Details: Court Opinion - July 21, 2023 For AMC Settlement
This court document detailed the timeline of how the AMC Theaters management went about their action to dilute shares in attempts to raise capital.
Disclaimer: This story line only extracts certain statements in chronological order and have them for our readers.
AMC is a movie theater company; the COVID-19 pandemic was disastrous for its revenue. To stay afloat, between the end of 2020 and the middle of 2021, AMC sold nearly all of its available common shares in a remarkable connection with retail investors, i.e., individuals rather than institutions.
By April 2021, approximately 85% of AMC’s stockholders were retail investors.3
As of March 2021, AMC had issued and outstanding 450,156,186 common shares out of a total of 524,173,073 authorized in its certificate of incorporation (the “Certificate”).
On January 27, 2021, the Board adopted a resolution proposing to amend AMC’s Certificate to increase the total number of authorized common shares by 500,000,000 shares to 1,024,173,073 shares
Stockholders appeared unsupportive, so on April 27, the Board determined not to seek stockholder approval of the proposed amendment.
On May 4, the Board postponed the 2021 Annual Meeting until July to try to garner stockholder support to amend the Certificate. The Board also amended the Company’s bylaws to lower the quorum requirement from a majority to one-third of the issued and outstanding stock entitled to vote at the meeting.8
On June 3, the Company filed a preliminary proxy statement for its then- delayed annual meeting, disclosing the Board had approved a proposal to amend the Certificate to increase the total number of authorized common shares by 25,000,000 shares to 549,173,073 shares, which would be put to a stockholder vote at the rescheduled 2021 Annual Meeting.
Once again, the electorate was not on board.10 On July 6, AMC announced that it would no longer seek stockholder approval for that proposed amendment, and withdrew it from the agenda for the 2021 Annual Meeting.
The Board lowered the quorum necessary for a stockholder meeting, the Board cited the fact that “nearly 85% of AMC’s stock is held by retail investors,” and “obtaining a quorum this year has proven challenging.”
By May 17, AMC’s proxy advisor was suggesting alternative voting structures to AMC and its counsel such as “[d]iscretionary voting – where brokers will vote any uninstructed shares with management’s recommendations” and “[p]roportionate voting – where brokers will vote any uninstructed shares in the same proportion that their instructed shares were voted.”
Even with these alternative structures, the proxy advisor suggested the vote cast split might be “51.11% FOR & 48.89% against,” but “if the retail FOR vote moves to 26.5% or below, . . . the advantage disappears.”
Without the ability to authorize more shares, AMC could not raise capital by issuing more common stock. AMC developed an alternative.
Project Popcorn:
AMC Creates The APEs
In addition to common stock, AMC’s Certificate authorized fifty million shares of preferred stock. None had been issued.
AMC and its advisors decided that selling preferred stock could raise capital and that the votes associated with the preferred stock could carry the Certificate amendment.
On July 28, 2022, after months of discussions, the Board approved the creation of AMC Preferred Equity Units (“APEs” or “APE units”).
Each APE is a depositary receipt representing an interest in 1/100th of a share of the Company’s Series A Convertible Participating Preferred Stock.
Each share of preferred stock automatically converts into 100 shares of common stock as soon as AMC has enough authorized common shares to effectuate the conversion. That makes each APE automatically convertible into one share of common stock.
On August 4, AMC announced it would issue one APE as a special dividend for each share of Class A common stock outstanding as of the established record date.
The Company told stockholders that APEs had the same voting power as common shares (i.e., one vote each).
AMC did not prominently disclose that pursuant to an August 4 deposit agreement (the “Deposit Agreement”), the Company’s transfer agent25 was required to vote uninstructed APEs proportionally with instructed APEs.
Proportionate voting for uninstructed APEs pursuant to the Deposit Agreement meant that APEs as a class would command greater voting power at a meeting than common shares as a class.
All of the APEs would be deemed present and voting at any meeting, even if voting instructions were only received for one APE.
By contrast, shares of common stock would only be voted if voting instructions were received.
