Shares in AMC Theatres saw a significant surge on Friday after a Delaware Court judge blocked the parent company, AMC Entertainment Holdings, from proceeding with a plan to convert AMC Preferred Equity Units (APEs) into common shares. The shares initially jumped by 100%, but settled at a 60% increase by the end of the day.
The decision was made by Vice Chancellor Morgan T. Zurn of the Court of Chancery in Delaware, who rejected an earlier settlement that would have allowed AMC to sell stock and reduce its debt. Judge Zurn’s 68-page decision concluded that the proposed settlement was not approved.
The judge’s ruling came after a report on the lawsuit from Special Master Corinne Elise Amato, who sided with plaintiffs arguing that the AMC Theatres board had violated their fiduciary duties by “weaponizing” preferred units and interfering with common stockholders’ voting rights. The plaintiffs also claimed that AMC was required to provide the common stockholders with a class vote on the creation of the preferred units, which had not been done.
AMC had previously announced that it raised $110 million by selling APE units to Antara Capital, LP in order to pay down debt. However, the conversion of APEs into common shares was opposed by retail investor critics who believed it would dilute the company’s stock and decrease its overall share price.
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AMC had gained popularity among retail investors in early 2021 when it appeared to be on the verge of bankruptcy due to the impact of the pandemic on the movie theater industry. The surge in the stock price allowed the company to strengthen its financial position by selling shares and repurchasing debt.
However, as the stock value normalized, AMC has faced difficulties raising fresh cash to sustain its business. The recent ruling by the Delaware Court judge has put a halt to the conversion of APE units into common shares, at least for the time being.
Judge Zurn acknowledged the extraordinary stockholder base of AMC, which includes many passionate individual investors who connect with each other online. The court received over 3,500 communications from approximately 2,850 purported stockholders, highlighting the widespread interest in the case.
Moving forward, AMC will need to reassess its plans for the convergence of APE units and common shares to prevent investors from taking advantage of the price difference between the two. This involves buying the lower-cost APE shares and shorting the higher-cost AMC common shares as part of an arbitrage trade.
As a result of the court ruling, the common stock in AMC Theatres experienced a 61.5% increase, rising by $2.71 to close at $7.12. This was a significant turnaround from its previous closing price of $4.40.
In conclusion, the decision by the Delaware Court judge to block the conversion of APE units into common shares has had a substantial impact on AMC Theatres’ stock price. The ruling was based on claims that AMC violated its fiduciary duties and failed to provide common stockholders with a class vote. AMC will need to reconsider its plans and find alternative solutions to address its debt and cash flow challenges.
