AMC Shares Surge on Court Ruling, With New Settlement Filed (3)

AMC Entertainment Holdings Inc. shares rose as much as 42% on Monday after a surprise court ruling Friday scuttled a stock conversion plan the cinema chain has now revised.

The company and investors leading a lawsuit over the plan filed a revision of a nine-figure settlement over the weekend in Delaware Chancery Court to address problems identified by Judge Morgan Zurn. The ruling, in which Zurn found that the original deal waived too many potential claims against the company, stunned some investors and analysts, who had expected her to sign off on the proposed class action settlement.

WATCH: A ruling blocks AMC’s plans for a stock conversion.

Source: Bloomberg

Zurn turned the deal down over sections that would have waived any claims by holders of the common stock, including those also holding AMC preferred equity units, or APEs. State corporate law requires such releases to work on a share-by-share basis, rather than an investor-by-investor basis, she said.

The settlement’s value, which is more than $100 million, has fluctuated with the company’s stock price, which was up 36% at $6 at 1:56 p.m. in New York.

What Changed

The shares are on a wild ride because some traders and hedge funds, as part of an arbitrage bet, have been adding to their APE positions and going short AMC shares. They’ve been betting they will be able to pocket the spread once the conversion goes through and narrows the price gap between the two. Friday’s ruling against the conversion proposal forced them to start unwinding that bet to limit their risk, boosting the shares.

Read More: AMC-APE Arb Blown Out Friday Gets Lifeline From New Filing

In the revised proposal, which appeared on the court’s public docket Monday, AMC and the plaintiffs sought to address the judge’s points. The new version of the agreement includes a narrower release, waiving only claims “that relate to the ownership of common stock.”

In a letter Saturday lawyers for the plaintiffs asked Zurn to approve the revised agreement without seeking additional comment from AMC shareholders. They said both sides had agreed to revised terms “identical in all other respects to the settlement previously submitted for approval, as to which notice has been provided to all potential class members,” and that the only change was to make the terms better for class members through the narrowed release.

More than 2,800 investors in the “meme stock” had written to Zurn opposing the deal, arguing it would dilute their shares, among other concerns. She had flagged similar objections at a settlement hearing in late June, when an attorney for AMC said the company hoped the agreement would bring it “global peace” amid the APE furor. One investor who objected to the deal mocked the broad waiver at the time as “intergalactic.”

Risk of ‘Collapse’

AMC Chief Executive Officer Adam Aron announced the revised settlement in an open letter to investors Sunday, emphasizing the “critical” importance of getting the deal approved and the APEs converted so the company can raise new equity capital.

“The risk of financial collapse is not whimsical,” Aron wrote in the letter, posted on Twitter. “That is especially the case now with the added uncertainty caused by the writers and actors strikes.”

Friday’s ruling raised another hurdle to AMC’s recapitalization efforts, prompted by a dive in the movie business tied to the Covid-19 pandemic. Investors had sought an expedited conversion, which offered a one-for-one exchange of its APE shares into its Class A common stock.

Objectors accused the theater chain of engineering an unsavory scheme to sideline its base of passionate retail investors, many of them participants in the market rally that saved AMC from a pandemic-era bankruptcy. The settlement allows the APE conversion while handing out extra stock to mitigate the dilution of ordinary shareholders.

“We believe the significant monetary benefit achieved through our clients’ litigation efforts clearly warrants compromising the common shareholders’ claims,” Mark Lebovitch, a lawyer for investors backing the settlement, said in an email Sunday. “Narrowing the release only strengthens that reality.”

The APEs

AMC issued the APEs last year, including a 30% block to hedge fund Antara Capital LP, and has been trying to convert them ever since. The APEs are supposed to be equivalent in value to the common shares but have traded at a steep discount to the stock due to uncertainty about the conversion.

More than 70% of the common shareholders who voted on the original APE conversion plan in March, before the settlement deal was reached, backed the move. The APE holders also supported the proposal, by a 9-to-1 margin. But thousands of other retail investors opposed the conversion over the share dilution.

Zurn stressed Friday that her ruling didn’t address claims of market manipulation — which included allegations about “synthetic shares, Wall Street corruption, dark pool trading, insider trading, and RICO violations” — raised by some retail objectors.

The case is AMC Entertainment Holdings Shareholder Litigation, 2023-2015, Delaware Chancery Court (Wilmington).

(Updates with revised proposal and context on share surge in first and second sections.)

--With assistance from Chris Dolmetsch and Yiqin Shen.

To contact the reporters on this story:
Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net;
Michael Leonard in Arlington at mleonard68@bloomberg.net

To contact the editors responsible for this story:
Misyrlena Egkolfopoulou at megkolfopoul@bloomberg.net

Shiyin Chen, Peter Jeffrey

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