AMC announced that APEs would trade on the New York Stock Exchange under the symbol “APE” starting August 22.
In an August 18, 2022, FAQ, AMC said that while the APEs could convert into shares of common stock, it “did not currently expect AMC to make such a proposal anytime soon.”
In addition to the APEs distributed as a dividend to primarily retail common stockholders, AMC tried to sell APEs more broadly.
On September 26, AMC disclosed it had entered into an equity distribution agreement with Citigroup Global Markets, Inc. to sell 425,000,000 APEs from time to time in at-the-market offerings.
This campaign was unsuccessful: by December, APEs were trading below one dollar per unit, forcing AMC to stop selling additional APEs on the open market.
The Board Pursues Conversion:
At a December 21 Board meeting, the Board approved two Certificate amendments and resolved to put them to a stockholder vote.
The amendments would: (i) increase the authorized number of shares of common stock to a number at least sufficient to permit the full conversion of APEs into common stock (the “Share Increase Proposal”);
and (ii) effect a 1-for-10 reverse stock split of AMC equity (the “Reverse Split Proposal,” and together with the Share Increase Proposal, the “Proposals”).
Upon approval of the Share Increase Proposal and filing of the amendment with the Delaware Secretary of State, each APE would convert into one share of common stock (the “Conversion”).
The Board specifically discussed how the Deposit Agreement increased the likelihood the Proposals would pass.
At that same December 21 meeting, the Board approved the sale of $110 million APEs to Antara Capital LP (“Antara”).
AMC and Antara entered into a “Forward Purchase Agreement,” pursuant to which AMC would (i) sell 106,595,106 APEs to Antara for $75.1 million and (ii) purchase from Antara $100 million of the Company’s 10%/12% Cash/PIK Toggle Second Lien Notes due 2026 in exchange for 91,026,191 APEs (the “Antara Transaction”).
The Forward Purchase Agreement also contained lock-up restrictions that prevented Antara from selling, transferring, or otherwise disposing of the APEs for at least ninety days.
Antara also purchased sixty million APEs at a price of $34.9 million through an at-the-market offering.
Antara agreed to vote all of its APE holdings in favor of the Proposals.
When approving the Antara Transaction, the AMC Board specifically noted that “AMC had a good chance to secure approval” of the Proposals, given that the APE unitholders would likely want to convert their units to common shares.
The next day, AMC announced that it would hold a special meeting within ninety days for stockholders to vote on the Proposals (the “Special Meeting”).
On February 7, AMC issued the APE units called for by the Antara Transaction.
Two days later, the Company waived the Forward Purchase Agreement’s lock-up restrictions, permitting Antara to sell up to twenty-six million APEs ahead of the Special Meeting.
Since the record date for the Special Meeting was February 8, Antara could still vote any APEs that it sold.46 AMC did not disclose why it waived the lock-up.
On January 27, 2023, AMC filed its preliminary proxy statement for the Special Meeting.
On February 14, AMC filed its definitive proxy statement and scheduled the Special Meeting for March 14.
AMC disclosed that Antara held 258,439,472 APEs, representing approximately 27.8% of all outstanding APEs and approximately 17.8% of the Company’s total voting power.
AMC disclosed that Antara agreed to vote all of its APEs in favor of the Proposals.
Antara’s APE votes plus the mirrored-voting feature guaranteed the Proposals would pass.
All of these events affected the common stockholders and the APE unitholders differently.
Events that increased the APEs’ relative voting power decreased the common’s relative voting power.
The converse would be true as well, but the Board did not do anything to increase the common stockholders’ relative voting power.
Allegheny suit:
On February 20, the plaintiffs filed suit. Allegheny County Employees’ Retirement System (“Allegheny”) filed a Verified Class Action Complaint Seeking Declaratory, Injunctive, and Equitable Relief against AMC and its Board alleging one count of breach of fiduciary duty and a second count for violation of 8 Del. C. § 242.51 That same day, Anthony Franchi (together with Allegheny, “Plaintiffs”)52 filed a Verified Stockholder Class Action Complaint against the Board alleging a single count for breach of fiduciary duty.
