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The story in brief. AMC Entertainment Holdings Inc. became a meme-stock company and sold a lot of stock to retail investors to raise money to buy, among other things, a gold mine. Eventually it sold all the common stock that its corporate charter allowed it to sell, and it couldn’t get its shareholders to approve more, because meme-stock investors mostly don’t vote. So it created a new type of preferred stock, AMC Preferred Equity Units (APEs), and gave out one APE for every share of common stock. Then it sold more APEs to raise more money. Then it held another shareholder vote, in which the common shares and APEs voted together as a single class, to approve (1) issuing new shares and (2) converting the APEs into common stock. This vote was somewhat rigged (the APEs would surely vote yes, and the voting mechanics basically turned non-voting APEs into yes votes), and AMC won it.
Before it could convert the APEs into common stock, though, a class of common shareholders sued, claiming that this was all rigged and illegitimate. AMC and the class eventually settled this lawsuit for a deal in which (1) each APE would convert into one new common share but (2) each old common share would convert into about 1.13 new common shares. [1] The Delaware judge hearing the lawsuit, Vice Chancellor Morgan Zurn, did not immediately sign off on the conversion: Some shareholders objected to the settlement, and she heard them out, commissioning a special master to examine the settlement. The special master filed a report last month saying “meh this seems fine.” Many of the objections are meme-stock nonsense about dark pools, hedge funds, phantom shares, naked shorts, etc.; I will not spend a lot of time on them, and neither did the special master or Vice Chancellor Zurn.
But on Friday, Vice Chancellor Zurn rejected the settlement. Oops!
Here is the opinion. Her reason for rejection was fairly narrow and technical. The lawsuit was a class action on behalf of AMC’s common shareholders, who claimed that AMC was treating them unfairly when it issued the APEs and tried to convert them into common stock. As in any class-action settlement, this one would release AMC from the class’s claims against it: The point of settling a class action is that no AMC shareholders can turn around and sue AMC again over this stuff. But the judge worried that the settlement released too many claims against AMC:
The release purports to release not only claims associated with the common stock, but also claims associated with preferred interests that common stockholders might also hold. The release cannot properly extend to those latter claims, because the plaintiffs were not appointed as fiduciaries for the holders of preferred interests and did not bring claims based on preferred rights. The plaintiffs only sued on behalf of a putative class of common stockholders, and only asserted claims based on the voting rights of common stockholders. They can agree to a release that encompasses the claims they asserted, and claims that the class holds and that arise out of the same factual predicate.
That is, the settlement would not only put to rest the complaints that AMC common shareholders might have about the APE deal, but also any complaints that AMC APEholders might have.
This makes no sense! The common shareholders had a complaint, they sued, and they negotiated a settlement in which they would get a somewhat better deal: They would get a bit more stock than the APEholders, to make up for the somewhat fishy circumstances in which the APEholders got their APEs. But the APEholders hadn’t sued: They had no complaints about the issuance of the APEs or their conversion into common stock; that was what they wanted. They were not involved in the lawsuit, so no one speaks for them in the settlement.
And the settlement is bad for the APEholders: Instead of converting into common stock on a one-for-one basis, they’re getting a bit less stock than the common shareholders. They bought APEs thinking that they would be economically equivalent to AMC common stock, and now it turns out that they won’t be: The APEs are a little bit worse than common. The APEholders should sue!
No they shouldn’t, not really: Converting into common, even at worse than a one-for-one ratio, really is what they want. (On Friday, the APEs closed at $1.80 per share, while the common shares closed at $4.40: The common trades at a 144% premium to the APEs, versus the 13% premium offered in the settlement.) Rationally the APEholders should like this deal. But since they are not involved in the lawsuit, the settlement can’t foreclose their claims. If they want to sue, they can go ahead.
Now, I am overstating it somewhat. The settlement wouldn’t release AMC from all APE claims. It would release it from APE claims “that common stockholders might hold”: If you are an AMC common shareholder, you are part of this class, and if you also own APEs then this settlement would prevent you from suing AMC for treating your APEs unfairly. But if you own only APEs and no common shares at all, then you are not part of the class and your claims are not released. But since a lot of people own both APEs and common shares (the APEs were originally distributed as a dividend on the common), and in different proportions, it seems unfair to prevent a holder of a million APEs from suing over their APE treatment if they happen to own one common share. “APE units are not represented in the complaints or in the common stockholder class,” writes Vice Chancellor Zurn, and so the lead plaintiffs of the class “cannot represent or release APE direct claims.”
This seems right? Vice Chancellor Zurn raised it in court and everyone kind of ignored her; she writes:
I raised the fact that the Release included APE claims released by common stockholders at argument to Plaintiffs and the defendants. Plaintiffs’ counsel first tried to describe the APEs as a share split to color the APE claims as appurtenant to the common shares, then deferred to the defendants’ counsel, and then wondered aloud if the defendants would drop that part of the Release. The defendants’ counsel simply insisted they were “entitled to complete peace.”
Anyway this seems obviously fixable:
File a revised settlement releasing only the common claims, not the APE ones.
Get that approved by the court.
Go ahead and convert the APEs into common.
If any APEholders want to sue, let them. Maybe they will win, and a court will give them some extra shares. Most likely they won’t, because this works out pretty well for them and they don’t have a ton to complain about. [2]
AMC doesn’t get “complete peace,” but it gets to convert its APEs into common and then sell more stock, which is the main thing. AMC’s meme-y chief executive officer, Adam Aron, tweeted an open letter begging to be allowed to do that:
Raising fresh equity in the near term is critical to our company, so it is important that we work to address the concern raised in the Delaware Court of Chancery’s ruling on Friday. …
AMC must be in a position to raise equity capital. I repeat, to protect AMC’s shareholder value over the long term, we MUST be able to raise equity capital. … If we are unable to raise equity capital, the risk materially increases of AMC conceivably running out of cash in 2024 or 2025, or AMC being unable to satisfactorily refinance and stretch out the maturity of some of our debt. …
And so:
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, according to people familiar with the filing. …
The settlement’s backers want Zurn to weigh the new version of the deal without seeking additional comment from AMC shareholders, the people said.
It’s pretty easy to revise the settlement to accommodate the judge’s concerns: In the sentence of the settlement that says “‘Released Plaintiffs’ Claims’ means any and all actions … that related to the ownership of Common Stock and/or AMC Preferred Equity Units,” just cross out the words “and/or AMC Preferred Equity Units.” So that’s what they did.
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