AMC’s Post-APE Stock Crash Reduces Attorney Fees to $5.7 Million

Lawyers who negotiated the settlement that let AMC Entertainment Holdings Inc. convert its APE preferred units into stock will take home $5.7 million—not the $20 million they had sought—after the company’s shares crashed following the conversion.

A Delaware judge, Vice Chancellor Morgan T. Zurn, handed the shareholder attorneys the seven-figure payout Monday, five weeks after she signed off on the deal that ended the bitter court fight between the theater chain’s leaders and its investors, including thousands of “meme stock” traders who powered the rally that spared AMC from a pandemic-era bankruptcy.

AMC’s shares have cratered roughly 85% since the settlement was approved Aug. 11, closing at $8.36 on Sept. 15. The company said Sept. 14 that it had sold 40 million shares for $325.5 million after announcing Sept. 5 that it planned to sell 390 million shares worth about $3.4 billion at the time.

Zurn’s decision for Delaware’s Chancery Court followed three days after the judge handed $213,000 to counsel for Rose Izzo, the retail investor whose settlement objections played a role in delaying the stock conversion by three weeks. Zurn initially rejected an earlier version of the pact July 21, sending the common stock soaring and the AMC Preferred Equity units, or APEs, plunging.

The rulings on legal fees capped a wild ride for retail investors and arbitragers who bet on the conversion by buying large numbers of APEs, financed by pricy debt, during the months when they traded at a steep discount to the class A stock.

AMC—increasingly desperate to recapitalize amid a years-long downturn in the movie industry—created the preferred units last year to get around a share limit it couldn’t raise without the approval of its retail investor base, which opposed a maneuver that would significantly dilute its members.

Volatile Settlement Value

Zurn had said she would award legal fees totaling 12% of the settlement. But she declined to base those calculations on AMC’s trading price when she approved the accord, saying she would wait until the company actually raised its share limit, converted the APEs, performed a 10-to-1 reverse stock split, and completed the deal by issuing one new class A share for every 7.5 held.

The extra shares handed out in the settlement, which fluctuated in value based on the company’s volatile stock price, were at one point worth nearly $130 million. But by the time they were doled out, their “notional value” was a little more than $76 million and their “dilution-adjusted value” was $48 million, according to Zurn’s Sept. 15 order, which was entered Monday.

The decision came about two months after the judge initially rejected the agreement, stunning the market. That decision said the release of legal claims against the company was too broad, drawing cheers from retail traders who wrote to Zurn by the thousands—and are still writing her—to oppose the accord.

Delaware’s top court gave the stock conversion a final green light Aug. 21.

Meme Stock Investors

The vocal and often disruptive involvement of meme stock investors has made the court case unusual, especially as the focus of the proceedings turned to the settlement. More than 2,800 of them wrote to oppose the pact over dilution concerns or market-manipulation theories that have spread online.

Zurn’s decision handing around $213,000 to Izzo’s lawyers, and $3,000 to Izzo herself, came the same day she denied a pair disorganized motions by meme stock investors, including one challenging her impartiality on wide-ranging grounds. But Izzo—the only settlement objector to retain counsel—was far from disorganized, the judge said.

She largely rejected attempts by Izzo’s lawyers to take credit for the roughly $14 million saved by her choice to wait until after the stock conversion before calculating the $5.7 million fee, and she gave them only about one-third of the $650,000 they had sought. But Zurn acknowledged that their arguments played an important role in the case.

“To be sure, some of her challenges were weak, and served more as a distraction rather than a helpful check on the merits of the settlement,” the judge said. “Nevertheless, it is clear that Izzo took a serious, thorough look into the merits.”

It’s challenging for judges to evaluate settlements that are favored by both sides, which “drop their adversarial weapons and work together towards the common goal” of getting the pact approved, according to Zurn’s nine-page ruling.

“This one-handed clapping makes it more difficult for the court to ensure that the proposed settlement is fair,” she said. “Izzo’s work provided the adversarial perspective of Delaware attorneys on an expedited and complex settlement that posed several novel procedural and substantive difficulties.”

Bernstein Litowitz Berger & Grossmann LLP, Grant & Eisenhofer PA, Fields Kupka & Shukurov LLP, and Saxena White PA are counsel for the lead shareholders. AMC is represented by Richards, Layton & Finger PA and Weil, Gotshal & Manges LLP. Izzo is represented by Margrave Law LLC and Halloran Farkas & Kittila LLP.

The case is In re AMC Ent. Holdings S’holder Litig., Del. Ch., No. 2023-0215, 9/18/23.