Few industries were hit as hard by the COVID-19 pandemic as movie theaters.[1] In 2020, AMC Entertainment (“AMC”), the nation’s largest movie theater chain, posted a staggering $4.6 billion loss. The company’s yearly revenue plummeted by 77% to $1.24 billion, including a massive 89% drop in fourth-quarter revenue.[2] The theater chain, though, was handed an unlikely lifeline – the retail investor. AMC’s stock was front and center of “meme stock mania” in 2021, while most of the country was stuck at home.[3] As a result of retail exuberance, by June 2021, AMC reached stock heights of $72.62, where just nine months earlier the stock was as low as $1.91.[4] In a bid to stay afloat, AMC leadership seized on the opportunity and issued as much stock as it could to shore up its balance sheet, pay down debt, and make acquisitions.[5] In June 2020, AMC had approximately 104 million shares outstanding; by the end of 2021 it had closer to 516 million.[6] Having issued as much stock as its charter allowed, AMC ran out of authorized shares to sell.[7] The company needed to sell more shares to continue its operations, but to do so, it required a majority of all its shareholders to vote in favor of amending the corporate charter to authorize further distribution.[8]
But ironically, it was those same retail investors who saved AMC just a year earlier that would put the company at a disadvantage by neglecting to vote their shares. One insight gleaned from meme stock mania is that retail investors often do not vote their shares. At AMC’s 2022 meeting, for example, only 28% of its 517 million outstanding shares voted.[10] As a result, AMC could not obtain the necessary votes to change their charter and issue new stock.
To overcome this, AMC devised an ingenious workaround: it issued a new class of stock called AMC Preferred Equity Units (“APEs”), with each APE having the same economic and voting rights as a common share.[11] Because APEs are preferred stock, not common stock, they are not subject to the corporate charter’s pre-authorized common share limitation.[12] The company gave out one APE as a dividend for each common share, and individually sold APEs to further raise cash.[13] In December, for example, AMC sold 257.6 million APEs to a hedge fund.[14]
Weeks after the sale, however, APEs began to trade at a significant discount compared to the common stock, making this strategy dilutive. In response, AMC once again asked its shareholders to approve the conversion of the APEs into common shares.[15] This time, there were more institutional investors holding APEs.[16] Additionally, to better improve the chances of an amendment vote, AMC gave APEs different voting powers. Technically, APEs are depositary receipts for 1/100th of a share of preferred stock, not shares themselves.[17] Preferred stock is held by a depositary, and the depositary had agreed to vote all of its preferred shares in proportion to how the APE holders voted. As an example, if 40% of the APEs vote yes, 10% vote no, and 50% do not return a proxy, the actual vote will be 80% yes and 20% no.[18] Not voting an APE is no longer equivalent to voting no.
In the lead up to the March 2023 scheduled shareholder vote, some shareholders sued, claiming the APEs’ voting scheme was “contrary to the spirit of the NYSE rules and widely recognized principles of stockholder democracy.”[19] The results of the vote are at the center of the suit: 25.5% of common stock voted to authorize more shares, with 9.1% voting against and 0.5% abstaining; the majority of common stock (64.8%) did not vote.[20] 57.1% of the APEs voted in favor, 5.2% against, 0.5% abstained, and 37.3% did not vote.[21] However, due to the preferred-stock voting rules, 91% of the preferred stock voted in favor, with 8.3% voting against and 0.7% abstaining, providing enough votes to authorize the new shares.[22] Although AMC was still not able to get a majority of common stockholders to vote, there was approval among the ones who did show up to vote, perhaps an important indication for the Chancery Court in the ongoing suit.
While the suit is still pending, and the question of whether the courts will approve such actions is up in the air, AMC’s officers and board came up with an ingenious plan to raise more capital and stave off bankruptcy. Meme stock mania gave more than unprecedented market volatility, short squeezes and major headlines – it also provided a unique opportunity for creative corporate governance.
[1] Stephanie Bennett, Movie Theaters Are Slowly Reopening a Year after COVID-19 Shutdowns, Fox Bus. (May 19, 2021), https://www.foxbusiness.com/economy/movie-theaters-reopening-covid-pandemic-shutdowns.
[2] Nathan Bomey, Movie Theater Chain AMC: ‘We Have Reason to Be Optimistic’ Despite $4.6 Billion Pandemic Loss, USA Today (Mar. 10, 2021), https://www.usatoday.com/story/money/2021/03/10/amc-movies-covid-pandemic-earnings/6946381002/.
