AMC: Movie Theatre? Meme Stock? What's It Doing in Delaware?
Wherein I answer at least some of your questions about AMC Entertainment Holdings, Inc.
Below is a backgrounder on the AMC matter for paid subscribers -- a response to the seemingly ever-arising question, “what the fck is going on with AMC, anyway?” or, “are you talking about the movie theatre company?!?” … to which the answers are, respectively: “It’s a long story, buckle up, and get your beverage of choice,” and “Yes, that one, but see also, answer No. 1.”
What I am about to attempt here today is the lay-person-legal-explainer’s equivalent of some Simone Biles-level twisting and turning to take y’all through a bit of the backstory of the AMC matter, all hopefully without faceplanting straight into the uneven bars of one readership contingency or another’s various feelings about this case. Please wish me luck, toss me bouquets of flowers, imma dust my hands with some chalk, wrap my wrists for the carpal tunnel, and get underway.
First off, there is no way to explain what is going on in the AMC Entertainment Holdings, Inc. cases in the Delaware Court of Chancery without talking about corporate law, corporate finance, broader societal issues like the pandemic, and more generalist philosophical, epistemological, and even psychological phenomena. If you have thought I’ve done a lot of wind-up or extraneous expository writing in my other pieces, I promise you will feel like I’m doing an inordinate amount of it here, because the story about this story is at least as important as the legal concepts at issue in this case. Deal with it. Or don’t. But if you can’t, you should probably see yourself out.
There is so much going on in and around the AMC case that is a stand-in for much larger societal issues, and it’s so easy to collapse what is relevant here, in the Delaware Court of Chancery, with the concerns people have with what goes on in the world at large. I’m going to do my best to disaggregate some of it, or at least to start the process. It’s going to be a herculean effort and it’s going to take more than this post. If you are not up for the journey, please bail out now. It’s probably not going to be easy to follow. I’m serving multiple constituencies. If you have no patience, run for the hills.
This is also a long story, and it runs the gauntlet through many hot button issues, and I know many readers are going to have strong feelings about a lot of things I’m going to say. That is okay, but if you’re not interested in learning or in having an actual conversation that doesn’t just confirm your priors, you should probably rage quit before the rage even sets in. It will save you the elevation in blood pressure and be better for your heart heath. The reality is that there are a lot of major yet fundamental issues that many retail traders do not understand, not because they are dumb or ignorant, but because no one with sufficient teaching skills has ever truly taken the time to try to explain the concepts in a way that was useful, because it’s incredibly difficult and exhausting mental labor to bridge a knowledge gap.
Imagine that you are working in whatever field you are an expert in -- it doesn’t matter if that’s finance, or food service, or fashion, or whatever -- but imagine that someone comes in who doesn’t know their proverbial (or actual) ass from their elbow in this field. And imagine something quite complex, like the hardest part of your job, and you’re asked to explain it to them in detail -- something that’s taken you years of learning, study, practice, trial, and error to figure out how to do. Now, you’re being asked to write it all down, make it comprehensible to someone who doesn’t know the first fcking thing about what you are talking about. So, you can’t use any of the words that you normally use, you can’t use any of the shorthand that you employ on a daily basis, you can’t speak the way that you are accustomed to speaking, you can’t use any of the terminology that you have been tossing around at work for your entire career -- every time you go to start a sentence, you have to start over because the first word you go to utter, you realize the person isn’t even going to understand what that word means.
This is what it feels like to try to explain complex corporate and legal concepts to lay people. It’s hard. It’s mentally exhausting. It requires psychological work that is draining, emotionally, and almost spiritually, because I have to try to empathize with the people to whom I’m trying to convey the information.
Then, imagine that you are trying to explain the most complicated part of what you do for a living everyday to someone who doesn’t understand the first thing about it, and out of nowhere, they start screaming at you, saying that you are paid by Ken Griffin, or calling you names, or just acting like a total fcking asshole straight to your face. Can you imagine why people don’t spend their time trying really hard to get the message through to people who are not already on their level? Because speaking across levels of discourse is hard, and people don’t make it easier when they attack the folks trying to do it for weird and bizarre conspiracy theoretical reasons. People tried to warn me off getting involved in this case many, many times, and I’ve thought better of staying involved in it at various points, like when I woke up to my DMs being randomly filled with hate speech one morning. But the reality is that I’m terrible at leaving people in a lurch, and I see how piss poor the information quality is out there in the wild, and I further see that there’s an opportunity for me to make it better, so I do what I can.
Look, I’m not telling you how hard this work is because I want you to feel bad for me. I absolutely love what I do. I could nerd out about this ish for the rest of my life, it brings me endless joy -- and I think that is obvious. But the task I am about to attempt requires so much care, nuance, and subtlety, and it’s very delicate because there are so many contingent interests at play: there’s a company in the balance, and a billion and a half outstanding shares of float that have value that matters to people, and a Court dealing with a massive overload from a case that is causing an incredibly diligent jurist and her staff to grapple with how to give due process to stockholder objections, while also being expedient and responsive to the parties’ needs. Almost every facet of this case has multiple angles that one has to hold in mind at the same time in order to think clearly about it all, which is quite hard to explain how to do, and even harder to actually do. There are an incredible number of moving parts, and if you are unable to take all that into consideration -- if you think you are going to come in here with a reductive take, or a quippy one-liner, or a slam on the Court, or some other stupidity or pomposity, please just exit now and save yourself the time. If you think you are going to get some quick fcking bullet points and go on with your day, you are in the wrong pace, and I don’t think the place you are looking for exists. Alternatively, if you want to learn how to think, if you want to nerd out, if you want to get way down in the weeds and figure out what the fck is up with this whole situation, read on, because we are already besties.
Alright, alright, time to get out your giant foam fingers, your pom-poms, your tiny international flags -- wave ‘em if you’ve got ‘em! Get ready for these Olympic Games, because the opening ceremonies are almost over and the main event is almost about to begin. For those of you who have been asking, “what the fck is going on with the movie theatre company?” … it’s time to finally get your answer. And for those of you who have been living in the weeds of this for the last few years, maybe it’s time to take a new perspective, or see a different take on things, or perhaps look at the matter with fresh eyes. I encourage you to set aside what you think you know about what has happened, and read this with an open mind. Also, some of you, please get ready to take notes and educate me where you see that I have my own blind spots. Feel free to hit reply to this email, or comment below with your thoughtful commentaries.
Also, as a general matter, in terms of anything that will happen in the future vis à vis the Court, I (obviously) do not profess to have answers about what will happen, ever. I am not here to prognosticate in the sense that some people want. I am here to explain what is so. I think it’s better to analogize what a subject matter expert provides to thinking about what it might be like if you came to Earth from another planet and asked a person familiar with the concept of gravity what would happen if you dropped a ball that was in your hand. Many times, when people ask me what’s going to happen with matters relating to the Court -- such as at the teleconference on scheduling for settlement logistics --, it’s similar to the person saying “well, if you let the ball go, it’s going to fall to the Earth at 9.8 m/s2.”
None of what I do in talking about what I know about the Court is ever a prediction, per se. If I ever sound like I think I might know how I think the Court might act, it’s much more akin to a likely explanation of a future event. The thing is, it could always also be wrong, under certain edge case conditions. Maybe the ball happens to be magnetic, and you happen to be standing over a magnetized field, and I can’t tell that from looking at you. There can always be things going on that aren’t obvious from the surface that can come up -- one of the parties could spring something weird on the Court or something, but the chances that things will likely go the way that I imagine they will go are the same chances that a ball will drop out of your hand and fall to the ground due to gravity. I’m just familiar with the Court the way that person is familiar with gravity, because I live and breathe this court as my home planet every day, all day.
And obviously, as the matters get more intricate, and the decisions that we are discussing being presented to the Court for decision get more complex, imagining how the Court will handle the issue presented becomes a bit more akin to asking a person familiar with quantum mechanics where exactly a particle is going to be located in space at any given moment. There’s only going to be a probability field in which we will have a higher likelihood of finding the electron, so to speak.
