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Investor Rose Izzo—who spearheaded an effort to derail the deal over the summer—filed her opening brief with Delaware’s top court, urging it to overturn a decision approving the accord by Vice Chancellor Morgan T. Zurn. Zurn’s ruling in August cleared the way for AMC to recapitalize by going forward with the stock conversion.
The pension fund and an individual investor who led the litigation “sold defendants insurance against damages arising out of the plainly foreseeable collapse of AMC’s market capitalization,” Izzo said in her Dec. 1 legal brief. “AMC’s stockholders would be better off had plaintiffs never filed suit.”
Izzo was one of nearly 3,000 shareholders who wrote to Delaware’s Chancery Court asking Zurn to turn the settlement down, many of them “meme stock” traders who powered the rally that spared AMC from a pandemic-era bankruptcy. The judge initially stunned the market by rejecting the agreement in July before signing off on a revised version three weeks later.
AMC’s shares cratered more than 80% in the first few weeks after the pact was approved, recovered slightly in October on hype about the Taylor Swift concert film, and plunged again to close at $6.86 on Dec. 1, down about 87%. The company said in September that it had sold 40 million shares, of a planned 390 million, for $325.5 million.
‘Disaster Insurance’
The dispute centers on a challenge to the AMC Preferred Equity units, or APEs, that the theater chain created in 2022 to get around a share limit it couldn’t raise without the approval of its retail investor base. Some stockholders opposed the conversion over equity dilution concerns, others believed AMC could survive without additional financing, and many simply didn’t vote on company proposals.
The lawsuit took aim at the company’s plan to let APE holders—including hedge fund Antara Capital LP, which held roughly 30% of the preferred units—vote on the recapitalization proposals.
The vocal involvement of AMC’s meme stock investors made the court case unusual, especially as the focus of the proceedings turned to the settlement, which handed out an additional share of common stock for every 7.5 held. Roughly 2,800 shareholders wrote to oppose the pact, many citing market manipulation theories that had spread online.
After losing several bids to halt the APE conversion, which was completed in late August, Izzo formally appealed Zurn’s ruling in October. Her Dec. 1 opening brief says the stock plunge following the conversion was exactly the predictable “catastrophe” she and her attorneys had warned of when seeking to scuttle the pact.
The lead shareholders settled for “a trivial issuance of additional common stock to class members while joining AMC and its board in predicting imminent financial doom,” according to Izzo’s court filing. “Some plaintiffs sell ‘deal insurance.’ Here, the plaintiffs sold disaster insurance.”
Despite “supposedly staring into bankruptcy’s maw,” the company made no effort to oppose their $20 million legal fee request, Izzo said. Zurn ended up handing out only $5.7 million in fees, thanks largely to the post-conversion stock crash, which reduced the value of the extra shares handed out in the settlement.
‘Defenestrated’
Meanwhile, when the only meme stock investor among the lead shareholders not only balked at the agreement but reached out to Izzo’s counsel for help, “plaintiffs concealed his opposition, then defenestrated him,” according to her court filing.
Izzo says the settlement had three problems that should have stopped Zurn from approving it: The accord released claims with only a remote link to the case, didn’t include a mechanism for letting investors opt out, and was negotiated by shareholders that were a poor choice to lead the litigation.
Response briefs are due Dec. 31.
Izzo is represented by Margrave Law LLC and Halloran Farkas & Kittila LLP. Bernstein Litowitz Berger & Grossmann LLP, Grant & Eisenhofer PA, Fields Kupka & Shukurov LLP, and Saxena White PA are counsel for the lead shareholders. AMC is represented by Richards, Layton & Finger PA and Weil, Gotshal & Manges LLP.
The case is In re AMC Ent. Holdings Inc. S’holder Litig., Del., No. 385, 2023, opening brief filed 12/1/23.