Plaintiffs claim the defendants’ issuance of APE units diluted the common stock’s voting rights and economic value.
Plaintiffs claim the defendants’ issuance of APE units diluted the common stock’s voting rights and economic value.
The breach of fiduciary duty claim paints the creation, issuance, sale, and voting capabilities of APE units as the instrumentalities used to thwart the common stockholders’ franchise, and the statutory claim contends the common stockholders should have voted as a class on the issuance of APE units.
On February 27, the Court entered a stipulated order of expedition and status quo order that permitted AMC “to hold its March 14, 2023 special meeting and solicit and tabulate any votes in connection therewith,” but prohibited the defendants from “amend[ing] AMC’s certificate of incorporation as a result of any vote of shares at AMC’s March 14, 2023 special meeting (or any adjournment thereof), pending a ruling by the Court on Plaintiffs’ to-be-filed preliminary injunction motion.”
The latter part of the order blocked the Conversion from taking effect until the Court could make a preliminary ruling on Plaintiffs’ claims. The Court scheduled a preliminary injunction hearing for April 27.
On March 2, in implementing the parties’ stipulation, the Court consolidated the two actions and designated Franchi’s complaint as the operative pleading.
On March 13, Plaintiffs’ counsel informed the Court that they would also pursue the statutory claim set forth in Allegheny’s complaint in the consolidated action.59 Plaintiffs did not file a consolidated complaint.
AMC held the Special Meeting on March 14.60 Both Proposals passed.
Of the shares of common stock present at the meeting, 72.49% voted in favor of the Share Increase Proposal61 and 70.39% voted in favor of the Reverse Split Proposal.
But only 35.23% of the 517,580,416 outstanding shares of common stock were present and voted at the Special Meeting
meaning only 25.54% of the outstanding common voted for the Share Increase Proposal, and 24.80% for the Reverse Split Proposal.
Due to the mirrored voting feature, all the APE units were present and voted at the Special Meeting.
Only 62.73% of APEs gave instructions on how to vote; that figure includes the 27.8% of the APEs that Antara agreed to vote in favor of the Proposals.64 91% of the APE units voted in favor of the Share Increase Proposal65 and 90.64% in favor of the Reverse Split Proposal.
A majority of common stockholders and a majority of the APE unitholders did not give any voting instructions at all, let alone in favor of the Proposals.
The Proposals passed only because of the APEs’ mirrored voting feature and Antara’s promised APE votes.
AMC acknowledged that fact internally (The Proposals passed only because of the APEs’ mirrored voting feature and Antara’s promised APE votes):
The Parties Reach A Settlement And Seek To Effectuate The Proposals; Common Stockholders Speak Up
The parties reached an agreement in principle to settle the case and executed a term sheet on April 2.
The next day, Plaintiffs filed an unopposed motion to lift the status quo order.
Their application argued that the defendants should be permitted to implement the proposed settlement and complete the Conversion before notice had been provided to stockholders, before the proposed terms were considered by the Court, and before the proposed settlement was approved as fair.
Lifting the status quo order was a condition of their settlement.
On April 5, I found the parties failed to make their case for implementing the proposed settlement before it was approved, and therefore failed to establish good cause to vacate the stipulated status quo order.
The status quo order remains in place.
On April 14, Plaintiffs’ counsel informed the Court the parties had agreed to revised terms that were not conditioned on lifting the status quo order, and requested a status conference with the Court “to discuss timing and notice for presentation of the proposed settlement.”
In the meantime, retail stockholders had contacted the Court via phone calls, letters, and filings to weigh in on the case and the terms of proposed settlement, which had yet to be disclosed.
Taking this engagement as a sign of unprecedented interest, the Court appointed Corinne Elise Amato, Esquire, as special master
The next day, the Special Master accepted her appointment.
On May 2, the Court expanded the Special Master’s purview “to include other submissions from interested parties styled as motions.”79 The Special Master wrote nineteen reports and recommendations.
