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.
"For example, these two securities, which are intended to be “economic equivalents” have never really been anything close to such."
THIS is the biggest, most fundamental issue that most common shareholders fail to understand properly, and which, with all due respect, I believe is misrepresented here. I'd argue that economic equivalency has little to nothing to do with the prices of the two securities at any given point in time; rather, it's about rights to all future cash flows (or liquidation value), if any. As Buffett and others have tried for decades now to get average investors to understand, stock ownership is more than holding a piece of paper that can be bought and sold, but actual honest-to-god ownership of a fraction of the company itself.
Let's consider the scenario in which APEs are allowed to exist independently of AMC commons with all stated economic and voting rights (minus the depository "trick"), but without any ability to _ever_ convert to commons. Let's further assume that by some miracle they're able to turn around their debt situation and return to profitability. AMC was paying quarterly dividends of 20 cents/share through the end of 2019. In this hypothetical world in which AMC returns to similar profitability (ignoring that their earnings were on the decline even before the pandemic since they hadn't yet cut their dividend), accounting for the 2:1 split plus additional APEs sold so far means that each AMC common and each APE would receive ~7 cents per quarter/28 cents per year. THIS is what is meant by economically equivalent. If AMC were somehow able to achieve this financial miracle, the current AMC price would reflect a dividend yield of about 5%, while APEs would give a mouth-watering ~20%. In this unicorn world, it'd be very surprising if they continued to trade at a sizable spread because of this, but even if they did they're still economically equivalent in terms of return per unit of equity.
I have one more point to make regarding future dilution via further APE sales in this scenario, but this is already obscenely long for a comment and I need to walk my doggos.
Great read. One assumption that needs to be factored in regarding the point about “lacking retail participation in voting”. There has been considerable discussion during 2021 and 2022 about many retail shareholders NEVER receiving their proxy notifications from their brokers. This was also an issue with receiving their APE dividend. These tended to come from the neo-brokers, and many that were EU based. Aron had even commented about this very situation on Twitter. Let’s presume that those are true facts. Given that, this has some real ramifications and potentially nefarious reasons behind that assuming brokers weren’t simply negligent. Brokers and Market makers are legally allowed to create shares when ever there is demand. That IS their job as market makers to create liquidity, thus making a market. These actions are called rehypothecation of shares, recipients have no indication if those are legit shares or IOUs, their brokerage statement shows that they are shareholders. These neo-brokers may or may not actually take possession of real shares because many of these retail folks are short term traders, and end up selling their position hours or days later. The issue arises when they actually decide to hold the shares and perhaps take part in a proxy vote. Only real shareholders shall be entitled to vote, but what about those who actually have been sold IOUs. That would exceed the outstanding shares in existence. One way to prevent such a debacle is to not send out proxy votes to small retail shareholders (who happen to have these IOUs, only the broker knows this). None of this is illegal per se AFAIK, but it has been noted by many retail shareholders who complained about not receiving their proxy or APE share dividend.
"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."
FWIW, it's actually even "worse" than you frame it here. If you ignore the preferreds for a second and focus only on the commons, the combined reverse split and authorization is equivalent to simply raising the total authorized commons from 550 million to 5.5 billion. Bringing the preferreds back into the picture, the special dividend was effectively a typical 2:1 split to a total of ~1.1B outstanding, meaning they'll be authorized to issue equivalent to another 4.4B shares. So when all is said and done they'll have the authority to issue 4x as many new common shares as there were common share equivalents held by AMC shareholders immediately after the dividend. Framed relative to the ~550 million original outstanding shares in a scenario without any of the current complications:
TL;DR - This is equivalent to if, instead of all the fuckery with splits and preferreds, AMC had requested permission to issue about 2.2 billion additional common shares.
Re: "...he talks about 103.5 new APE units trading", I interpreted this then and now simply as a reference to the trading volume of APEs, which are their new equity, in contrast with volume of commons, not that they'd already sold that many new units. I could be wrong, but felt worth highlighting a more benign possible interpretation.
