The fate of cinema chain AMC Entertainment Holdings Inc. hung in the balance as a Delaware judge delivered a landmark ruling, sending shockwaves through the stock market.
Shares of AMC surged by a jaw-dropping 100 per cent in response to the decision that quashed a $129 million settlement, throwing the company’s financial future into uncertainty.
The legal battle centered around a settlement that would have allowed AMC to sell additional shares, providing a lifeline to weather the storm of pandemic-induced losses. However, Morgan Zurn, presiding over the Delaware Chancery Court, declared the deal unfair and unenforceable.
The proposed agreement aimed to pay off common stockholders while allowing preferred shareholders to convert their holdings into common stock. But, it lacked the necessary consent from the preferred shareholders, potentially closing the door on future legal claims against the company.
AMC’s tumultuous journey began during the COVID-19 pandemic, which dealt a severe blow to the cinema industry. In response, the company’s CEO seized on the phenomenon of “meme stocks,” aggressively selling shares to boost liquidity. As AMC continued to issue new shares, it needed approval from existing shareholders to authorize more equity. However, some investors expressed concerns about dilution, leading to a stalemate.
To raise capital, AMC introduced convertible preferred stock known as APEs in 2022. The company aimed to streamline its capital structure and reduce the discount at which APEs traded in the market by converting them into common shares. As part of its strategy, AMC sold APEs to a friendly hedge fund, Antara Capital, with an understanding that the hedge fund would support the authorization of more shares. But this move sparked opposition, as some shareholders argued that the deal infringed upon the rights of existing common shareholders who had previously rejected similar attempts.
Enter the legal tussle, with plaintiffs and the company eventually negotiating a settlement, offering common stockholders a substantial stock grant worth $129 million in return for dropping their objections to the preferred stock transaction. This agreement required court approval, but little did anyone anticipate the ruling that was to follow.
The courtroom drama escalated when a “special master” appointed by the court issued a report supporting the settlement. However, Judge Zurn disregarded the recommendation, citing the extraordinary and passionate nature of AMC’s stockholder base. With nearly 2,000 shareholders contacting the court during the litigation, the judge acknowledged the unprecedented involvement of retail investors with emotional connections to the company. The issues raised ranged from theories about synthetic shares and Wall Street corruption to dark pool trading and insider trading, indicating the fervent interest in the case.
The rejection of the settlement took many by surprise, including AMC itself, which did not provide an immediate response to the court ruling. Nonetheless, the stock market responded in a frenzy, with AMC’s shares skyrocketing by 100 per cent in after-hours trading, though later settling to a still-impressive 60 per cent increase. Meanwhile, APEs saw a decline of approximately 15 per cent.
As AMC’s shareholders navigate the aftermath of this momentous courtroom battle, the company’s future remains uncertain. The ruling serves as a reminder of the power wielded by passionate retail investors in the era of meme stocks and the profound impact they can have on the financial landscape. Only time will tell how AMC’s captivating saga continues to unfold.