In case it’s not obvious to any of you, the courts were not meant to be tools of trading. They are not here for your degenerate gambling desires. Their efforts should not be employed for those ends. They should certainly af not be abused for those ends. There’s something happening at the margins that feels unseemly and gross but isn’t per se illegal and I don’t know how to grapple with it, other than to provide the maximum amount of good and accurate information in the most timely way possible. That is my mission. Should you choose to accept to come along for the ride, you are welcome to do so. This message will not self-destruct because the whole point is that it serve as an archive.
And now, for the rest of the story…
Way back in ancient pandemic history in the quaint, quiet times of 2020 when hindsight was yet to have taught us everything we now know, AMC 0.00%↑ became a meme stock. Please let’s not get off on the wrong foot early here, and have some of you take the “Meme Stock” moniker as a derogation, which some folks apparently do. I’m sure that there are people out there who use the term “meme stock” as a slur. That doesn’t mean that it is one. Please read the first line of the definition of a meme stock from the font of all knowledge. This is simply a factual description of what AMC is. Some meme stocks are further out of line with fundamentals than others. It doesn’t mean that they all are wildly out of line with fundamentals. As you will see below, AMC’s own 8-Ks disclosed AMC as a meme stock. Being a meme stock means that the stock is popular on social media and with retail investors. AMC is a meme stock, my g-d, how is this even something I have to justify saying in 2023.
Just fair warning, this piece is going to be rife with incredibly obvious things, some of which seem to be controversial for very non-obvious reasons. If you are a person who is -- for whatever reason -- very emotionally charged by very obvious things being stated, you should probably take a walk outside, or touch grass (I have recently learned this can be interpreted euphemistically or literally, I intend it here literally), or perhaps go to the gym or run on a treadmill. If you spam the comments section with repetitive messages about some issue that I didn’t discuss here, I will block you, because the reason that I did not discuss it here will be that it is not relevant to the purview of the Delaware Court of Chancery, and one of the things that I think people are not at all coming to terms with is that the Delaware Court of Chancery is a court of limited jurisdiction, and that jurisdiction does not include every single complaint that could ever be made about a company or its management or trading policies in the United States or the way that broker-dealers operate or the way that hedge funds or other players do business or many, many other things that are perhaps unseemly but are simply inappropriate issues to be bringing to this Court.
If there is one piece of advice that I can give to anyone reading this who feels like they have been saying the same thing for the past few years and no one is listening, it is: if you have a complaint with something in life, the absolute best thing that you can do before you go around the Earth simply spamming the complaint upon every corner of the internet conceivable, you would be much better served by actually engaging with people who might give a shit and trying to discover which people and what agencies could potentially ever give a single, solitary fck about the thing that you are whinging about. Because until you find the proper outlet for your complaint, you are simply just a spammer. And do you know what happens to spammers? They get blocked. They get ignored. They get shut down. They get banned from platforms. And I do not want that to happen to you. But y’all need some tough love. Because going around talking about things to people who simply do not have the power to effect any change about them is not an effective strategy in life, and it is bound to leave you feeling helpless and ignored. A much better course of action is to expend that energy trying to figure out who the people are who share your set of concerns. The more confronting truth is that there is a radical failure of government, and oversight, and the people you are looking for to help you might simply not exist. This is a much bigger problem, and one that I don’t have a great answer for. Still, though, spamming is not the solution. Concentrated action is still better than diffuse spam. And, I’m not going to lie. You are all currently spamming the Court with a lot of absolute trash that has nothing to do with this case. And you should stop doing it. But that’s just, like, my opinion, man. But here, it’s my domain.
So that is all to say, if you spam in the comments here with bunch of things about “naked shorts” at some point, I’m going to ban you. Because I am -- sometime -- going to find the time and energy to explain why these conspiracy theories are both insufficiently supported by reality to do the work some of y’all want them to do, and also simply inappropriate for discussions about the Delaware Court of Chancery, no matter how much work they could be doing, in any imagined world. /rant
Where were we? Right, back in the doldrums of 2020 … no wonder I’m resisting going back there! It was depressing af. The lockdowns, the deaths, the absolute unrelenting uncertainty of what the hell was going on, whether the schools would reopen, whether life would go back to “normal” and whether we would ever do things like go back to the movies, in person.
Enter, stage left, AMC Entertainment Holdings, Inc. Everything is going pretty normal, to the extent life can be normal for a company that operates an entirely in-person business operation when everything that happens in-person is suddenly and mandatorily shut down. The stock price takes a hit, along with nearly every other stock in the market. It’s hard to see on the chart now, because everything is so blown out by the subsequent price action, but you can see it there in March 2020 if you squint. Volume is not super high, I mean, it’s a movie theatre company stock, for goodness’ sake, who really cares about it, right?
Throughout 2020, the company struggled with the impacts of the pandemic and on December 11, 2020, AMC filed an 8-K disclosing that “[i]n the absence of additional liquidity, the Company anticipates that existing cash resources will be depleted during January 2021 [and that to] remain viable through 2021, the Company currently estimates that it will require at least approximately $750 million of additional liquidity to fund its cash requirements.”
In the same filing, AMC disclosed that they had entered into an agreement with Mudrick Capital Management, LP to secure $100m in financing and by the end of January 2021, the company had secured over $900m in investment capital to shore up a bit of reprieve. By March, as you can see from the big green candles in volume and price spikes, somehow, the internet had come to save the day … the memes also began to flow and the Redditors entered stage right. But as AMC worked to reopen almost 99% of its theatres, it still had trouble filling seats.
Another notable disclosure in that early 8-K that hopefully all those meme stock investors read was this (emphasis added as a reminder that hindsight is so 20/20, or in this case, 2021):
The Company is actively pursuing potential sources of additional liquidity, including:
· Additional Equity Financing. The Company intends to pursue an at-the-market program that includes up to approximately 178.0 million shares. The amount of liquidity we might generate will primarily depend on the market price of our Common Stock, trading volumes, which impact the amount of shares we are able to sell, and the available periods during which sales may be made. To date, the Company has raised approximately $155.2 million through the sale of 50 million shares of its Common Stock pursuant to its prior at-the-market offering programs. Because (a) we may not be able to make sales during certain periods, including after the filing of our annual report in March 2021, (b) our market price and trading volumes are volatile, and (c) the current program includes a significantly higher number of shares than earlier programs, which will be highly dilutive to our currently outstanding shares, among other things, there is no guarantee as to the amounts of liquidity we might generate or that our prior experience accurately predicts the results we will achieve.
Lastly, there was this final sign off:
The Company is unable to determine at this time whether these potential sources of liquidity will be available to it. There is substantial doubt that these potential sources of liquidity will be realized or that they will be sufficient to generate the material amounts of additional liquidity that will be required until the Company is able to achieve more normalized levels of operating revenues. We do not believe that any individual source of liquidity described above will be sufficient to address the Company’s liquidity requirements, and even if all of the potential sources of liquidity described above are available, they may not be sufficient to address the Company’s liquidity requirements. In the event the Company determines that these sources of liquidity will not be available to it or will not allow it to meet its obligations as they become due, it will need to change course and pursue an in-court restructuring of its liabilities, and in the event of a future liquidation or bankruptcy proceeding, holders of the Company’s Common Stock would likely suffer a total loss of their investment.
From March throughout 2021, the company and the memes went wild with their parallel issuances. AMC did some at-the-market equity offerings as it had previewed, and the memers did not disappoint with their mimetic virality. Rocket emojis abounded. Following Matt Levine’s “basic meme-stock corporate finance advice” that “if people want to pay a lot of money for your stock for no real reason, you should sell it to them,” and “if your stock is overpriced, you should sell it,” and that’s basically what AMC did.
As the company capitalized on this phenomenal price action, they started to see the writing on the wall, or rather, the emptiness approaching in the authorized share capital closet. On April 1st, 2021, they filed something that their new retail stockholder base did not get fooled by -- a definitive proxy statement announcing their desire to amend the company’s charter to increase the total number of shares of Class A Common Stock the Company can issue by 500,000,000 shares to a total of 1,024,173,073 shares. If it’s not obvious by those two numbers sitting side-by-side one another, that’s an increase of almost 100%. In the business, we call this kind of thing dilutive.