I mean the special master is pretty irrelevant. They are just there to compile all the letters and put it into a manageable form with some recommendations as to the court based on the content. It doesn't really sway much one way or the other except to say that the amount of letters both for and against the settlement far exceeds what the court expected and needs someone to manage that for them. It doesn't particuarly effect the settlement one way or the other than there is a special master.
I tried to reach out to you on Twitter - unfortunately without success.
So I want to use this platform and ask you politely to do a Q&A with me - because I have question about some things you write and I think you don’t have the full picture what a Adam Aron is going to do to his shareholders.
Let me just give you an example. You said:
„ 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.“
Sorry, that is not correct. Let’s make together the basic math here and look into the history.
History of outstanding shares of AMC - we know they didn’t change their certification of incorporation since 2019 - starting point.
On Dec 31. 2019 - 103.85 Million shares outstanding
On March 31. 2020 (begin of the pandemic) - 104.32 million shares outstanding
On October 30 2020 - 137.39 million shares outstanding
On Dec 31 2020 - 224.33 million shares outstanding
On January 22 2021 - 339.07 million shares outstanding
On March 31 2021 - 450.28 million shares outstanding
On June 02 2021 - 501.78 million shares outstanding (before the big June runup)
On June 30 2021 - 513.33 million shares outstanding.
On Dec 31 2021 - 513.98 million shares
These numbers also include the Common Class B shares, Wanda held back in the time. I just added those numbers up.
As you can see, Adam Aron diluted AMC common stockholders within 2 years COMPLETELY. Has he done it „smart“? Well, that’s a point we can argue about. but, fact is, he has brought the company in a situation - giving out shares like a drug dealer - to a point where he couldn’t raise any money without shareholder approval. What’s the dilution factor? You start with - 103.85 million and you end up with 513.98 million shares - 495% - whoa…that’s big. Ok, let’s give him a benefit of a doubt.
He did it for the „survival“ of the company and yes - of course - it was a good opportunity to raise money.
Ok - this was the FIRST dilution round on AMC stockholders. Now let’s take a look into APE.
So the APE issuance was not a „free dividend“ for stockholders as Adam Aron us claiming it, it was on August 22 technically a 2:1 forward stock split.
So he doubled the amount of shares, each shareholder held and transferred value from AMC common to APE - to finance the transaction. AMC common shareholders had no choice but to give up 3.6 Billion $ in market cap from AMC to APE.
On March 14 - AMC had 519.19 million outstanding shares and 974.19 million outstanding „units“ of APE.
So AA sold within 6 month 460.21 million shares into the market and not to forget around 257 million shares just to 1 HedgeFunds which has heavily shorted the company.
So he achieved his mission again - with the first batch of nearly 1 Billion APE he could raise around 300 million $ and he has no more shares to issue - or he does his magic trick again, there are 40 million more preffered AMC stock he can create 4 billion APE units.
What is the dilution factor within 3 years? 1438% (1493.38 shares outstanding/ 103.85 starting point) - well, that seems kinda healthy business practice. If you need money, just dilute your shareholders.
So what will be the effect of the reverse split and conversion regarding the possible dilution to shareholders?
519.19 million AMC outstanding => after RS => 51.9 million shares outstanding.
974.19 million APE outstanding => after RS => million 97.4 shares outstanding.
Put together 149.33 million NEW AMC shares.
But with the changes in the the certificate of incorporation, AMC has AFTER reverse split and conversion 550 million shares authorized shares and still 50 million authorized preferred stock.
So AA can still issue around 400 million shares to dilute shareholders. An additional dilution factor by 368%. And if he diluted as fast as he did with APE - AMC will become a penny stock again. I think you are aware, that the market cap normally doesn’t change with dilution of stock. The same market value will just be divided through more and more pieces.
If we compare the situation after reverse split and conversion - the dilution factor on shareholders would be 5296% (5.5 billion equivalent outstanding shares / 103.85 million shares outstanding).
