On Friday, July 21, Delaware Vice Chancellor denied AMC Entertainment’s (NYSE: AMC) filing for a stock conversion settlement that would provide the company’s common shareholders with stock holdings worth $129 million.
AMC was sued in February by its investors over how the shareholder vote on the conversion plan was carried out.
On July 23, AMC CEO Adam Aron published an open letter to the investors, announcing the company has filed a revised petition for a stock conversion plan to address the court’s concerns.
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The open letter triggered a massive share price surge in AMC’s stock premarket trading on July 24, propelling them by more than 47% to $6.49.
Shares of AMC closed 1.6% higher on Friday at $4.40.
What’s in the letter?
The latest AMC stock price spike comes after the CEO of the cinema theater chain, Adam Aron, posted a letter “on a subject of existential importance” to the company’s shareholders. In the letter, Aron said the company made the necessary amendments to the settlement plan aimed at resolving issues voiced by Delaware judge Morgan Zurn.
“Yesterday we along with the plaintiffs, filed with the Delaware Court, a modification of the legal release surrounding the settlement of the Delaware litigation in an effort to address the Court’s voiced concern.”
– Aron wrote in an open letter to investors.
Essentially, in the stock conversion plan, AMC asked the judge to convert the company’s preferred shares to common shares, ultimately allowing the company to issue new stock.
According to Aron, approving the settlement is critically important as it would allow the company to raise new equity capital and evade bankruptcy risks.
“The risk of financial collapse is not whimsical. That is especially the case now with the added uncertainty caused by the writers and actors strikes.”
– Aron noted.
Being unable to secure fresh capital would amplify the risks of AMC running out of cash in 2024 or 2025, or prevent it from successfully stretching out the maturity of its debt, the CEO added.
How did it come to this?
The judge’s decision to deny the initial filing represents a new obstacle to AMC’s recapitalization efforts after a string of challenges plagued the company’s business after a coronavirus-induced sector decline.
Investors then asked for a swift stock conversion, offering a one-for-one exchange of its APE shares into its Class A common shares.
However, a group of investors was not pleased with the way AMC executed the vote on the stock conversion plan, accusing the company of plotting a scheme to circumvent the will of common stockholders who were against the company’s decision to dilute their holdings.
The proposed settlement had faced over 2,800 objections from AMC stockholders, which Zurn referred to as “unprecedented” in its Friday ruling.
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