To imagine this on a smaller scale, let’s just cut the denominator by 100,000,000. Please be aware that I am now going to paint an incredibly complex pastiche with a children’s crappy free crayon on the back of a restaurant menu, so understand it’s going to be missing all the nuance. This is simply a thought experiment. It’s intended to give you a sense of something, not a picture of the whole. Imagine that your BFF is starting a company and asks you to invest. The company needs to raise capital, and they want you to be an investor. They say, “Hey! We are going to split this company into five pieces, and we’d like you to buy all five pieces for $100 each, because we need to raise $500.” This is nothing like how valuations or at-the-market offerings are done, so please don’t think any of the details are relevant, I just want you to understand how you might feel about what would happen if -- after you bought the five outstanding shares of the company, the company decided to issue five more shares a couple years later, without giving you anything as compensation. It might feel … what’s the word? Right, that might feel dilutive of your position as the original holder of all five outstanding shares of stock, since now you would be holding only five out of ten total shares of stock.
That being said, it might be dilutive but also accretive, and thus, technically in your best interest, if -- in the process of issuing and selling those other five shares of stock, the demand and hype created in that process drove the price up for the shares (in whatever kind of market you can imagine existing for such a small-time operation such as the one we are imagining in this little thought experiment) to something like $200 each. Because now you would own five shares, which would only constitute 50% of the equity of the company, which is very bad for voting purposes, but you would have increased the value of your equity by 100%, which is very good for capital purposes, presuming you either 1.) give af about paper returns for some reason, or 2.) want to sell your shares into this (hopefully non-illiquid) market, or 3.) have some other reason that my imaginary hypo supports. In reality, when we are talking about retail stockholders, none of them have a meaningful voting position, so the dilutive effect on their voting position is negligible because they didn’t begin with a voting control bloc to start with, so the only question is whether the dilution “harm” is outweighed by the accretive value. Many people (better versed in corporate finance than I am) would argue rationally that it is not.
But here’s the thing about memes, meme stocks, retail stockholders, and the internet in general. You may be surprised to hear this, but things don’t always happen in a rational manner. And so, when we call a transaction like the one proposed in the April 1, 2021 (perhaps again, not the best day to launch a serious proposal to meme stock stockholders for fear they might feel that they were the butt of the joke) dilutive, it doesn’t necessarily carry with it a pejorative connotation. In corporate finance, I would say it’s arguably more of a descriptive term than a normative term. But I feel like -- for whatever reason -- the retail stockholders got wind of this proposal and they decided that it was definitely a “no good, very bad thing” that they did not want to have happen. Hindsight is easy to apply in a backward-looking way, but if I had to play armchair psychologist, I would argue that burying the lede of the “big fcking number” of the 500,000,000 share punchline at the very end of the proxy was perhaps a “big fcking mistake” because in my absolutely unscientific analysis, it really gives the disclosure the vibes of trying to pull a fast one over an almost-literally-born-into-existence-yesterday retail stockholder base on -- of all days -- April Fool’s Day.
Whatever the reason, whether a proper or improper understanding of the impacts of dilution, whether a substantive or procedural beef with the presentation of the terms of the deal … retail was not pleased. And they made their dissatisfaction with the plan plain.
By June 2, 2021, AMC’s stock price hit its ATH of $72.62, almost three times its highest point in recent memory. Going back to 2014, the stock hadn’t much broken above $22, so this constituted a significant departure from recent memory, and certainly an enormous jump from the more recent years of dwelling around the $1-10 per share range. The huge spike on June 2nd caused AMC’s market cap to exceed GameStop’s market cap, which meant another boost for the meme stock vibes, and more mimetic action always causes more mimetic action. At that point, GameStop was the OG meme stock, so to exceed its market cap was to go godtier.
In an attempt to capitalize on -- and reward -- its retail stockholders for their participation in saving the company from the brink of bankruptcy that it was facing in late 2020, AMC announced that by registered with AMC Investor Connect, retail investors would earn a large popcorn with every visit, and estimates were that retail comprised approximately 80% of the stockholder base by this point. CNBC reported that according to S3, on June 2, 2021, short sellers lost $2.8 billion as the stock price surged, which again fed more virality to the mimetic narrative, and made the memers go -- as they say -- bananas.
In June, AMC sold 11.5m shares in a matter of hours and eventually followed Matt Levine’s second piece of meme stock advice, or at least the footnoted caveat to the advice to the notion that “[i]f your stock is overpriced, you should sell it,” which is that the SEC doesn’t love meme-stock issuers taking advantage of dumb prices to sell stock, so if you’re going to do it you have to warn potential buyers that the price is dumb.” And so, that’s what they did. In the 8-K that announced the 11.5m stock sale, they cautioned:
We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.
Extreme fluctuations in the market price of our Class A common stock have been accompanied by reports of strong and atypical retail investor interest, including on social media and online forums. The market volatility and trading patterns we have experienced create several risks for investors, including the following:
· the market price of our Class A common stock has experienced and may continue to experience rapid and substantial increases or decreases unrelated to our operating performance or prospects, or macro or industry fundamentals, and substantial increases may be significantly inconsistent with the risks and uncertainties that we continue to face;
· factors in the public trading market for our Class A common stock include the sentiment of retail investors (including as may be expressed on financial trading and other social media sites and online forums), the direct access by retail investors to broadly available trading platforms, the amount and status of short interest in our securities, access to margin debt, trading in options and other derivatives on our Class A common stock and any related hedging and other trading factors;
· our market capitalization, as implied by various trading prices, currently reflects valuations that diverge significantly from those seen prior to recent volatility and that are significantly higher than our market capitalization immediately prior to the COVID-19 pandemic, and to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our Class A common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations;
· to the extent volatility in our Class A common stock is caused, as has widely been reported, by a “short squeeze” in which coordinated trading activity causes a spike in the market price of our Class A common stock as traders with a short position make market purchases to avoid or to mitigate potential losses, investors purchase at inflated prices unrelated to our financial performance or prospects, and may thereafter suffer substantial losses as prices decline once the level of short-covering purchases has abated; and
· if the market price of our Class A common stock declines, you may be unable to resell your shares at or above the price at which you acquired them. We cannot assure you that the equity issuance of our Class A common stock will not fluctuate or decline significantly in the future, in which case you could incur substantial losses.
We may continue to incur rapid and substantial increases or decreases in our stock price in the foreseeable future that may not coincide in timing with the disclosure of news or developments by or affecting us. Accordingly, the market price of our shares of Class A common stock may fluctuate dramatically, and may decline rapidly, regardless of any developments in our business.
Let me ask you a quick question. Did you read all of that, or did you skim over it? Could you just not really be fcked to read it all? I ask because sometimes when people see legal disclosure language, their eyes glaze over and they just … cannot. Which, like, I understand. It’s one of the reasons why I don’t write in an incredibly staid and stulted way, because … y’all would just never read it. I know how you are.
Which leads me to question how impactful such warnings are, or what purpose such disclosures truly serve to protect retail investors in these situations when mimetic price action is driving investment, because the 11.5m shares sold out in a matter of hours from its announcement, which I highly doubt is long enough for that amount of legalese to be digested by even a fraction of the retail stockholder base, and I find it even less likely that in a feeding frenzy even a fraction of any such participants could possibly give a fck about such things. Obviously, this is a bigger conundrum, but perhaps let’s bookmark it for future discussion -- what is the place, meaning, use, and effectiveness of 8-K disclosures? Why do we do them? What work do we expect them to do? What weight do we intend them to bear? What expectations does the law put on them? What functions do they perform in actuality? Does it matter that there’s an enormous delta between the assumptions, expectations, idealizations, and the reality?
Anyway, bigger questions for another day. We’ve still got a lot of work to do here. At this point, the stock price is still at incredibly high levels compared to the quite-admittedly-abysmal then-current fundamentals of the company. And the company wants to follow Matt Levine’s sage advice and capitalize on that by issuing more shares. But there is a problem. And this problem -- and the company’s eventual solution -- is what will (through a long and winding path even longer and more winding than the way that I write these Substack pieces) wend its way over the next two years to this exact line of text, explaining how AMC finds itself attempting to settle a case against it filed by stockholders in the Delaware Court of Chancery.
