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The SEC's confounding hesitation when it comes to taking timely action against violations of established norms is feeding the speculative frenzy around AMC Entertainment shares, bolstering the claims of those who see a broader conspiracy in how the stock is supposedly manipulated to prevent a sustained ramp-up.
As can be seen in the snippet above, AMC shares have now ended up on the NYSE's Threshold Securities list for the 23rd consecutive day. For the benefit of those who might be unaware, the list consists of securities whose transactions failed to clear for five consecutive settlement days at a registered clearing agency. While such settlement failures might occasionally be the result of administrative errors, AMC's sustained spree on the list suggests some level of naked short-selling, which is an illegal practice where short positions are opened without first borrowing the requisite shares from someone else or ensuring that they can be borrowed.
So, when naked short-selling is employed, and the resulting shares are not delivered to the appropriate counterparty, the underlying transactions will fail to clear, which are then reported on the Threshold List. Against this backdrop, the SEC's lethargy to take appropriate remedial action is quite troubling.
As the Threshold List drama unfolds, AMC investors are also keeping an eye on a high-stakes legal battle. Back in the summer of 2021, AMC issued a special dividend of 1 AMC Preferred Equity (APE) share to every common stockholder. Since then, the company has been issuing APE units in droves to raise additional cash and pay down its debt.
In March 2023, AMC sought authorization from its shareholders to increase its common stock count by around 10x, concurrent with a 10-to-1 reverse stock split. Interestingly, the company glued this authorization with another proposal to convert its APE units into common equity. After accounting for APE convertibility, the increase in AMC's share authorization would allow the company to raise additional capital. To no one's surprise, the two proposals put forth in the special meeting were approved by shareholders. Some AMC investors were, however, able to obtain a status quo order from the court, alleging that they were short-changed in the voting process. The plaintiffs had two main concerns:
- AMC board members breached their fiduciary duty by "weaponizing" APE shares, thus interfering with the voting rights of common shareholders.
- AMC was statutorily required to provide the common stockholders with a class vote on the creation of the preferred units but failed to do so.
The court allowed AMC to tabulate votes in the designated meeting of the shareholders but take no further action.
In order to resolve the issue of the status quo order, AMC hastily negotiated a settlement with its litigant shareholders. Under the terms of the agreement, immediately after the conversion of APE units into common equity, AMC would issue one additional share for every 7.5 common shares held (or 6.9 million common shares in total). This payment, which could be worth over $100 million, was meant to compensate investors.
AMC then filed this settlement in the Delaware Court of Chancery to vacate the status quo order. During the hearings, the court received almost 4,000 letters from around 3,000 investors, who cited fears of unbridled dilution of their investment.
Nowhere in the opinion does it state that it is rejecting the conversion of $APE into $AMC common.
Please read it for yourself. Take the time, or 🤫🤐
#AMC https://t.co/WiwPDOj3iw pic.twitter.com/2l7MAhWDLk— MattC - Ducking - Warbucks (@stkchedda) July 21, 2023
Last week, the court rejected the proposed settlement on the following grounds:
"[The settlement releases] not only claims associated with the common stock, but also claims associated with preferred interests that common stockholders might also hold. The release cannot properly extend to those latter claims, because the plaintiffs were not appointed as fiduciaries for the holders of preferred interests and did not bring claims based on preferred rights."
The judge gave AMC two options: either abandon the settlement and resume litigation or strike the unenforceable portion of the settlement and open itself to potential legal claims from APE holders.
AMC has now opted for the latter option, filing a revised settlement on the 24th of July. As the court proceedings continue, do note that AMC is expected to run out of cash by 2024/2024 if it fails to raise additional capital.
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