AMC Entertainment (NYSE:AMC) won the proxy firm Institutional Shareholder Services (ISS) endorsement for its reverse stock split and preferred stock conversion.
This increases the likelihood that CEO Adam Aron will win the March 14 shareholder vote. Aron wants to increase the company’s authorized shares slightly, convert AMC Entertainment Preferred Equity Units (NYSE:APE) to common stock, and do a reverse stock split of 1 to 10.
The plan has been controversial, with some shareholders filing a class action suit to stop the move.
The Allegheny County Employees’ Retirement System filed the suit last month in Delaware, saying management will “eviscerate” the voting power of common stockholders if the plan is approved.
The lawsuit may be the shareholders’ only remedy because there are now more preferred shares outstanding than common ones. Aron issued the APE shares last year after shareholders refused to authorize more common stock to pay down debt.
Aron told his Feb. 28 earnings call the movie business is picking up, and AMC had been able to use $314 million in cash raised by stock sales to retire $390 million in debt. AMC ended 2022 with $480 million in cash, while rival Cineworld (OTCMKTS:CNNWQ) declared bankruptcy after it ran out of cash. Aron said AMC can now make money outside its theaters, selling popcorn through Walmart (NYSE:WMT).
Critics say there are broader issues. If management can bypass share limits by unilaterally issuing preferred stock, the limits have no meaning. Preferred stock can then be used to stop activists and entrench management’s control.
ISS had opposed Aron’s slate of directors last year over the issue of management pay.
Converting APE shares to AMC common could be a payday for the APEs. APE shares rose 9% on March 3 and 5% more over the weekend, opening on March 6 at $1.91 each. AMC common fell slightly over the weekend, opening at about $6.50 each.
AMC Stock: What Happens Next?
Aron’s actions may benefit AMC, but the precedent could be awful for shareholders. Management can already entrench itself with voting stock. If it can also manipulate the number of common shares with preferred ones… then what are investors buying?
On the date of publication, Dana Blankenhorn held no positions in any companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.