On April 27, after prompting from the Court,81 the parties filed a stipulation of settlement (the “Stipulation”).
Under its terms, AMC agreed to distribute 6,922,565 shares of common stock to existing common stockholders, at a ratio of one share of common for every seven and a half shares of common stock held, after the Reverse Split but before the Conversion.
Any fractional shares would be sold and the cash proceeds distributed pro rata.
The Proposed Settlement has the practical effect of reallocating the ownership of AMC’s equity between its common stockholders and the APE unitholders.
If the settlement is approved, the existing common stockholders would own a slightly bigger slice of the AMC pie at the expense of the APE unitholders.
The Proposed Settlement thus ameliorates some of the dilution that the APEs inflicted on the common stock. Without the Proposed Settlement, the existing common stockholders would own 34.28% of AMC’s equity after the Conversion and the former APEs unitholders would own 65.72%.
With the Proposed Settlement, the existing common stockholders would own 37.15% of AMC’s equity after the Conversion and the former APEs unitholders would own 62.85%.
In exchange for this increased slice of ownership, the common stockholders would release all claims asserted in or relating to the allegations in the Allegheny complaint or the operative complaint “that relate to the ownership of Common Stock and/or [APEs] during the Class Period.”
The Stipulation attached a Proposed Scheduling Order with Respect to Notice and Settlement Hearing (the “Scheduling Order”), and a Notice of Pendency of Stockholder Class Action and Proposed Settlement, Settlement Hearing, and Right to Appear (the “Notice”).
After filing revised versions of the Scheduling Order and the Notice, the Court entered the scheduling order attaching the final version of the Notice on May 1.
The Stipulation and Notice define a proposed “Settlement Class” to mean “all holders of AMC Common Stock between August 3, 2022, through and including the Settlement Class Time,” or record time, “after the Reverse Stock Split is effected, but before the Conversion.”
The Scheduling Order and Notice set the objection deadline for May 31 and the settlement hearing for June 29 and 30 (the “Settlement Hearing”).
On May 3, the Court filed a letter to stockholders explaining procedures for objecting and speaking at the Settlement Hearing (the “May 3 Letter”).
Approximately 2,850 purported stockholders submitted more than 3,500 communications, many of which were styled as objections, that were emailed or postmarked between May 1 and May 31, 2023.
Two objecting stockholders retained counsel: Rose Izzo and Anthony Kramer, who joined in Izzo’s objection.
The parties filed briefs in support of the Proposed Settlement and responded to the objections.
On June 21, the Special Master filed her report and recommendations (the “Special Master’s Report”).
Plaintiffs and thirteen putative stockholders timely filed exceptions to the Special Master’s Report by the June 28 deadline.97 I held the Settlement Hearing on June 29 and 30.
During the leadup to the Proposed Settlement, the conflicting interests between the common stockholders and APE unitholders were on display.
First, objector Izzo, who owns more APEs than common shares, intimated she seeks to become lead plaintiff.
In opposing this move, Plaintiffs acknowledged the adversity between the common stockholders and the APE unitholders by asserting that Izzo is not “qualified to speak for the Class” because she owns more APE than common, “and thus would benefit financially if the Settlement were rejected and the Conversion happened someday on worse terms to the Class,” giving rise to “a facial conflict of interest.”
Second, a putative intervenor who held APE units, but not any common stock, sought to intervene to protect the value of his APEs from the Proposed Settlement.
On July 21, 2023 The Judge rejected the settlement.
As a result the AMC stock spiked to almost 100% in the afterahours session.
On Sunday July 23, CEO Adam Aron wrote a letter and published it on twitter without AMC letterhead
“My open letter message below to you all is on a subject of existential importance to AMC Entertainment shareholders. I urge you to read it. #AMCSurviveThenThrive” Adam Aron - CEO of AMC Theaters
The main focus of the letter is that AMC Theaters is in desperate need for raising capital and the importance of the approval of the settlement to allow reverse split and merge go through.
Judge Zurn Document - July 21, 2023
The story continues …