A Delaware judge on Friday blocked a proposed settlement that would have allowed AMC Entertainment Holdings (NYSE:AMC) to issue more shares, sending its common shares soaring and preferred shares down in after-hours trading.
The ruling by Vice Chancellor Morgan Zurn came after the judge found that the settlement would have violated the rights of preferred shareholders, who were not represented in the lawsuit.
Under the proposed settlement, AMC would have issued common shares worth an estimated $129 million to common shareholders. However, the settlement would have also released preferred shareholders from any claims they may have had against AMC.
Zurn ruled that the settlement would have been unfair to preferred shareholders, who would have been diluted without any compensation. She also found that the settlement was not in the best interests of AMC’s creditors, who would have been left holding the bag if the company went bankrupt.
The ruling sent AMC’s common shares up by 69% in after-hours trading. However, its preferred shares fell by 20%.
The decision is a blow to AMC, which had been hoping to use the settlement to raise capital and reduce its debt. The company is currently burning through cash at an unsustainable rate, and it has warned that it could go bankrupt if it does not raise more money.
However, the ruling is a victory for preferred shareholders, who had objected to the settlement. They argued that the settlement would have unfairly diluted their shares and left them with no recourse if AMC went bankrupt.
The ruling also sends a message to other companies that are considering settling shareholder lawsuits. It shows that courts will not hesitate to block settlements that are unfair to minority shareholders.
What is a preferred shareholder?
A preferred shareholder is a type of shareholder who has certain preferences over common shareholders. These preferences can include the right to receive dividends before common shareholders, the right to vote on certain matters, and the right to receive assets before common shareholders in the event of a liquidation.
Why is this ruling important?
The ruling by Vice Chancellor Morgan Zurn is important because it sets a precedent for how courts will treat shareholder settlements that affect minority shareholders. It shows that courts will not hesitate to block settlements that are unfair to minority shareholders, even if the settlement is supported by the majority of shareholders.
This ruling is also important because it could have implications for other companies that are considering settling shareholder lawsuits. Companies that are considering settling shareholder lawsuits should be aware that courts will not hesitate to block settlements that are unfair to minority shareholders.
What happens next?
It is not clear what will happen next in this case. AMC could appeal the ruling, or it could try to negotiate a new settlement that is fair to all shareholders. It is also possible that the company will simply have to raise capital through other means, such as issuing new debt or selling assets.
Conclusion
The ruling by Vice Chancellor Morgan Zurn is a setback for AMC Entertainment Holdings, but it is a victory for preferred shareholders. The ruling shows that courts will not hesitate to block settlements that are unfair to minority shareholders.
The ruling also has implications for other companies that are considering settling shareholder lawsuits. Companies that are considering settling shareholder lawsuits should be aware that courts will not hesitate to block settlements that are unfair to minority shareholders.
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