AMC Judge Upholds Trading Ban for Investors Who View Court Files

AMC Entertainment Holdings Inc. investors who view confidential court files related to a nine-figure legal settlement must pledge to refrain from trading AMC securities until the case concludes, a Delaware judge said Wednesday.

Vice Chancellor Morgan T. Zurn declined to reconsider the trading ban and other provisions of a confidentiality agreement she previously approved, including a clause that prohibits shareholders from discussing the documents with one another. The investors have said they need the files as they weigh whether to go to court in late June to oppose the settlement, which would end litigation over AMC’s APE preferred units.

Concerns about stock volatility and sudden financial hardships don’t change the conclusion that “more stringent protections are warranted,” the judge said. She cited the potential for insider trading or other securities violations. “A stockholder with access to material nonpublic information will be hard pressed to establish a trade was not based on that information,” Zurn wrote for Delaware’s Chancery Court.

The shareholders—many of them participants in the surprise “meme stock” rally that rescued AMC from the brink of a pandemic-related bankruptcy—have written to the court in droves about the settlement. The deal would resolve a proposed class action led by a pension fund that challenged the company’s plan to convert the APE units into common stock.

Most of the amateur investors have indicated they’re against the agreement, although a majority of the relatively small number voting on the original conversion plan approved it in March, before the settlement. That proposal also received overwhelming support from the APEs, many of which are held by sophisticated institutional traders.

Each APE represents 1/100th of a preferred share theoretically worth 100 class A shares, so they’re supposed to be equivalent to common stock. But the units have tended to trade at a steep discount due to uncertainty about the conversion. The gap has fluctuated drastically in recent months based on developments in the court case.

‘Appropriate Precaution’

The settlement, announced in early April, would let the company move ahead with its plan to recapitalize by converting the APEs, while each owner of common stock would get an additional share for every 7.5 they hold. The deal is allegedly worth more than $100 million at current stock prices.

Zurn held May 20 that ordinary investors can see the confidential court record within 100 miles of their address, subject to highly restrictive conditions. The company can supervise the shareholders, prohibit or limit printing, ban electronic devices, and eject anyone behaving “inappropriately,” the judge wrote at the time.

She also ordered investors seeking document access to sign a 41-page confidentiality agreement and warned them to comply with it. One of the shareholders subsequently asked her to rethink several of those conditions, including the trading ban, the prohibition on discussing the files, and another provision requiring settlement objectors to prove they hold AMC stock.

Zurn rejected the request. The proof-of-ownership condition is standard in the context of shareholder settlements, which only actual members of the class action have standing to oppose, the judge said Wednesday. Although she acknowledged the other conditions are unusual, she said they’re justified in light of AMC’s “legitimate” confidentiality concerns.

“Stockholders seeking advice on whether or how they should object are encouraged to seek legal counsel, not the advice of other stockholders or the online community at large,” Zurn wrote. The trading ban is also “an appropriate precaution,” the judge said. The investors will have to decide for themselves if the tradeoffs involved in viewing the confidential documents are worth it, she concluded.

Bernstein Litowitz Berger & Grossmann LLP, Grant & Eisenhofer PA, Fields Kupka & Shukurov LLP, and Saxena White PA are counsel for the pension fund and investors 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. Stockholder Litig., Del. Ch., No. 2023-0215, 5/24/23.