By June 3, 2021, consider this. The stock price is at an all-time high. Imagine you are the company. You are following Matt Levine’s corporate finance advice. You know that when your stock price is at an all-time high, and in particular, if say -- you are in the middle of a company-life-or-death situation like a worldwide pandemic that threatens your entire business model, and already you are dealing with massive cash flow issues, you really should be, you know, selling your stock to people if they want to pay a lot of money for it. And those really big candles on the chart above show that people were screaming very loudly that they wanted to pay very big number prices for stock for reasons that don’t make a lot of logical sense on the books, such that they were at the time. There’s just one huge problem. As of June 3, 2021, the company only has 46,124 authorized shares of Class A common stock available for issuance. Translation? Ain’t barely any stock left to sell.
And given the fact that retail stockholders’ interest and “price discovery” was keeping the company afloat as it chewed through the remainder of its available stock issuances, they also appeared to recognize that they couldn’t go through with the vote as disclosed in the DEFA14A from back on April Fool’s, to which retail had revolted. But these tantalizing share prices are sitting tauntingly on the market, unavailable to be capitalized on, and it’s surely driving management insane by this point, can’t you imagine? You can sell shares at 10x their recent value, but you have no shares to sell, and you can’t do what you have been doing for years, and just making the money printer go brrrrrrr.
BUT YOU WANT TO MAKE THE MONEY PRINTER GO BRRRRRR.
IT’S THE PANDEMIC.
EVERYONE IS MAKING THE MONEY PRINTER GO BRRRRRR.
So, on June 3, 2021, AMC files another proxy, this time, for a radically pared down ask. No more hiding the ball and trying to slip in a doubling of the outstanding share count. No attempt to go from 500 million to one billion outstanding shares of Class A common (that would come again, later). Now the ask was for a mere cool 25 million share increase, which will not be issued until at least 2022. Not going to lie, the letter from Adam Aron in this proxy just sounds desperate. The language is cadging. But don’t take it from me. See for yourself.
Dear fellow owner of AMC,
Thank you for investing in AMC! Only the owners of AMC get to vote on the matters that are critical to the success of our company and the value of our shares. So, please take the time to exercise your right to vote to protect and enhance the value of your investment in your company.
The ask:
You are being asked to re-elect certain Directors, ratify the selection of our independent auditor, and have your say on executive pay.
In addition, we are asking that you authorize the possible future issuance of a relatively small amount of AMC shares.
Proposal to increase our authorized share capital by 25 million shares. This does not mean those shares actually will get issued, and in any case they cannot be issued prior to 2022:
Allow me to take just a few moments to explain the rationale behind the proposal to increase our authorized share capital.
AMC may face challenges and may uncover exciting opportunities as we emerge from the impact of COVID-19. To successfully navigate the road ahead, we need to assemble all of the tools that might help us, and an important tool for any company is having shares available to issue if the right opportunity arises. We would only consider issuing our precious shares when we believe that doing so will enhance the value of your investment in AMC. This is an important request, given that at the moment we essentially have no shares left for future issuance, only 46,124 to be precise.
We are requesting an additional 25 million shares to be available for possible issuance in the future should the right opportunity arise. This represents less than 5% of our issued share capital.
It is also fully 95% less than the most recent request of stockholders to authorize more shares. We have carefully been listening to our shareholders, and understand that the prior request gave some of you pause.
Consider some of the situations where it might be beneficial to use shares in the future to create value for our stockholders:
o We may have opportunities to use shares to reduce our debt and reduce or eliminate the associated interest costs.
o We may be able to generate cash to be used to invest in our theatres, acquire new theatre leases, or invest in other attractive growth opportunities and thereby enhance the value of our company.
o We may be able to use shares in exchange for cash rent reductions that will improve the profitability of our theatres.
o We may be able to use shares as currency for attractive merger & acquisition opportunities.
o We may use shares to raise cash, but only if necessary to bolster liquidity or ensure our survival in the event that the anticipated return to a normal theatrical box office environment takes significantly longer than expected.
Some of you may be concerned that approval may dilute your stockholdings. I can assure you that this is the very opposite of our goal.
Remember that an increase in authorized shares does not increase the number of shares that are issued and traded in the market, and the new authorized shares that we are requesting cannot even be considered for issuance until 2022 at the earliest.
The best way to protect and grow stockholder value is to ensure that we have the tools to successfully navigate the road ahead, and we are much better equipped to fight the fight if we have the flexibility to issue shares.
AMC's directors, management team and I all are stockholders who are incentivized to protect and increase the value of your AMC shares. Therefore, you can be confident that that we would only issue shares if we believe that doing so will create value for you, our supportive owners.
Summary:
By voting in favor of the proposals under consideration at the Annual Meeting, you can help us to position AMC, in its 101st year of business, for prosperity over the next 101 years as well.
Thank you for supporting AMC.
See you at the movies!
Adam Aron
I know hindsight keeps coming up as a motif, but that fourth bullet point will really stick out like a sore thumb if you’ve been paying attention to this saga and are only revisiting it now for funsies. If you haven’t, don’t worry, we’ll pass by it briefly later and if you catch it, you can come back to see what’s so funny. It’s a goldmine.
A few days later, Adam Aron rescinds the request and promises not to make any more asks for share issuances increases in 2021. When I first started following this case, and read the complaints at issue in the Delaware Court of Chancery litigation (spoiler alert, I promise we’ll get to them someday!), I kept wondering why these share issuance vote proposals never even seemed to get close to a vote, but were instead pulled from the proxy by management in what seemed like very early calls. There was even some obfuscation around whether or not there had been preliminary vote tallies on one of them, but as the facts became clearer, it appeared that there had been nothing more than a temperature-taking kind of exercise on social media, and when it was clear from the weight of the Reddit and Twitter shiptoasting that retail was not on board, management quite quickly retreated. Before I knew anything about this case, or much about meme stonks in general, I couldn’t really make heads or tails of this phenomenon.
Now, although I’m loathe to say I “understand” any of this, I think I could venture something in the direction of a good faith guess as to why. It occurs to me that from a simplistic point of view, there’s one theory that could sound something like: at this stage in the game, AMC was simply entirely dependent upon retail for its survival, and they had to do and say basically whatever it took not to piss their retail stockholder base off and get them to meme-fck off to the great Bed, Bath, and Beyond (may their memory be a blessing), and there was too great of a risk of causing an imbalance in the force at this moment that could quickly lead to price collapse in a meme stock situation, if you don’t keep the retail frenzy feeding feverishly. It was still pretty darkly pandemic times in the sense that people had little else to focus on beyond their device screens, and the intensity of viral, mimetic energy was at one of its perhaps strongest points in history. Musk’s appearance on Saturday Night Live, which spiked the price of Dogecoin to unseen levels was in May 2021 … it was an era when everyone had too much time on their hands and way too little to distract them from obsessing over staring at their favorite meme stock chart or other newfound trading platform. It was a weird time.
So, Adam Aron makes a promise, on Twitter. He says that it’s no secret that he thinks that stockholders should authorize more shares, but he says they don’t want to proceed “with such a split” which he only describes as “many yes, many no” -- I assume what he really means is that a very loud contingency on social media was vociferously and perhaps virally sharing that they did not want the authorization amendment, and so he explains that they are cancelling the July vote, adding “[a]nd no more such requests in 2021.” And to be fair, he kept his promise.
Admittedly, Twitter is always almost always a forum for incomplete information, and the “many yes, many no” thing here is glossing over a big issue that is going to become central to the case soon enough, so let’s back up and find out what exactly is the reality here.
The reality is this. You know all these amendments I’ve been talking about AMC wanting to get done? The 500,000,000 YOLO one, and now here, the very conservative 25,000,000 one, both of which were proposed amendments to the certificate of incorporation? The one that here, Adam Aron says he does not “want” to procede with a split of “many yes, many no”? The reason this bothers me will perhaps become obvious if we dig into the particulars a bit. Perhaps I’m being a bit pedantic, I’ve never been accused of not being pedantic. I take some pride in it, in fact. Let’s look at the precise language of the proxy and embrace the pedantry.