In conclusion, based on todays numbers, shareholders were already diluted by Adam Aron by 1438% from the beginning of 2020 - so to speak within 3 years. The stock price plummeted from its all time highs from 72$ per share to around 6$ per shares as a combined price - 92%. With the Reverse split and conversion shareholders face a risk of being diluted again by 400 million shares (equivalent to 4 BILLION shares he would have before RS)
I hope hearing from you - you can find me on Twitter @Alexand89683221 (Alexander Holland)
I also presented the court with an analysis about the full impacts of this Reverse split conversion and what it will do with shareholder portfolios. My letter and my analysis was filed on April 18th.
Let’s say you run a company and a bunch of „crazy“ shareholder show up to force a short squeeze on you stock. The stock price goes crazy. But what the shareholders came for did not happen. They are still binded to their „credo“ - Buy&Hold. Then you realize, if these stupid shareholders buy the stock at astronomical prices, well I can profit off of that. So you begin to feed their narrative. You begin to talk about „shorts should shit in their pants“, you show up on YouTubers who talk about an epic short squeeze, you give your audience confidence in you, you show your audience your „naked shorts“, you begin tagging your tweets „pounce“, „checkmate“ „chokeonthat“ - while you Profit off the whole situation. You dilute the shareholders you know they would not sell, because they have bought for a short squeeze. You gift shares to your sons, they make also millions out of it - and in the end, after you have plundered your shareholderbasis, you ask for more dilution. They should sacrifice everything while you have made millions.
Settlement is preliminary, but without a class are we even sure the plaintiffs are receiving the settlement? Draw a Venn diagram of: wronged AMC holders; plaintiff class; and settlement beneficiaries.
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.
Just keeping it 💯!
A great summary. Thank you for the time you put into this and for sharing your insights,
"For example, these two securities, which are intended to be “economic equivalents” have never really been anything close to such."
THIS is the biggest, most fundamental issue that most common shareholders fail to understand properly, and which, with all due respect, I believe is misrepresented here. I'd argue that economic equivalency has little to nothing to do with the prices of the two securities at any given point in time; rather, it's about rights to all future cash flows (or liquidation value), if any. As Buffett and others have tried for decades now to get average investors to understand, stock ownership is more than holding a piece of paper that can be bought and sold, but actual honest-to-god ownership of a fraction of the company itself.
Let's consider the scenario in which APEs are allowed to exist independently of AMC commons with all stated economic and voting rights (minus the depository "trick"), but without any ability to _ever_ convert to commons. Let's further assume that by some miracle they're able to turn around their debt situation and return to profitability. AMC was paying quarterly dividends of 20 cents/share through the end of 2019. In this hypothetical world in which AMC returns to similar profitability (ignoring that their earnings were on the decline even before the pandemic since they hadn't yet cut their dividend), accounting for the 2:1 split plus additional APEs sold so far means that each AMC common and each APE would receive ~7 cents per quarter/28 cents per year. THIS is what is meant by economically equivalent. If AMC were somehow able to achieve this financial miracle, the current AMC price would reflect a dividend yield of about 5%, while APEs would give a mouth-watering ~20%. In this unicorn world, it'd be very surprising if they continued to trade at a sizable spread because of this, but even if they did they're still economically equivalent in terms of return per unit of equity.
I have one more point to make regarding future dilution via further APE sales in this scenario, but this is already obscenely long for a comment and I need to walk my doggos.
