Fri 08/11/2023 17:43 PM
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Vice Chancellor Morgan Zurn of the Delaware Court of Chancery Court today released a memorandum opinion approving the revised settlement in the AMC Entertainment Holdings stockholder litigation, an important step toward the company converting its AMC preferred equity units, or APEs, into common stock. The court also denied a pre-emptive request from settlement objector Rose Izzo for a stay preventing the conversion while Izzo pursues an appeal of the settlement’s approval before the Delaware Supreme Court.

“Approval of the Proposed Settlement will lift the status quo order,” the vice chancellor says, freeing the company “to effectuate the Reverse Stock Split and Conversion.” Vice Chancellor Zurn writes that she “read[s] the defendants’ July 26 letter as expressing an intention to do so as quickly as possible.”

Under the terms of the settlement, after giving effect to the 1-for-10 reverse stock split and conversion of APEs into common stock, AMC will issue 1 share of new common stock for every 7.5 shares of common stock held on the day prior to the conversion taking effect. Immediately after the release of the decision, the price of AMC common stock declined in after-hours trading, and APE shares rose.

AMC and the lead plaintiffs in late July agreed to amend the settlement after the vice chancellor declined to approve the original terms of the settlement. The amended settlement removed the release for the defendants from claims brought by APE unitholders - addressing the core concern raised in the vice chancellor’s opinion.

In today’s opinion, the vice chancellor notes that while the plaintiff’s fiduciary duty claim had merit, “a remedy for that claim that is equitable and beneficial to the class overall is challenging to identify.” Additionally, Vice Chancellor Zurn holds that the plaintiff’s statutory claim, which sought to invalidate the August 2022 issuance of the APEs, “had no merit.” Accordingly, the vice chancellor finds that “release of those claims, and others with the identical factual predicate to the plaintiffs’ complaints, is sufficiently supported by the settlement consideration.”

The vice chancellor also certifies the class as a “non-opt-out class,” noting that opt-out rights are “not warranted given the Proposed Settlement’s structure.” Additionally, the notice of the proposed settlement to AMC common shareholders was “sufficient and its delivery was adequate,” the decision says.

In rejecting Izzo’s request for a stay pending appeal, the vice chancellor finds that the objector was unable to demonstrate that she would suffer irreparable harm absent the stay. Moreover, the “harm to the Company, and therefore to its stockholders (including Izzo), would be even greater if this action is stayed pending appeal,” according to the vice chancellor. Izzo also “failed to show a likelihood of success” on appeal, and “the Company and its stockholders would face substantial harm if a stay were granted,” the vice chancellor says.

The opinion notes that “the defendants anticipate the Company will have to raise additional capital through equity sales to stave off bankruptcy and remain in compliance with its loan covenants.”

If AMC “filed for bankruptcy before an appellate decision were issued, both the common stockholders and APE unitholders would almost certainly suffer a complete loss of their investment,” the decision adds. Additionally, AMC’s second-quarter financial results “reveal a continued need to sell equity to raise cash despite recent earnings,” the vice chancellor finds (emphasis added).

By lifting the status quo order that had prevented AMC from implementing the APEs conversion and the reverse stock split, the vice chancellor writes, AMC will be able to “free up additional common stock for sale.” Vice Chancellor Zurn acknowledges AMC’s argument that if the company was unable to complete the conversion, it would have likely needed to sell additional APEs at a discount, which “would harm AMC’s common stockholders.”

AMC noted in a recent court filing that it must still provide 10 days’ notice to the New York Stock Exchange before implementing the reverse stock split and APEs conversion.

The company previously said that final approval of the settlement and the ensuing APEs conversion is essential for the company to raise additional equity capital to pay down debt. AMC told the court that a final ruling “in the late part of July or early August would create the maximum chance of AMC being able to raise equity capital through a capital markets financing in the near term.”
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