To approve an amendment to our Third Amended and Restated Certificate of Incorporation to increase the total number of shares of Class A Common Stock (par value $0.01 per share) the Company shall have the authority to issue by 25,000,000 shares to a total of 549,173,073 shares of Class A Common Stock effective January 1, 2022 ("Proposal 1").
Ok, so -- now here’s the Very Important Question™️ that is going to become even more important down the road … what kind of vote is required to effectuate this kind of change to AMC’s Certificate of Incorporation?
Because let me tell you the first thing that you need to know whenever you hear some CEO or management person or talking head on TV or other shittalking know-it-all blathering away about corporate law speaking about a vote of this or that on whatever issue concerning corporate governance. The first thing you need to know is that you need to know what kind of vote is required for that kind of an issue.
Because a vote is not a vote is not a vote. There are all different kinds of votes with different requirements and anyone who cannot tell you the particulars of what kind of vote is required in any particular situation does not know what the fck they are talking about, so you should press pause, change the channel, turn them off, do whatever you need to do if someone is talking about a vote and not talking about what kind of vote. This is why when Adam Aron talks about the 75% and 88% of stockholders voting for this or that thing, it frustrates me, because those are percentages of not the correct denominator required for the votes he is mentioning. (More on that later.) When votes are mentioned in proxies, there’s even a nice section called “Voting Requirement to Approve Each of the Proposals” that lays all of this information out.
Here, for example, “Amendment of our Third Amended and Restated Certificate of Incorporation (our "Certificate of Incorporation") requires approval by the holders of a majority of the outstanding shares.” Of the six proposals in this proxy, this is the only one with such a requirement. For good reason, amendments to a company’s charter and bylaws require a higher voting standard than many other matters. For example, some of the compensation items only require “approval by the holders of a majority of the shares present in person or represented by proxy and entitled to vote” -- this is a very different standard than the one required for amendment of the Certificate of Incorporation, and it is a very, very different practical reality when you are dealing with a stockholder base that is 80% comprised of retail. That’s because -- for better or for worse -- retail stockholders are famous for simply not showing up to vote, so any type of proposal or amendment that requires a majority of the outstanding (the first type) versus a majority of the voting (the second type) is a BFD, or more accurately, a big fcking problem. Because if you literally cannot get the stockholders to show up to vote, you literally cannot get the thing passed.
So … it’s still not clear to me whether AMC pulled the proposals because they knew they couldn’t get the proper vote because they would never get a sufficient vote count or because they knew they would never get a sufficient vote percentage, or both, or also whether the whole thing was just such a PR and potential stock price vibes nightmare that they just decided it was not worth the risk of mimetic reputational damage.
But -- this is where things get complicated in many ways, and you start to see that the company truly did not have a good solution to its problem at this point. Let’s get into it.
It’s still the pandemic-ish.
People aren’t going to the movies like they used to.
Shutdowns are still happening, business has not bounced back.
The company raised $2b in Q2 2021, but it’s basically out of ways to raise cash.
The company is overlevered.
The company needs to raise more money.
The company has tried -- to what extent we can debate, but at least, as described above -- and failed to properly get stockholders to authorize new share issuances.
The company is -- to that extent -- out of ways to raise money.
Without a capital raise, the company will face trouble, and could certainly risk bankruptcy.
The company does not see any way to get a majority of its retail stockholders to vote for a share issuance, as is properly required for a capital raise.
So, we can sit here, two years and a couple of creative capital raises that have landed the company in a stockholder class action lawsuit in the Delaware Court of Chancery later, with the benefit of armchair-quarterbacking-hindsight, and say that we don’t like the path that they chose to get from 2021 to 2023. But there’s a real question of: what would the alternative have been, if there even was one? And it’s not clear that there really was one. Not to get too philosophical on you (too late), but like most things in life, there’s unfortunately no control group, there’s no way to know what would have happened in the counterfactual conditional situation -- i.e., what would have happened if they hadn’t done the things that the stockholders are complaining about in the Chancery actions … well, we’ll never know. We can’t rewind the clock. We don’t get a do-over. The best we can do is apply logical reasoning, the powers of deductive inferential thinking, and imagine what potentially could have been -- but those are just thought experiments, none of that is scientifically rigorous. None of that can be proven, and reasonable minds can disagree about what might have happened if we ask ourselves a series of what if hypotheticals. And this is -- in part -- why discussing this case becomes so fraught. Because we cannot know. No one can say with certainty what would have happened if the company had made different choices. We can only speculate. And that’s unsatisfying, but that is life.
Søren Kierkegaard said: "It is really true what philosophy tells us, that life must be understood backwards. But with this, one forgets the second proposition, that it must be lived forwards. A proposition which, the more it is subjected to careful thought, the more it ends up concluding precisely that life at any given moment cannot really ever be fully understood; exactly because there is no single moment where time stops completely in order for me to take position: to go backwards."*
As with so much of life and philosophy, this more nuanced take is often reduced to something like, “Life can only be understood backwards; but it must be lived forwards.” If you take this seriously, you can understand what’s both complex about Adam Aron’s position in real time, trying to manage the survival of the company (if we are being maximally generous to the struggles of being the CEO of a company 80% owned by retail stockholders), but also you can comprehend what’s difficult about trying to grok what’s going on as one of those retail stockholders in real time, because there is no moment for time to stop completely in order to take position in order to “go backwards” and understand.
Did I say we weren’t going to get too philosophical? I lied. I am sorry. A little. But you see, that’s what we are trying to do here, we are trying to look backwards and understand what happened. But obviously, at this moment, back in 2021, in the middle of a critical period, faced with the reality of what was going on, Adam Aron, again -- in a generous reading -- didn’t have the benefit of this kind of hindsight, and he didn’t have many options on the table.
For the remainder of 2021, Adam Aron mostly moves forward with normal life, trying to navigate being a meme-popular stock held by a large percentage of retail stockholders, as well as an operating company trying to come back from a pandemic-ravaged business situation. On January 3, 2022, he makes the following statement on his Twitter account:
“MY NEW YEAR’S RESOLUTION FOR AMC. In 2020 and early 2021, AMC took on debt at high interest rates to survive. If we can, in 2022 I’d like to refinance some of our debt to reduce our interest expense, push out some debt maturities by several years and loosen covenants. With an improving financial position, one of our 2022 goals is to strengthen our balance sheet. There is no guarantee of success, but we will try very hard to get this done. We are always thinking of creative ways to make AMC’s future more secure.”
In the intervening months, Adam Aron brings the company into crypto, Dogecoin, NFTs, Halloween highs, short sellers, the Delta variant, vaccine ups and downs, and so much more, including the literal (sort of) goldmine, which actually turned out to have much less actual gold in it than one would want preferably for a goldmine to have. (Yes. I know, I feel the same way. It is true. The movie theatre company bought a goldmine, it’s as insane as it sounds, but if I went down every rabbit hole here with you, I will never get any sleep before this teleconference in the morning.) Needless to say, for life as an Extremely Online™️ CEO, there is never a dull moment. Credit again where credit is due, the man is pulling out all of the stops.
But for our legal purposes, the next major event that happens in this saga is on August 4, 2022. That’s a long time in pandemic months for the company to be going without any new capital raises. But while they may be short on shares available for issuance, they are not short on creative solutions to their capital concerns. Enter, stage right, the APEs:
On August 4, 2022, the Company announced that its Board of Directors declared a special dividend of one AMC Preferred Equity Unit (an “AMC Preferred Equity Unit”) for each share of Common Stock outstanding at the close of business on August 15, 2022, the record date. However, the AMC Preferred Equity Unit dividend is expected to be paid as of the close of business on August 19, 2022. The NYSE has established August 22, 2022 as the ex-dividend date. If an investor sells Common Stock before the ex-dividend date of August 22, 2022, that investor will not be entitled to the AMC Preferred Equity Unit dividend on the shares that are sold. Alternatively, if investors buy Common Stock before the ex-dividend date of August 22, 2022, such investor will be entitled to receive the AMC Preferred Equity Unit dividend on the shares purchased.
