Relevant Documents:Munoz Redacted ComplaintMunoz Redacted Motion for Status Quo Order
AMC Entertainment Class A stockholders Usbaldo Munoz and Anthony Franchi have filed a public version of their Monday, Feb. 20, class-action complaint against AMC directors in connection with AMC’s proposed conversion of AMC preferred equity units, or APEs, to Class A common stock.
The plaintiffs in the Munoz action target what they say is a deceptive scheme to use a “mirror voting” arrangement that was hidden from common stockholders to guarantee that newly issued preferred units can control stockholder votes and dilute the company’s voting base, even after common stockholders previously voted not to expand the company’s stock pool.
The Munoz complaint is the second stockholder class action filed against AMC this week in the Delaware Court of Chancery related to the proposed conversion. The Allegheny County Employees Retirement System on Monday
filed a separate class-action complaint against AMC and its directors with largely similar allegations.
At an
initial conference before Vice Chancellor Morgan Zurn on Thursday, Feb. 23, counsel for Allegheny and Munoz indicated that the plaintiffs were working together and preparing a consolidation order. Zurn
scheduled a hearing on the plaintiffs’ motion for injunctive relief for March 10. Vice Chancellor Zurn asked the parties to meet and confer to develop a comprehensive discovery process and proposed case schedule that they are to file with the court within 24 hours.
The judge added that if discovery cannot be completed for the plaintiffs’ yet-to-be filed preliminary injunction motion before the March 10 hearing, the hearing would instead focus on the plaintiffs’ motion for a temporary restraining order, or TRO.
The Munoz complaint seeks a declaratory judgment that the AMC directors breached their fiduciary duty to AMC stockholders and an order enjoining the APEs from being voted at future company stockholder votes. The Munoz plaintiffs also filed an unredacted version of their motion seeking a status quo order, or in the alternative, a TRO preventing the implementation of AMC’s proposed conversion of APEs to common stock.
Unlike the Allegheny complaint, the Munoz plaintiffs do not allege that AMC’s
issuance of APEs violated Delaware corporate law and they do not seek a declaratory judgment invalidating the APEs.
The Munoz plaintiffs say the AMC board members breached their fiduciary duties to common stockholders by undermining shareholders’ “sacrosanct” voting rights in favor of another class of investor through the issuance of APEs with superior voting rights. In light of the AMC board’s “novel yet pernicious financial engineering,” the result of the March 14 stockholder vote on whether to convert APEs to common stock - effectively diluting the value of the common stock - “is a
fait accompli,” say the Munoz plaintiffs.
According to the Munoz complaint, AMC issued most of the shares authorized under its certificate of incorporation during the Covid-19 pandemic in a bid to stave off bankruptcy and raise capital following the fortuitous rise of its share price fueled by retail investor interest in “meme” stocks. In 2021, the company sought to increase the number of authorized shares under its certificate, but proposals to that end were rejected by stockholders who did not want to further dilute their shares, say the Munoz plaintiffs.
As a workaround, the AMC board issued preferred stock in July 2022, each with an economic and voting right equal to 100 common stock, and APEs representing a 1/100th interest in each preferred stock were issued as preferred stock dividends to common stockholders, according to the complaints. The preferred stock was deposited with depositary institution Computershare Inc., which agreed to vote APEs as instructed by their holders, the plaintiffs add.
According to the Munoz plaintiffs, Computershare also agreed to vote APEs for which instructions were not provided - which would normally be treated as nonvotes - on a mirrored basis with APEs for which instructions were provided. Thus, all APE votes would always be cast, while common stock votes that were not cast would be considered nonvotes, says the plaintiffs. The Munoz plaintiffs allege that this voting arrangement was never disclosed to AMC’s common stockholders.
On Dec. 22, 2022, AMC
announced a forward purchase agreement with Antara Capital. AMC said at the time that it expected to raise $110 million of new equity capital through the sale of APEs to Antara in two tranches at a weighted average price of $0.66 per share. In conjunction with the agreement with Antara, AMC
said that it would hold a special meeting for holders of both AMC Class A common shares and APEs to vote on the conversion of all APES into Class A common shares.
As part of the agreement, Antara agreed to hold its APEs for up to 90 days and vote them at the special meeting in favor of the proposals. In addition, AMC said it would limit the amount of additional equity capital it could raise prior to the special meeting. AMC filed its
proxy statement in connection with the proposals on Feb. 14.
Between the issuance of APEs as dividends and subsequent sales, including the Antara sale, AMC has issued approximately 930 million APEs, but has only approximately 518 million shares of common stock outstanding, according to the Munoz complaint. The greater number of APEs along with Computershare’s mirror voting agreement ensures that APE holders will carry the vote to convert APEs into common stock, say the Munoz plaintiffs.
The Munoz plaintiffs contend that the AMC board misled stockholders throughout this process, downplaying the dilution risk associated with the issuance of the APEs and withholding the existence of the mirror voting agreement.
Through this scheme, the Munoz plaintiffs say that Antara and other APE holders have ensured themselves a “massive” economic windfall at the expense of common stockholders. They also accuse Antara of simultaneously shorting AMC common stock “to profit not only from the appreciation in value for the APEs, but also the destruction of value for the Common Stock.”
In their redacted motion for a status quo order, the Munoz plaintiffs say the AMC board is abusing “a novel weaponization of blank check preferred stock” to override the stockholders’ known desire not to increase the number of authorized shares.
The Munoz plaintiffs requested that the court enter an order “either setting an injunction hearing in advance of March 14, 2023, or permitting the vote to take place but preventing the filing and implementation of the Certificate Amendments until a final hearing can be held.” The Allegheny plaintiffs in contrast requested the court enter an order “restraining Defendants from submitting the Proposals to a vote of AMC Stockholders until Plaintiff has had the opportunity to take expedited discovery in support of its claims and to present a motion for a preliminary injunction for this Court’s consideration.”
Counsel for both sets of plaintiffs and the defendants indicated at Thursday’s status conference that they were in alignment that the March 14 shareholder vote should proceed as scheduled and that any injunctive relief should center on AMC’s filing of an amended certificate of incorporation that would effectuate the proposals considered at the shareholder vote.
The Munoz plaintiffs say in their complaint a status quo order or TRO preventing the implementation of AMC’s proposed conversion of APEs to common stock is appropriate because they pled a colorable claim that the board acted primarily for the purpose of impeding the exercise of stockholder voting power.
“AMC used its blank check preferred stock to place 64% of its total voting power in the hands of one class of equity … then created a massive economic windfall for holders of that security,” the Munoz plaintiffs allege. Additionally, the AMC board bears a “heavy burden” of demonstrating a “compelling justification” for taking such actions, say the plaintiffs.
The Munoz plaintiffs also contend that the common stockholders’ loss of voting rights and the destruction of stockholder value following the conversion constitute irreparable harm.