[3] Paul R. La Monica, Meme Stock Mania May Finally Be Over, CNN Bus. (Dec. 6, 2022), https://www.cnn.com/2022/12/06/investing/meme-stocks-gamestop-amc/index.html.
[4] AMC Entertainment Holdings, Inc. (AMC), Yahoo! Fin., https://finance.yahoo.com/quote/AMC/history?period1=1522627200&period2=1680393600&interval=1mo&filter=history&frequency=1mo&includeAdjustedClose=true.
[5] Maggie Fitzgerald, AMC Files to Sell 11 Million Shares, Hitting Stock Temporarily, CNBC (June 3, 2021), https://www.cnbc.com/2021/06/03/amc-files-to-sell-11-million-shares-as-retail-trading-frenzy-continues-to-boost-stock.html.
[6] AMC Entertainment Holdings, Quarterly Report (Form 10-Q) (Sept. 30, 2022), https://d18rn0p25nwr6d.cloudfront.net/CIK-0001411579/7c0aba5e-4ef5-4c8c-8098-08ab92d22722.pdf.
[7] AMC Corporate Charter, 4, available at https://s25.q4cdn.com/472643608/files/doc_downloads/governance/Certificate-of-Incorporation.pdf.
[8] Del. Code Ann. tit. 8, § 282.
[9] Issues with retail investors voting are not limited to just AMC. Digital World Acquisition Corp (“DWAC”) and Soliginex have both experienced serious governance issues due an inability to get retail investors to vote. See generally Svea Herbst-Bayliss, Exclusive Deal Partner for Trump’s Truth Social Fails to Get Backing for SPAC Extension, Reuters (Sept. 6, 2022), https://www.reuters.com/markets/deals/exclusive-deal-partner-trumps-truth-social-fails-get-backing-spac-extension-2022-09-06/; Matt Levine, Money Stuff, Bloomberg (Apr. 18, 2023).
[10] AMC Entertainment Holdings, Current Report (Form 8-K) (Jun. 16, 2022), https://www.sec.gov/ix?doc=/Archives/edgar/data/1411579/000155837022010100/amc-20220616x8k.htm.
[11] AMC Entertainment Holdings, AMC Preferred Equity unit (“APE”) Dividend (Exhibit 99.1) (Aug. 4, 2022), https://www.sec.gov/Archives/edgar/data/1411579/000110465922092397/tm2223780d1_ex99-1.htm.
[12] On a technical note, AMC’s charter capped its preferred shares at 50 million, but the charter allows its preferred shares to be distributed with whichever terms the board approves. As a result, AMC made each preferred share equivalent to 100 common shares. So, AMC technically created AMC Preferred Equity Units as their APEs, which equal 1/100th of a preferred share.
[13] Press Release, AMC Entertainment Holdings, Announces $110 Million Equity Capital Raise, AMC Theaters (Dec. 22, 2022) https://investor.amctheatres.com/newsroom/news-details/2022/AMC-Entertainment-Holdings-Inc.-Announces-110-Million-Equity-Capital-Raise-a-100-Million-Debt-for-Equity-Exchange-and-a-Proposed-Vote-to-Convert-AMC-Preferred-Equity-APE-Units-Into-AMC-Common-Shares-and-Implement-a-Reverse-Stock-Split/default.aspx.
[14] AMC Entertainment Holdings, Proxy Statement (Schedule 14A), SEC (Aug. 4, 2022), https://www.sec.gov/Archives/edgar/data/1411579/000110465923007550/tm232700-1_pre14a.htm#tPN2.
[15] Id.
[16] Id.
[17] Deposit Agreement, AMC Entertainment as Issuer and Computershare Trust Company as Depository, SEC (Aug. 4, 2022), https://www.sec.gov/Archives/edgar/data/1411579/000110465922086144/tm2222422d3_ex4-1.htm.
[18] Matt Levine, Money Stuff, Bloomberg (Mar. 15, 2023).
[19] Complaint at 35, Allegheny County Employees’ Retirement System v. AMC Entertainment Holdings, Inc. (Del. Ch. 2023) (No 2023-215), https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rEeseIgYaFPc/v0.
[20] AMC Entertainment Holdings, Current Report (Form 8-K), SEC (Mar. 14, 2023), https://www.sec.gov/ix?doc=/Archives/edgar/data/1411579/000110465923032409/tm239497d1_8k.htm.
[21] Id.
[22] Id.
[23] At the time of this writing, the Delaware Chancery Court had blocked the settlement agreement between AMC and the suing shareholders.