What does that mean? It means that the company declared a special dividend of one preferred equity unit for each share of common stock. So, if you were an AMC stockholder before the dividend date of August 22, 2022, you would receive one APE for every share of common stock you owned. Colloquially, people refer to APE 0.00%↑ as “preferred” and $AMC as “common” and that will allow me to explain how the company was able to issue new shares when I’ve been telling you for the last ten thousand words that the company was unable to issue more shares without stockholder approval. However, those discussions were all in relationship to Class A common stock. AMC had another type of available stock. As with many public companies, AMC’s certificate of incorporation included what is sometimes referred to as a “blank check” provision for preferred stock issuance. This is where things start to get funny. Funny ha-ha, or funny like a clown? You’ll have to decide.
It gets complicated here, so I’m going to try to both keep the details but also not get too in the weeds. Pray for me.
When AMC had to turn to the preferred stock pool to issue the APEs, they faced a problem. The blank check is only so blank -- it had a limit of 50 million preferred shares. But the “blank” part of the check allows for the terms to effectively be whatever the board wants, so AMC did a cute thing, which I will let Matt Levine explain:
“AMC made each preferred share equivalent (in voting and economic rights) to 100 common shares, and then it made each APE — technically not a share at all, but an AMC Preferred Equity unit — equal to 1/100th of a preferred share. If you buy an APE unit, what you are getting is 1/100th of an AMC preferred share, which is equivalent to 100 common shares, so you are getting the equivalent of one common share. It all works out. And AMC’s board authorized one billion APEs, which would take only 10 million of the 50 million preferred shares it is allowed to issue.
Nobody really wants to issue 1/100ths of a share, though, so AMC is not actually issuing fractional preferred shares. Mechanically what happens is that when AMC issues APEs, it actually issues (whole shares of) preferred stock to a depositary, a bank or trust company that holds onto the shares for it, and the depositary issues APE units. AMC’s depositary is Computershare Trust Co., which does a lot of this sort of business. What you have bought, when you buy an APE, is a depositary receipt from Computershare representing 1/100th of an AMC preferred share. And Computershare actually owns the preferred shares, on behalf of all the APE unit holders.”
The reason I have to let Matt Levine explain these things is because I honestly cannot explain things like that with a straight face and expect anyone to take me seriously in the future because corporate finance sounds so absurd to me on its face that I just for real cannot. I really appreciate that other people can.
And thankfully, Levine, god of all things corporate and meme finance, points out that the depositary receipt part of this issuance is not-so-odd (although perhaps much more common in the bank context), despite how batshit all of it sounds. And again, to be fair, even the normal stuff sounds ridiculous and batshit, and it truly is totally normal, so I know it’s probably just me, and totally not that the system is bonkers. Ok, maybe the system is also bonkers, but it’s the system we’ve got, and -- harkening back to my point at the outset of this piece -- it’s very important to recognize the playing field that you find yourself standing on, and recognizing the rules of the world that you live under, because failing to accept the reality of the world that one occupies is a quite miserable way to live. Ask me how I know.
Despite the fact that the depositary receipts I’m still not sure that renders it unquestionably unimpeachable, due to several other concomitant factors when the APEs’ origin story is viewed holistically. However, in order to view it holistically, you sort of had to get way tf in the weeds.
The 8-K included a fairly standard list of Exhibits, which most people probably didn’t bother to read in great detail, but here, that ‘twas where the Devil lied.
Buried in the Deposit Agreement among AMC Entertainment Holdings, Inc., Computershare, Inc., and Computershare Trust Company, N.A., a document that probably three people actually read at the time, was an important point of order. The last line of Section 4.5, entitled Voting Rights, contained a fairly particular provision: “In the absence of specific instructions from Holders of Receipts, the Depositary will vote the Preferred Stock represented by the AMC Preferred Equity Units evidenced by the Receipts of such Holders proportionately with votes cast pursuant to instructions received from the other Holders.”
Now, this provision is both odd and it is not. It is odd when viewed in the context where we find it, that is -- situated in a “special-dividend-preferred-share-of-a-movie-theatre-company-that-gained-meme-stock-energy-during-a-global-pandemic-and-which-is-going-to-become-common-stock-someday-if-we-can-get-or-force-the-votes” kind of situation. Because, see, if we were talking about a standard fare bank issuing preferred stock with this 1/100th or 1/1000th depositary share “trick” -- well, it would be weird corporate finance jiu jitsu, but it would be totally normal, even though it sounds like voodoo. And even if we were talking about the “Computershare votes the shares for people if they don’t show up to vote, which feels really icky,” it would also be at least something that’s not unheard of, because the exact same language appears in Citigroup’s depositary agreement, basically verbatim: “If the depositary does not receive specific instructions from the holders of any depositary shares representing the Preferred Stock, it will vote all depositary shares held by it proportionately with instructions received.” There are other examples from other banks, besides.
But again, we need to zoom out, I think, to view this particular situation holistically in context to see whether it “hits different” or not. Because the parts that seem kind odd on their surface actually check out as fairly standard provisions, if not somewhat oddly applied out of their usual context -- that is, they are definitely, like Donny in The Big Lebowski, very much “out of their element” here, which is usually in banking, or REITs, or at least utilities, or insurance companies. Preferred stock issuances using these depositary receipts don’t appear as standard fare in run of the mill Fortune 500 companies, and there’s good reason for that, because the features of preferred stock don’t align with the properties here. This was, for certain, a blunt instrument. Desperate times, desperate measures, as they say. But that doesn’t make it wrong, or outside the bounds of what’s an acceptable thing to do under corporate law or fiduciary duties owed to stockholders. So again, we need to zoom out.
I see six aspects to the APEs, which I would summarize as follows -- three we have discussed explicitly, the others need to be explained:
1. preferred stock
2. issuance as dividend (516,820,595) + subsequent sale (483,200,000)
3. depositary receipts (1/100th share)
4. Computershare mirrored voting arrangement
5. Antara voting agreement deal
6. planned conversion into common
The first is simple: this is preferred stock. They were fresh out of common stock to issue. They could not (or felt that they could not) get the retail base to turn out as required to vote for the amendment required to issue additional common stock. So they had to turn elsewhere. The only else where to turn was to preferred. They had 50 million preferred shares to issue from, which had been authorized in 2013, according to the APE FAQ.
The second item follows from this: AMC took 10 million of those preferred authorized shares to create the 1 billion APEs and they issued 516,820,595 as a divided and sold somewhere around 400 million into the market. Of the original 1 billion, estimates are that there are anywhere between 10 – 100 million APEs outstanding at this point, after accounting for required reserves for equity awards and other holdbacks.
The third item is wrapped up in the above, with thanks from Levine’s explanation of the explosion for how we get from 10 million to 1 billion, with a little help from our depositary receipts trick. We already discussed the fourth item, which is the “as votes those who show, so vote you all [who don’t actually vote]” provision. I think it is interesting to note that while this provision can be found in other bank’s depositary agreements for their preferred stock issuances, I do wonder whether a challenge to a vote made this way would satisfy a strict review on a requirement for a vote that had to have an affirmative vote of the majority of the outstanding shares. It seems like there’s certainly an argument to be made for a challenge there that you couldn’t use a procedural end run around a statutory requirement, in order to try to bootstrap vote totals.
The fifth item, the Antara deal, is probably the most complicated and the one I’m least knowledgeable to speak about in detail, so I just say that it feels like something that the Court would want to scrutinize when looked at in conjunction with the other items in the list, simply in the sense that if Antara purchased a whole bunch of APEs, let’s say … let’s just say if there was a contract the company entered into with anyone to vote a certain block for the conversion of preferred into common, in conjunction with the Computershare voting arrangement, such an agreement could effectively guarantee that the vote would be -- as the lawyers have referred to it -- a fait accompli, before it ever even took place. As alleged by plaintiffs, the facts are that in December 2022, AMC entered into transactions with Antara for them to own almost 30% of the issued APEs whereby Antara agreed to vote its shares in favor of proposals to approve the Amendments that would allow the conversion. The thing is that I don’t actually know how the Antara deal shook out because of how the court cases ended up interplaying with the vote and whole thing, but in terms of a plan and fiduciary duties owed not to act in breach thereof, the plan doesn’t have great vibes because a vote that can only go one way isn’t really much of a vote at all. (There’s also something I can’t quite put my finger on, but there’s something about the fact that the half the preferred stock was issued as a dividend that makes it seem like it was perhaps generous (thank you for the gift!) but also somewhat nefarious (have you just foisted a vote upon me no matter what I do — or do not do?) … I still have to think on this a bit more.)
