AMC’s Troubling Predicament Prior to the Lawsuits
The Devastating Impact of COVID-19 Lockdowns
AMC Entertainment Holdings Inc. (AMC) is the world's largest movie theater chain, operating over 1,000 theaters and 10,500 screens globally prior to 2020. AMC's business was booming, with the company generating over $5 billion in revenue in 2019. However, the onset of the COVID-19 pandemic changed everything.
Beginning in March 2020, lockdown orders forced AMC to close all of its theaters indefinitely. For months, AMC generated virtually no revenue. This resulted in massive losses and severe liquidity issues. AMC reportedly lost $4.6 billion in 2020 and $2.2 billion in 2021.
With fixed costs still needing to be paid even while theaters were closed, AMC was burning through cash at an alarming rate. By January 2021, bankruptcy fears swirled as AMC warned it could run out of money. AMC needed to take drastic steps to raise capital just to stay afloat.
Surprise Salvation from Retail Investors
In a remarkable twist, AMC found salvation from an unexpected source - retail investors congregating on Reddit's WallStreetBets forum. These traders, seeking to profit from a short squeeze, helped drive AMC's stock price from under $5 in December 2020 to over $20 briefly in late January 2021.
Seizing this opportunity, AMC raised $917 million in cash by selling stock in January 2021 while its price was inflated. This provided much-needed liquidity and staved off imminent bankruptcy.
AMC leaned further into its popularity as a "meme stock" over the ensuing months. AMC CEO Adam Aron regularly engaged with the Reddit investor community on Twitter. The company also rolled out promotions like free popcorn at theaters to boost retail shareholder perks. This further bolstered the stock price, which skyrocketed to nearly $60 in early June 2021.
Ongoing Financial Troubles Despite Meme Stock Resurgence
However, AMC was far from being out of the woods. While meme stock mania provided temporary relief through stock sales, AMC's core business was still devastated by COVID-19 disruptions.
With major blockbusters delaying release dates and COVID variants depressing theater attendance, AMC's revenue remained massively depressed in 2021. AMC reported a net loss from operations of over $1.26 billion in 2021.
Thus, by late 2021, AMC required even more cash to stay solvent. Yet its inflated stock price limited the viability of further equity offerings. SEC rules also constrained AMC's ability to sell stock below book value without shareholder approval.
AMC's Controversial Measures to Raise Capital
Faced with ongoing liquidity dangers despite meme stock relief, AMC pursued a series of controversial maneuvers in 2022 aimed at raising more capital from equity markets. However, these plans generated backlash from certain shareholders, resulting in lawsuits.
The Creation of AMC Preferred Equity Units
In August 2022, unable to sell more traditional common stock, AMC's management got creative. They devised a special dividend paid out in a new security called AMC Preferred Equity units ("APE" units).
This allowed AMC to raise $137 million by selling APE units to investment firm Mudrick Capital Management in August 2022. Unlike a traditional stock sale, issuing APE units did not dilute the value of AMC's common shares. The APE units traded separately, akin to a tracking stock.
In theory, this allowed AMC to tap equity markets while preserving value for common shareholders. However, in practice, APE units ended up trading at a massive discount to AMC common shares. By late 2022, APE units were trading 70% below AMC common stock despite representing an identical economic interest.
The Antara Capital Deal and Planned APE Conversion
By December 2022, AMC still could not obtain shareholder approval to increase its authorized common shares due to retail investors controlling the vote. So AMC struck a deal with APE unitholder Antara Capital.
Antara agreed to convert its APE units into common shares and vote for proposals to authorize more AMC common stock and implement a reverse stock split. This would pave the way for AMC to sell additional common equity. AMC projected this could raise $1.6 billion.
But many shareholders objected to the forced APE conversion and reverse split, which they viewed as dilutive to existing holders. This set the stage for lawsuits alleging the plans breached AMC's fiduciary duties.
Shareholder Lawsuits Asserting Direct and Derivative Claims
In February 2023, groups of AMC shareholders filed class action lawsuits in Delaware Chancery Court over AMC's actions. The lawsuits included both direct and derivative claims.