Great read. One assumption that needs to be factored in regarding the point about “lacking retail participation in voting”. There has been considerable discussion during 2021 and 2022 about many retail shareholders NEVER receiving their proxy notifications from their brokers. This was also an issue with receiving their APE dividend. These tended to come from the neo-brokers, and many that were EU based. Aron had even commented about this very situation on Twitter. Let’s presume that those are true facts. Given that, this has some real ramifications and potentially nefarious reasons behind that assuming brokers weren’t simply negligent. Brokers and Market makers are legally allowed to create shares when ever there is demand. That IS their job as market makers to create liquidity, thus making a market. These actions are called rehypothecation of shares, recipients have no indication if those are legit shares or IOUs, their brokerage statement shows that they are shareholders. These neo-brokers may or may not actually take possession of real shares because many of these retail folks are short term traders, and end up selling their position hours or days later. The issue arises when they actually decide to hold the shares and perhaps take part in a proxy vote. Only real shareholders shall be entitled to vote, but what about those who actually have been sold IOUs. That would exceed the outstanding shares in existence. One way to prevent such a debacle is to not send out proxy votes to small retail shareholders (who happen to have these IOUs, only the broker knows this). None of this is illegal per se AFAIK, but it has been noted by many retail shareholders who complained about not receiving their proxy or APE share dividend.
"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."
FWIW, it's actually even "worse" than you frame it here. If you ignore the preferreds for a second and focus only on the commons, the combined reverse split and authorization is equivalent to simply raising the total authorized commons from 550 million to 5.5 billion. Bringing the preferreds back into the picture, the special dividend was effectively a typical 2:1 split to a total of ~1.1B outstanding, meaning they'll be authorized to issue equivalent to another 4.4B shares. So when all is said and done they'll have the authority to issue 4x as many new common shares as there were common share equivalents held by AMC shareholders immediately after the dividend. Framed relative to the ~550 million original outstanding shares in a scenario without any of the current complications:
TL;DR - This is equivalent to if, instead of all the fuckery with splits and preferreds, AMC had requested permission to issue about 2.2 billion additional common shares.
Re: "...he talks about 103.5 new APE units trading", I interpreted this then and now simply as a reference to the trading volume of APEs, which are their new equity, in contrast with volume of commons, not that they'd already sold that many new units. I could be wrong, but felt worth highlighting a more benign possible interpretation.
So in that long write-up, you didn't give your chances of success given the special master. Thoughts?
I mean the special master is pretty irrelevant. They are just there to compile all the letters and put it into a manageable form with some recommendations as to the court based on the content. It doesn't really sway much one way or the other except to say that the amount of letters both for and against the settlement far exceeds what the court expected and needs someone to manage that for them. It doesn't particuarly effect the settlement one way or the other than there is a special master.
Hello Chance,
I tried to reach out to you on Twitter - unfortunately without success.
So I want to use this platform and ask you politely to do a Q&A with me - because I have question about some things you write and I think you don’t have the full picture what a Adam Aron is going to do to his shareholders.
Let me just give you an example. You said:
„ 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.“
Sorry, that is not correct. Let’s make together the basic math here and look into the history.
History of outstanding shares of AMC - we know they didn’t change their certification of incorporation since 2019 - starting point.
On Dec 31. 2019 - 103.85 Million shares outstanding
On March 31. 2020 (begin of the pandemic) - 104.32 million shares outstanding
On October 30 2020 - 137.39 million shares outstanding
On Dec 31 2020 - 224.33 million shares outstanding
On January 22 2021 - 339.07 million shares outstanding
On March 31 2021 - 450.28 million shares outstanding
On June 02 2021 - 501.78 million shares outstanding (before the big June runup)
On June 30 2021 - 513.33 million shares outstanding.
On Dec 31 2021 - 513.98 million shares
These numbers also include the Common Class B shares, Wanda held back in the time. I just added those numbers up.
As you can see, Adam Aron diluted AMC common stockholders within 2 years COMPLETELY. Has he done it „smart“? Well, that’s a point we can argue about. but, fact is, he has brought the company in a situation - giving out shares like a drug dealer - to a point where he couldn’t raise any money without shareholder approval. What’s the dilution factor? You start with - 103.85 million and you end up with 513.98 million shares - 495% - whoa…that’s big. Ok, let’s give him a benefit of a doubt.
He did it for the „survival“ of the company and yes - of course - it was a good opportunity to raise money.