The sixth item, I think, is where the comparison to standard kind of preferred stock really breaks down, and this whole thing truly gets its ouroboros weirdness from -- the fact that the whole schema was intended to call into being its own ability to generate the vote to authorize the issuance of the shares that management was unable to procure through standard procedures in the first place from the common stockholders, which will then -- by operation of the conversion, collapse the preferred and the common stock back into a single class of stock, and in conjunction with a reverse split, authorize additional share issuance, and basically give the company what it wanted in the first place (and has argued that it very much needs).
The FAQ language on this is … just very weird. Like, technically, yes, preferred can convert to common, but no, we don’t plan to make a proposal to do it “any time soon” (of course, this was back in August of 2022 when the dividend was announced). What does this even mean in terms of a meaningful disclosure?
At the same time, AMC also put out this little chart explainer on the differences and similarities between the two securities:
It’s just like … okay, I guess? Maybe this is totally normal because in some way, all the pieces are not not entirely abnormal? (Someone pointed me to $PARA and $PARAP, as well as $AVGO and $AVGOP, among others, which I will check out, because hey -- the first set are actually in the same industry, and both looks like common and mandatorily convertible preferred stock, so that’s … interesting -- the difference being, I am presuming, that almost all these others had the issuance approved for conversion prior to issuing the shares not this kung fu reverse panda shiz, but, ya know…)
Anyway, here everything just feels like at least several degrees off in the wrong direction on every vector, such that everything feels super fcking askew. Not in a way that you can totally put your finger on, but that’s the worst kind of “off” because it’s so slippery, and maybe it’s not wrong at all.
Also, strong “how it started / how it’s going” vibes here, not in the good way:
If you read those tweets literally, he’s saying, “it would only be dilution if we decided after August 22nd to issue more APEs” and then even if you are being super literal, on August 23rd, which is definitely after August 22nd, he talks about 103.5 new APE units trading, which apparently, by his own logic, is now dilutive. Again, as I mention above, you would assume his argument goes back to what I said above about how presumably he thinks they are doing it smartly, and therefore accretively. I think his choice of the subjunctive tense gets him in trouble a lot because it makes him sound sketchier than perhaps he is trying to be, at least to me personally, but maybe that’s just a stylistic beef that I have with his languaging.
But stylistic differences aside, here’s the sort of worse/better/more difficult philosophical problem for everyone to grapple with, especially the people who are very opposed to the settlement, because this is a real question that you have to ask yourself—
What, exactly, was the company supposed to do to survive, instead of what it did? Because if a company can’t raise capital, it’s generally well understood that’s a big fcking problem. And retail stockholdership is a new enough phenomenon and the reality of the abysmal voter turnout numbers -- my g-d, between actual democracy and corporate democratic engines, how are we going to GOTV, y’all?!? But it’s something that the Court is going to have to grapple with, perhaps not in this case, because it doesn’t seem to be squarely presented as an issue at this point, but you can see it bubbling up as a potential problem … what is a company to do in the face of § 242(b)(2)’s requirement for a vote of the majority of the outstanding stockholders if you literally have a majority of retail stockholders in your base and you simply cannot get them to show up to vote for anything at all? Are you allowed to resort to cute tricks and bootstrapping to save the company, if that’s what it takes? Maybe that’s not what happened in this case, maybe it is, that’s a factual matter and we don’t have the full record in front of us here to make that determination, but as a conceptual matter, it’s an interesting question to consider.
The other super weird thing about all this is that the reality has been odd from the jump. For example, these two securities, which are intended to be “economic equivalents” have never really been anything close to such. Preferred and common have been trading at some sort of arb play (strong emphasis on the word play) ever since they came into existence. And lots of playing there has been. And since I’m not allowed to say this whole mess is dilutive without being shouted down, I’ll make Matt Levine say it, for some reason, he seems to get a pass:
AMC hoped, I suppose, that people would treat the APEs and common shares as equivalent, and that they’d trade at similar prices, but that didn’t really happen. By the end of 2022, AMC common shares were at $4.07, while APEs were at $1.41. This is untidy and annoying — similar things should trade at similar prices — but it is also bad for AMC as a corporate finance matter, because it is going around selling stuff that is equivalent to common stock at a 65% discount to its common stock price. That is dilutive.
So, AMC issued all these APEs, and then they finally called a vote, but one that they appeared actually ready to go through with this time. However, you could imagine why they felt a lot more confident about this time than the previous go-rounds. This proposal, as disclosed in the February 2023 proxy, requested a meager additional ~25,000,000 authorized common stock shares, as follows:
Proposal No. 1: To approve an amendment to our Third Amended and Restated Certificate of Incorporation (our “Certificate of Incorporation”) to increase the total number of authorized shares of Common Stock from 524,173,073 shares of Common Stock to 550,000,000 shares of Common Stock (the “Share Increase Proposal”);
However, it was Proposal No. 2 that really did the work:
Proposal No. 2: Approving an amendment to our Certificate of Incorporation to effectuate a reverse stock split of the Common Stock at a ratio of one share of Common Stock for every ten shares of Common Stock, which, together with the Share Increase Proposal, shall permit the full conversion of all of our outstanding shares of Series A Convertible Participating Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) into shares of Common Stock (the “Reverse Split Proposal” and collectively with the Share Increase Proposal, the “Charter Amendment Proposals”)
This “conversion” would -- in conjunction with a reverse split that would somewhat obfuscate the numerical calculation of things after the fact, collapse all of the Series A Preferred (929,849,612 shares) into common stock (517,580,416 outstanding shares, as of the record date of February 8, 2023). So, while Adam Aron had asked for an authorization of 550,000,000 shares of common stock back in early 2021, this would effectuate more like the equivalent of an authorization of a billion share issuance.
Again, in one real sense, this ship has sailed long far away from the harbor and it’s a real question whether fighting this battle is cutting off one’s nose to spite the proverbial face. But if there’s one thing about democracy, it’s messy. And nowhere is that being more proven than on the docket for this case, where a tiny fraction of stockholders, in good (and potentially even in bad) faith are trying to make their voices heard. As someone who believes in the rights of stockholders, in a case like this, it is possible to understand why Delaware defers to the notion that directors and officers manage the affairs of the company, because all too quickly anything else quickly becomes unworkable. And in one sense, you can look at the way that retail non-voting interplays with the voting requirements of § 242(b)(2) and a company’s need to raise capital as almost a de facto veto, and wonder if there’s not simply a requirement that management have a way to work around it, and that it would not be something that could be seen to be substantially within their discretion to handle.
After the issuance and the definitive proxy filing, two cases were filed in the Delaware Court of Chancery, and insanity quickly ensued. The cases asserted claims for breach of fiduciary duty against Adam Aron and the board of directors of AMC seeking injunctive relief against “the proposed dilutive share count increase that those stockholders repeatedly had rebuffed and were not willing to support at the corporate ballot box.” Of course, as I have repeatedly discussed in the subsequent months since the case was filed and particularly in the month since the case has moved to the settlement phase, once the parties align on the consensual side of the v. both in favor of the settlement, the Court’s role switches to one much more akin to that of a fiduciary, in order to ensure that the stockholders’ (at least here, the common stockholders’) interests are protected by the terms of the settlement. (More about that in the links below.)