The key direct claim was for breach of fiduciary duty. Plaintiffs alleged that by creating APE units with disproportionate voting rights and approving the Antara Capital deal, AMC's Board breached its fiduciary duties.
Specifically, plaintiffs argued these actions served to disenfranchise common shareholders, override their voting rights, and guarantee that the APE conversion and reverse split would pass. This flooded the market with more shares, diluting common holders.
In the Allegheny County complaint, plaintiffs also claimed AMC violated 8 Del. C. §242 by failing to obtain a class vote of common shareholders before creating APE units that allegedly altered common shareholders' rights.
After expedited discovery and mediation, the parties reached a proposed settlement of the direct claims in March 2023. The derivative claims were stayed pending resolution of the direct settlement.
The Settlement Approval Saga
Reaching a settlement was only the first step. Like many class action settlements, it also required court approval under Court of Chancery Rule 23 before taking effect. This process proved contentious, resulting in the court ultimately rejecting the initial settlement before approving a revised version.
Terms of the Proposed Class Settlement
Under the proposed direct class settlement reached in March 2023, AMC agreed to issue over 6.9 million new shares of common stock to existing common shareholders. This provided some value to partially offset the dilution from the APE issuances.
In exchange, the plaintiffs agreed to release all claims based on the acts and conduct alleged in their complaints. This included the fiduciary duty and statutory claims related to the creation of APE units, the Antara deal, and the reverse split plan.
The parties submitted the proposed settlement to Vice Chancellor Morgan T. Zurn in Delaware Chancery Court. Like most class settlements, it required her approval under Court of Chancery Rule 23 before becoming effective.
The Settlement Initially Rejected Due to Overbroad Release
In July 2023, Vice Chancellor Zurn rejected the initial version of the settlement in a lengthy opinion. She found the release provision was fatally overbroad.
Specifically, Chancellor Zurn held that the release could not extinguish claims held by AMC's APE unitholders, because they were not members of the settlement class. Yet the release by its terms encompassed all claims arising from the acts alleged in the complaint, which included claims unique to APE holders.
Because APE holders were not class members, did not receive consideration, and were not afforded notice or opt-out rights, the Chancellor ruled it was improper for a settlement of common shareholders' claims to release claims held only by preferred shareholders.
Approval Granted After Release Provision Narrowed
The parties went back to the drawing board and submitted a revised settlement days later. The key change was removing the language that explicitly released claims held by APE holders.
On August 11, 2023, Chancellor Zurn approved the revised settlement after ensuring the release provision no longer exceeded the bounds of the common shareholder class claims. She found notice and class representation adequate under Rule 23.
The court also balanced the merits of the claims versus the settlement consideration. Chancellor Zurn deemed the statutory claim weak but found potential merit in the fiduciary duty theory.
Ultimately, she determined the settlement consideration justified releasing those viable fiduciary duty claims under the unique circumstances. This enabled the settlement to proceed, allowing AMC to execute the APE conversion and reverse split as planned.
Key Takeaways from this Significant Corporate Governance Saga
The tumultuous AMC saga, culminating in high-stakes shareholder litigation and a hard-fought settlement approval, offers several key insights and lessons for practitioners:
Meme Stock Mania Can Provide Lifelines Alongside Risks
AMC's ability to leverage Reddit-fueled meme stock mania provided a lifeline when bankruptcy loomed. However, meme stock volatility also created litigation risks if capital raises seemed to disadvantage loyal retail investors. Boards must carefully balance these dynamics.
Multi-Class Structures Are Powerful but Controversial Tools
AMC's creation of APE preferred units gave it flexibility to raise capital without diluting common shares. However, such multi-class structures remain controversial as they can disproportionately empower certain stakeholders. Expect litigation challenges if preferred shares gain voting rights seen as disenfranchising common holders.
Scrutinize Releases in Shareholder Class Settlements
Overly broad settlement releases that exceed the bounds of the court's jurisdiction or fairness limits can sink even late-stage deals, as AMC learned. Release provisions should be vetted to ensure they match the scope of the court-certified class and claims at issue.