Ok - this was the FIRST dilution round on AMC stockholders. Now let’s take a look into APE.
So the APE issuance was not a „free dividend“ for stockholders as Adam Aron us claiming it, it was on August 22 technically a 2:1 forward stock split.
So he doubled the amount of shares, each shareholder held and transferred value from AMC common to APE - to finance the transaction. AMC common shareholders had no choice but to give up 3.6 Billion $ in market cap from AMC to APE.
On March 14 - AMC had 519.19 million outstanding shares and 974.19 million outstanding „units“ of APE.
So AA sold within 6 month 460.21 million shares into the market and not to forget around 257 million shares just to 1 HedgeFunds which has heavily shorted the company.
So he achieved his mission again - with the first batch of nearly 1 Billion APE he could raise around 300 million $ and he has no more shares to issue - or he does his magic trick again, there are 40 million more preffered AMC stock he can create 4 billion APE units.
What is the dilution factor within 3 years? 1438% (1493.38 shares outstanding/ 103.85 starting point) - well, that seems kinda healthy business practice. If you need money, just dilute your shareholders.
So what will be the effect of the reverse split and conversion regarding the possible dilution to shareholders?
519.19 million AMC outstanding => after RS => 51.9 million shares outstanding.
974.19 million APE outstanding => after RS => million 97.4 shares outstanding.
Put together 149.33 million NEW AMC shares.
But with the changes in the the certificate of incorporation, AMC has AFTER reverse split and conversion 550 million shares authorized shares and still 50 million authorized preferred stock.
So AA can still issue around 400 million shares to dilute shareholders. An additional dilution factor by 368%. And if he diluted as fast as he did with APE - AMC will become a penny stock again. I think you are aware, that the market cap normally doesn’t change with dilution of stock. The same market value will just be divided through more and more pieces.
If we compare the situation after reverse split and conversion - the dilution factor on shareholders would be 5296% (5.5 billion equivalent outstanding shares / 103.85 million shares outstanding).
In conclusion, based on todays numbers, shareholders were already diluted by Adam Aron by 1438% from the beginning of 2020 - so to speak within 3 years. The stock price plummeted from its all time highs from 72$ per share to around 6$ per shares as a combined price - 92%. With the Reverse split and conversion shareholders face a risk of being diluted again by 400 million shares (equivalent to 4 BILLION shares he would have before RS)
I hope hearing from you - you can find me on Twitter @Alexand89683221 (Alexander Holland)
I also presented the court with an analysis about the full impacts of this Reverse split conversion and what it will do with shareholder portfolios. My letter and my analysis was filed on April 18th.
You can find it here. I hope you spend it a read.
https://www.docketalarm.com/cases/Delaware_State_Court_of_Chancery/2023-0215/IN_RE_AMC_ENTERTAINMENT_HOLDINGS_INC._STOCKHOLDER_LITIGATION/docs/91570221.pdf
P.S.
Let’s say you run a company and a bunch of „crazy“ shareholder show up to force a short squeeze on you stock. The stock price goes crazy. But what the shareholders came for did not happen. They are still binded to their „credo“ - Buy&Hold. Then you realize, if these stupid shareholders buy the stock at astronomical prices, well I can profit off of that. So you begin to feed their narrative. You begin to talk about „shorts should shit in their pants“, you show up on YouTubers who talk about an epic short squeeze, you give your audience confidence in you, you show your audience your „naked shorts“, you begin tagging your tweets „pounce“, „checkmate“ „chokeonthat“ - while you Profit off the whole situation. You dilute the shareholders you know they would not sell, because they have bought for a short squeeze. You gift shares to your sons, they make also millions out of it - and in the end, after you have plundered your shareholderbasis, you ask for more dilution. They should sacrifice everything while you have made millions.
Well, that’s a too big of an conspiracy - right?
Settlement is preliminary, but without a class are we even sure the plaintiffs are receiving the settlement? Draw a Venn diagram of: wronged AMC holders; plaintiff class; and settlement beneficiaries.