We covered the first scheduling hearing, and tried to dismiss subsequent confusion over things like a placeholder motion to dismiss, some details about what might come out of a hypothetical preliminary injunction hearing, and we covered early potential discovery disputes over depositions, wrote such an insane amount about the defendants’ motion to compel plaintiffs’ depositions that the plaintiffs just conceded to allow them (I’m kidding, I had nothing to do with the outcome), we extensively covered the first news of the proposed settlement, and as usual I found that I had more to say, and lastly, I gauchely gloated about being right.
Somewhere in between there, AMC held the called-for vote -- sort-of -- while agreeing to be bound by the Court’s Status Quo Order and not effectuate whatever results came of the vote. I say sort of because they held the vote not as separate classes as between $AMC common and $APE preferred, but with everyone voting together as a single class. Also, every time that Adam Aron refers to the voting results, he fails to mention that he’s talking about the percentage results of those who showed up to vote, and says things like, “it passed 75% or 80%” … and interestingly, in their motion to lift the status quo order, plaintiffs assert that “[o]n March 14, 2023, AMC convened the Special Meeting, at which the Amendments were approved. Without the mirrored voting feature of the APEs, the proposals to approve the Amendments would not have passed.” I can’t remember if I knew that and forgot it because it’s now the middle of the night, or if I never knew that in the first place. I knew the vote had passed, but I don’t remember know that the outcome had definitively been dependent upon the mirrored voting feature. At this stage of the game, when we are really focused on approving a settlement and hearing objections to the same, I’m not sure that’s incredibly relevant, but it’s definitely something to keep in mind. Also, now that I think about it, if Adam Aron is using the mirrored voting totals when he bandies those numbers around, then it’s like six degrees of Kevin Bacon too porky.
Adam Aron’s semantic antics aside, I have always said that I thought the merits of this case were complicated and nuanced. I still think that today. I think the plaintiffs were right when they said, in their motion to lift the status quo order, that they “faced certain meaningful defenses” -- I think they sure did. I’ve been reviewing Laster’s ruling from the Fox/Snap case, which is now up on appeal to the Delaware Supreme Court, and g-d d-mn, that man can just create an entire rubric in an hour or so of speaking, and it is a lot to wrap one’s brain around. I mean, I’m sure he didn’t just create it in that hour of speaking during his oral ruling, but by the time the thoughts come out of his mouth, they make so much schematic sense that it feels like you have to learn the entire layout to a new neighborhood just to get the lay of the land, and right now, I feel like I’m still driving down one-way streets and making illegal right turns on red. Thankfully, the car I’m almost running into the ditch is only metaphorical and not actual. Anyway, to the extent I can keep my eyes on the road, it does seem like the decision itself (although perhaps not Laster’s own would-be “blank slate” interpretation of § 242(b)(2)) is not beneficial for plaintiffs case here.
So, it’s just one rock after another hard place in this case. There are no incredibly satisfying answers, everything is going to be some shade of gray, and I think that’s hardest for people to get on board with. Memes and mimetic price action and mimetic energy work best in black and white -- they work when things are fairly lacking in nuance, when they gloss over the details, when people don’t worry themselves with getting in the weeds, when they don’t take time to read the fine print, when they don’t slow down enough to take a breath and distinguish hype and hyperbole.
And well … that just about brings us up to whatever time in the middle of the night it is right now before this morning’s scheduling conference.
You can follow along as I cover that live right here, assuming I can stay awake.
Much love, Chance
P.S. Next up for this case should be a debrief of the next steps for the motions to intervene, the likely participation from the appointment of the special master, and then — hopefully — a substantive review of the proposed settlement once it is filed, and then analysis of any formal objections that are filed thereafter. We should have a much clearer sense of the likely schedule after the teleconference.
P.P.S. As for the pending motion(s) to intervene, I’ve been reviewing Ionis and Mattel and some other cases that have some interesting things to say about the interplay between intervention, objection, and the filing of the stipulation … and wonder if it will come up on the call in the morning given the standard blocking effect that the filing of the stipulation would have on intervenors. I suppose it depends on the planned timing of everything, and how it will all shake out, which is obviously still up in the air.
P.P.P.S. There’s also another very interesting issue of the dates for the class that seems largely unsettled, but of course, so much of the details could be entirely settled and simply unknown to us because the stip, notice, and all simply haven’t been filed yet … so it’s perhaps just a matter of being patient and waiting our turn to see and analyze things in due course, but also … it’s kind of weird that it appears that while we are thinking about and seeing lots of objections coming in dealing with opt-outs, that we effectively still might have a class into which one can opt-in? That can’t be right, can it? Maybe it’s February 14th from the complaint?
P.P.P.P.S. I find it quite difficult, actually, to do an overview explainer on a case like this, once I’m so close to it. In a sense, it should be easier because I’m so intimately familiar with all the details. But being so familiar with all the minutiae makes it hard to know what normal people know and what they don’t. Who are normal people, anyway? If you’re a normal person, what do you know? Does any of this make sense to you? Pray tell. What questions are you left with? What is it like being normal?
P.P.P.P.P.S. In thinking about the position of the APE 0.00%↑ , I was reminded of the Aquatic Safety settlement where VCMR sua sponte raised the issue of the company creditors who were not being made whole by the settlement, and on that basis, did not initially approve the settlement as first proposed (to bypass the creditors and only payoff equity holders). Like, in Aquatic Safety, VCMR was concerned about creating a fraudulent transfer claim by approving the settlement, and it’s interesting because there, VCMR wasn’t satisfied with notice to the creditors, she demanded actual approval afaict. Obviously, I think the situation is distinguishable, I’m just trying to sort out on what conceptual basis because I’m a nerd who likes to think about every fcking thing on a theoretical level. Can’t stop me. That all being said, back in the real world, the question again becomes, what is good for the goose is probably good for the gander here, and in the end, it could be the case that accepting this settlement is in the best interests of all involved, for various reasons, because it’s actually just a good economic deal. If the proposed deal ends up looking very similar to the one that was proposed in the affidavit to the motion to lift the status quo order with simply updated financial calculations based on new dates (since those are now a month old at this point!), almost everyone whom I have asked has expressed the opinion that the settlement is actually quite fair to both common and preferred, but my sense is that — if true — communicating that effectively to both classes of stockholders is going to be a yeoman’s or yeowoman’s task.
P.P.P.P.P.P.S. The deepest irony of writing this piece is that in having one of many long conversations over the past few days about this case in working through some of these issues, I was convinced that I should really go see a movie at an AMC 0.00%↑ movie theater, and I think I just might do it. 🍿
Footnote:
*Kierkegaard actually said: “Det er ganske sandt, hvad Philosophien siger, at Livet maa forstaaes baglaends. Men derover glemmer man den anden Saetning, at det maa leves forlaends. Hvilken Saetning, jo meer den gjennemtaenkes, netop ender med, at Livet i Timeligheden aldrig ret bliver forstaaeligt, netop fordi jeg intet Øieblik kan faae fuldelig Ro til at indtage Stillingen: baglaends.” However, I didn’t assume any of you would understand much of that, so I went with the English bastardization.
Great article as usual. Only things that are really in my mind after such a through and comprehensive look over the case are two fold. One, the motions to intervene (which now with the most recent one is up to three over the settlement terms). Is there a particular order of operations to this? Like a sort of Please Excuse My Dear Aunt Sally sort of formula for how judges handle things, or do they just kinda vary depending on the judge and the particular motion. Because it seems to me that either we are getting out of order here to even talk about scheduling all this stuff for the settlement if the matter of the MtI's are actually pending...unless VCZ had decided they are all going into the round file already and is just trying to come up with the most careful and effective way to address those matters.
Second would be the matter of those claiming or moving to "opt-out" of the settlement. Having read the final ruling from the Delaware Supreme Court on Kahn v. Sullivan after you had mentioned it in one of the previous article, it had been my understanding that in these sorts of shareholder actions it is sort of a tough noogies situation. There is no opting out. If a settlement is reached and you don't like it well we did the best we could do for all and we aren't going to relitigate or rug a settlement for your specific grievances, sorry. Am I maybe getting ahead of myself to understand things like that?
Thank you! Simply thank you. You've done the investing class and the bar a great service. I hope you take a break and continue your campaign to make the Chancery Court of Delaware the world's sine qua non of corporate law and justice.