All eyes are on AMC Entertainment (NYSE:AMC) stock, as the cost-to-borrow (CTB) fee for AMC has almost doubled compared to yesterday. The figure sits at an exceptionally high 351.25%, up from 180.30%. This follows news that the movie theater chain had settled with plaintiffs in two putative stockholder class actions.
The class actions were filed because the plaintiffs argued that AMC Preferred Equity Units (NYSE:APE) shareholders should vote separately from AMC shareholders on proposals. The litigation led to a status quo order which prevented AMC from enacting the proposals approved at the recent special meeting of stockholders. These included an increase in authorized shares and a reverse stock split, which would greenlight the conversion of APE into AMC. The order was to be in effect until the results of a preliminary injunction motion on April 27.
However, the class action filers and AMC have now settled. AMC noted that the “Plaintiffs and the Company will jointly request that the status quo order in the above-referenced case (the “Status Quo Order”) be lifted.”
AMC Stock: Cost-to-Borrow Fee Soars Higher
As part of the settlement, AMC will provide the plaintiffs with one share of AMC for every 7.5 shares owned upon the completion of the conversion of AMC into APE and the removal of the order. This would result in a total of 6.92 million shares being issued, representing 4.4% of all outstanding Class A common stock on a pro forma basis.
Following the removal of the order, AMC will file amendments to initiate a 1-for-10 reverse stock split and increase authorized shares to 550 million from 524.17 million. So, what does this all have to do with the CTB fee?
Shares of AMC plummeted after it was announced that the company had settled with the class action filers. This is because the conversion of APE into AMC, as well as the settlement, will dilute existing AMC shareholders. The CTB fee rises when short seller demand is high and falls when demand is low. At the same time, a high CTB fee could influence short sellers to sell out by buying the underlying stock to escape the high CTB fee.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.