlement for the class that falls within a range of reasonable outcomes that a disinterested person could accept, and (2) the representative plaintiffs satisfied the requirements of due process so that the settlement can bind absent class members to the plaintiff,” she wrote in the plaintiff’s opinion.

The case included a comment period open to all AMC shareholders — such a large group that Zurn needed to hire a special master to handle them.

“AMC’s shareholder base is extraordinary. It includes a large number of human owners who care passionately about their stock ownership and the company. Many of them are connected to each other online. When notice went out to AMC shareholders, the reaction was unprecedented. The court received more than 3,500 submissions from approximately 2,850 alleged shareholders.” She said disparate treatment for the two classes of stockholders was not raised by either, she said. Issues raised included “theories of synthetic stock, Wall Street corruption, dark pool trading, insider trading and RICO violations, and a share count request.” But “the court’s role is limited to considering settlement-specific issues.”

It is not clear what happens next. An AMC did not immediately respond to a request for comment.

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