AMC’s Saga Over APE Settlement With Investors: Explained

AMC Entertainment Holdings Inc. investors have been on a wild ride in recent days after a flurry of developments in a blockbuster shareholder case against the theater chain, starting with a surprise court ruling July 21 that temporarily scuttled a nine-figure legal settlement.

1. What’s the Litigation All About?

AMC was one of several high-profile businesses—including GameStop Corp. and Bed Bath & Beyond Inc.—rescued by retail investors in 2021 from a bankruptcy driven by long-term trends that the Covid-19 pandemic had accelerated.

The “meme stock” rally briefly drove AMC’s stock price to astronomical levels. After it fell back to earth, the company was forced to rely on loan financing that became increasingly unsustainable as the Federal Reserve hiked interest rates to fight inflation.

AMC needed to recapitalize, but it was near its authorized share limit, and proposals aimed at selling new stock were dead on arrival thanks to the retail investors, it said. They had saved the business, and many bitterly opposed the prospect of having their stakes diluted. Even more of them simply didn’t vote on company proposals.

So the company created a new class of theoretically equivalent shares, called AMC Preferred Equity units—APEs—that it could sell at a discount to traders willing to place bets that AMC would be able to convert the APEs to ordinary stock, erasing the price difference. AMC gave out some of the APEs as a dividend and sold others, including a large bloc to hedge fund Antara Capital LP.

AMC then made the move that prompted the shareholder litigation: It said the APE holders themselves could vote on the plan to convert the preferred units. The proposal also included a “mirror voting” clause requiring a stock depositary to vote all the preferred units proportionately based on the actual APE votes cast.

A pension fund and individual AMC shareholders sued in Delaware’s Chancery Court in February, claiming the provision—together with the 30% guaranteed vote in favor by Antara—ensured the conversion would pass, allegedly violating Delaware corporate laws that require stockholders to vote as a class on any proposal to dilute them.

2. What Happened in Court?

The judge, Vice Chancellor Morgan T. Zurn, agreed to fast-track the case. She allowed AMC to proceed with its March 14 vote on the plan, but blocked the company from actually implementing any stock conversion without her permission. The proposal passed overwhelmingly, with 9-to-1 approval from the APEs and roughly 70% support from common stockholders, although most of them didn’t vote.

After about six weeks of litigation, the two sides emerged with a proposed class action settlement that would let the conversion move forward while handing out extra common stock to mitigate the impact on ordinary shareholders. The agreement’s precise value, which is upwards of $100 million, has fluctuated with the company’s stock price.

Analysts widely expected court approval, but retail shareholders began writing to the court in droves opposing the settlement, leading Zurn to name a special master who could review the tidal wave of correspondence. Nearly 3,000 investors ultimately sent almost 4,000 letters to the court, and four of them showed up at a settlement hearing in late June to formally object, one represented by counsel.

Some of the shareholders voiced straightforward concerns about the prospect of having their investments diluted. Many expressed deep anguish about their disillusionment with Wall Street. Others shared market manipulation theories spreading online about synthetic shares, dark pool trading, short sales by insiders, and corruption more broadly.

Zurn defied most predictions by turning the deal down July 21, but not based on any of those theories. Instead, the judge cited relatively narrow grounds, flagging sections of the settlement that waived any claims by common stockholders, including those involving APEs they might also hold. State corporate laws require such releases to work on a share-by-share rather than investor-by-investor basis, the judge said.

AMC shares briefly surged up to 100% in after-hours trading following the ruling, while the APE units sank as much as 63%. The huge swings reflected the arbitrage positions of traders and hedge funds who were forced to start unwinding their bets on a speedy conversion.

3. Where Do Things Stand Now?

In her ruling, Zurn told the company and the shareholders who negotiated the settlement that their choices were to abandon the deal and resume litigating the case, or to strike the portions she had called unenforceable and resubmit the agreement, leaving AMC exposed to potential legal claims by APE holders.

They opted for the latter approach, filing a revised settlement July 24 after signing it the evening of July 22. The new version includes a narrower release, waiving only claims “that relate to the ownership of common stock.”

The lone settlement objector with a lawyer, meanwhile, filed a motion seeking clarification on where Zurn’s ruling leaves a bid by her attorney to take over the case, ditch the settlement, and restart the litigation.

Zurn, writing in response late Monday, said the deal approval process can resume without a delay for retail investors to file new objections. “The narrowed release does not adversely affect the putative class,” she said in a letter, suggesting the new settlement could be approved in August.

The judge signaled she remains sensitive to AMC’s recapitalization needs, which the company called urgent as recently as Sunday, when CEO Adam Aron published an open letter in social media saying that if the company can’t raise equity capital, it could run out of cash in 2024 or 2025. “The risk of financial collapse is not whimsical,” Aron said. AMC previously requested a ruling “before the capital markets go quiet in August,” Zurn noted.

But she chided the parties for dragging their feet on addressing her concerns about the release after she flagged them at the settlement hearing. “Please advise, with as much detail as possible, as to any events or circumstances compelling a decision by a certain date,” Zurn wrote.

AMC’s common shares dropped as much as 15% in after-hours trading July 24, while its APE preferred units spiked as much as 19%. On Tuesday, the common stock closed at about $5.11, while the APEs closed at around $1.77.

Elsewhere, AMC has sued its insurers, accusing them of refusing to fund the settlement. A different stockholder is seeking a court order compelling the company to hold its first annual meeting and board election in more than 13 months. Antara is also facing a securities lawsuit in federal court seeking the return of its alleged short-swing profits.

Read More:

• AMC’s ‘APE’ Stock Draws Pension Fund Suit Over Dilution Claims
• AMC ‘APE’ Vote Gets Green Light, But Charter Changes Must Wait
• AMC, APE Holders Reach $100 Million Deal in Conversion Fight
• AMC Shares Surge as Judge Denies APE Deal in Surprise Ruling (4)
• AMC Shares Surge on Court Ruling, With New Settlement Filed (3)