On February 20, 2023, Saxena White and its co-counsel filed class action complaints alleging that AMC Entertainment Holdings, Inc. (“AMC” or the “Company”) set in motion a plan to improperly override the voting rights of its common stockholders that would result in significant economic harm to the value of the Company’s common stock. Plaintiffs sought injunctive relief in the Delaware Court of Chancery on behalf of a class of holders of AMC common stock to prevent the Company from amending its Certificate of Incorporation to effectuate this change to its capital structure.
As alleged in the complaint, AMC’s operations were hit hard by the COVID-19 pandemic, and in the wake of a severe drop in revenue, numerous hedge funds took short positions in AMC’s stock. In response, retail investors (calling themselves “Reddit Apes”) rallied around the Company and took positions in its stock in an effort to defeat the short sellers, lifting AMC’s share price. With the increase in its stock price, AMC sold nearly all of its remaining authorized common stock to raise capital. But when AMC announced, on two separate occasions in 2021, proposals to issue new common stock, these proposals were met with massive resistance by its shareholder base.
Determined to issue more shares, in 2022 the Company devised a clever workaround: AMC issued a new class of equity—AMC Preferred Equity Units, or APEs—as a special dividend to its common shareholders and sold additional APEs through an at-the-market program. Before issuing the APEs, the Company entered into a deposit agreement with the depositary for the preferred shares, pursuant to which it would vote preferred stock as instructed by the holders of then-issued APEs. Where investors did not provide voting instructions for their APEs, however, the depositary would vote these uninstructed APEs on a “mirrored” basis in the same proportion as the APEs for which the depositary received voting instructions. The complaints alleged that, in an election in which the APEs and common stock would vote together, this arrangement essentially rigged the vote to favor the interests of the APE holders, at the expense of the common shareholder and their voting rights.
Though APEs were designed to be functionally equivalent to AMC common shares, they traded at a deep discount to the common stock. To obtain authorization to increase AMC’s authorized common shares, the Company was determined to combine both securities into one class of common shares, and to do that, AMC entered into transactions with hedge fund Antara Capital LP. On December 22, 2022, AMC disclosed a transaction with Antara that would result in the hedge fund owning almost 30% of the issued APEs, as well as an agreement that Antara would vote for the proposals to allow the conversion of the APEs into common shares. At the same time, AMC announced a special meeting of stockholders, scheduled for March 14, 2023, to vote on proposals that would result in the conversion of all APEs to common stock via amendments to the Company’s Certificate. With more APEs than common shares, and the APEs having proportional voting, the complaints alleged that this undermined the common shares’ voting rights. The complaints further alleged that the conversion would cause the value of the two equities to converge, with APE holders reaping a financial windfall and common shareholders suffering economic harm and dilution.
On February 27, 2023, the Court entered a status quo order allowing AMC to hold the special meeting but prohibiting AMC from filing the amendments pending a ruling by the Court on Plaintiffs’ to-be-filed preliminary injunction motion. The Court set a preliminary injunction hearing for April 27, 2023. On March 14, 2023, the special meeting took place, with the amendments being approved. Without the mirrored voting feature of the APEs under the depositary agreement, the proposals would not have passed.
Throughout March of 2023, the parties engaged in extensive expedited discovery. Then, on March 28, the parties participated in a mediation session with former Delaware Court of Chancery Vice Chancellor Joseph R. Slights III, with extensive follow-up negotiations over the next several days. As a result of these negotiations, the parties executed a term sheet documenting a proposed settlement on April 2, 2023.
Under the terms of the proposed settlement, AMC will issue to eligible class members new shares of AMC common stock collectively valued, based on recent market prices, at more than $129 million. Specifically, each record holder of common stock immediately prior to convergence and at the time of the reverse split will receive one share of common stock for every 7.5 shares of common stock they hold (calculated on a post-split basis). The proposed settlement is a significant recovery for the class at the injunction stage and one of the largest financial recoveries in a Delaware stockholder voting rights case.
The stipulation of settlement was filed with the Court on April 27, 2023.On May 4, 2023, Plaintiff filed a motion for final approval of the settlement and the Court held a final settlement approval hearing on June 29-30, 2023.. Additional information about the case and the settlement procedures are available in the notice and the Court’s letter.