Balance of Equities Crucial in Seeking Injunctions
Seeking injunctions against transactions that directors claim are necessary to raise cash and avoid insolvency is an uphill battle. The balance of equities often favors allowing such deals to proceed, even if shareholder claims have merit.
In summing up this saga, the still-uncertain path forward for AMC illustrates how creative financial engineering collided with shareholder rights issues amid unprecedented times. The lessons from this landmark case will guide practitioners navigating similar dynamics for years to come.
Frequently Asked Questions
What were the exact claims in the AMC shareholder litigation?
The AMC shareholder litigation included both direct and derivative claims. The key direct claims were for breach of fiduciary duty and violation of 8 Del. C. § 242.
Specifically, the breach of fiduciary duty claim alleged that AMC's board breached its duties by creating the APE units and approving the Antara deal. Plaintiffs argued this improperly disenfranchised common shareholders and guaranteed proposals that would dilute common holders would pass.
The statutory claim under 8 Del. C. § 242 alleged that creating APE units altered common shareholders' rights. Thus, plaintiffs claimed AMC violated Section 242 by not obtaining a class vote of common holders approving this alleged alteration of rights.
In addition, plaintiffs brought derivative claims on behalf of AMC asserting that the board breached its fiduciary duties by approving the transactions at issue. The derivative claims were stayed pending resolution of the direct claims and settlement.
What is the potential merit of the fiduciary duty claims?
The fiduciary duty claims have some merit under Delaware law, but AMC also has potential defenses. Plaintiffs would argue the Blasius enhanced scrutiny standard applies when the primary purpose of board action is to disenfranchise shareholders.
The facts indicate AMC's board deliberately crafted the APE units and Antara deal to overcome common shareholders' opposition to the reverse split and authorization proposals. This suggests interference with shareholder voting power for which Blasius scrutiny could apply.
However, AMC would counter that it had a legitimate objective - raising essential capital to avoid insolvency and bankruptcy. AMC could argue its actions were reasonable in relation to this objective. But plaintiffs may counter that other options existed that were less disenfranchising.
The merits would involve complex issues of applying Blasius scrutiny. Settlement avoided further litigation costs to resolve these thorny questions.
Why was the statutory claim under Section 242 weak?
Delaware courts interpret Section 242(b)(2) to require a class vote only when a board action alters the peculiar rights, powers, or preferences of that class of stock. Merely diluting the voting power of a class does not trigger Section 242 protections under key precedents like Dickey Clay.
Here, the APE units did not alter any of the peculiar voting rights, powers, or economic preferences of AMC common stock itself. Common shares retained one vote each. The only impact was dilution of voting power. But this proportional dilution does not comprise a cognizable harm under Section 242 based on current Delaware law.
Thus, plaintiffs faced an uphill battle in showing the APE creation altered common stockholders' rights requiring a class vote under Section 242. The claim appeared unlikely to succeed based on precedent.
Why was the release provision originally rejected?
Vice Chancellor Zurn rejected the initial settlement because the release was overly broad in purporting to release claims held by APE preferred unitholders. APE holders were not members of the common shareholder settlement class.
The general rule is that a settlement release cannot discharge claims held by parties that were not actively involved in the litigation. This protects their due process rights. APE holders did not receive notice, consideration, or the ability to opt-out of the settlement.
Yet the initial release by its terms encompassed all claims relating to the acts challenged in the lawsuit. So the release exceeded the bounds of releasing only common shareholder claims. The fix was narrowing the release to no longer explicitly include APE holder claims.
Why was the revised settlement with the narrowed release approved?
After rejecting the initial settlement, Vice Chancellor Zurn approved the revised deal because the problematic release provision was narrowed.
The revised release accomplished what a proper settlement release should do - it released only the claims actively asserted in the litigation by the parties involved. Here, that consisted of the fiduciary duty and statutory claims brought by common shareholders against AMC's board.
By removing language that explicitly released claims unique to APE holders, the revised release properly matched the scope of claims the court had jurisdiction over in the common shareholder class action. With an appropriate release, the court deemed the settlement reasonable under Court of Chancery Rule 23.
