AMC Meme Stock Investor Challenges Stock Conversion at Argument

A pension fund and an AMC Entertainment Holdings Inc. investor defended on Wednesday a settlement they negotiated with the cinema chain so it could proceed with a stock conversion opposed by its meme stock base.

One of those retail traders, Rose Izzo, is asking the Delaware Supreme Court to reverse the settlement approved in August 2023 by a lower court. She alleges the pension fund and the individual investor colluded with AMC to dilute meme stock investors in the conversion of preferred equity units into common stock.

Izzo seeks to reverse a conversion that’s already happened, with roughly 7 million settlement shares issued to resolve the litigation, said Gregory Varallo of Bernstein Litowitz, representing the Allegheny County Employees’ Retirement System and investor Anthony Franchi.

But she offers no plan for how the Court of Chancery could undo the conversion and move forward with a plan that would give Izzo and other objectors the opportunity to opt out so they could pursue their claims, Varallo told the high court.

“The lower court exercised its discretion fully conscious of the impracticability and perhaps impossibility of the relief sought,” he said.

Izzo’s attorney, Anthony Rickey of Margrave Law LLC, argued the conversion has left some shareholders destitute, and reversing the order approving the settlement would offer them hope for recovery “from the defendants who wronged them.”

Throughout the litigation last year, the objectors’ concerns were downplayed “as irrational and misunderstanding the risk to AMC from bankruptcy, but the scale of the subsequent disaster defangs that argument,” Rickey said.

For objectors who bought stock at $40 a share before the conversion, AMC’s stock would have to be traded at $400 per share for them to break even, he said. Instead, the stock trades today at $3 to $4 per share.

“Those stockholders have lost nearly their entire investment,” he said.

The settlement allowed AMC to recapitalize by converting preferred units created in 2022 into common stock.

AMC Objectors

The conversion plan drew a challenge from a pension fund and other investors, who wanted the APE holders to vote on the proposal. Some stockholders opposed the conversion over equity dilution concerns, others believed AMC could survive without additional financing, and many simply didn’t vote on company proposals.

In an unusual twist to the litigation, nearly 3,000 AMC retail investors wrote the Chancery Court with objections. The court appointed a special master to summarize the correspondence; Izzo was one of just a handful of objectors, however, who showed up to a two-day settlement hearing to personally address the judge with their concerns.

In approving the settlement, the Court of Chancery sided with “pessimists” at the expense of “optimists” who deserve their day in the court, Izzo’s attorneys said in a brief.

The objectors had “a rational, compelling reason to say no,” and the Chancery Court lawsuit was supposed to focus on their right to opt-out of the conversion—until the plaintiffs changed sides, Rickey said.

The Chancery Court correctly found the pension fund and Franchi were adequate to represent AMC stockholders in the case, Varallo said.

“The fact that Allegheny didn’t suffer the same amount of losses” as Izzo or other objectors “doesn’t disqualify it as an adequate representative, and it certainly doesn’t give rise to antagonism with the class,” he said.

AMC’s attorneys argued in a brief that the Chancery Court “went out of its way to provide AMC stockholders with an opportunity to express their views on the settlement.” John Neuwirth of Weil Gotshal said the cinema chain supported Varallo’s remarks and otherwise relied on their briefs.

The Supreme Court panel hearing Wednesday’s arguments included Chief Justice Collins J. Seitz Jr. and Justices Karen L. Valihura and N. Christopher Griffiths. A panel of three justices typically hears oral arguments, except in death penalty appeals or other cases where it determines en banc consideration is warranted.

Izzo is represented by Halloran Farkas & Kittila and Margrave Law LLC. AMC is represented by Richards Layton & Finger and Weil Gotshal. The Allegheny County Employees’ Retirement System and investor Anthony Franchi are represented by Bernstein Litowitz, Grant & Eisenhofer, Fields Kupka & Shukurov, and Saxena White.

The case is In re AMC Entertainment Holdings Inc. S’holder Litig., Del., No. 385, 2023, oral argument 5/8/24.