During a special meeting of shareholders last week AMC’s investors voted overwhelmingly in favor of increasing the number of common shares in the world’s largest movie theatre chain and also approved a 10 to 1 reverse stock split. The former passed with 88% of the vote, the latter with 87%. This should allow the exhibitor to raise additional operating cash and reduce its over USD $5 billion in debt by increasing its share base.

The financial machinations of the maneuver can be tricky to understand, but the short version of the story is that, after shareholders balked at allowing AMC to issue more common shares to raise more cash in 2021, the company created a new set of shares dubbed AMC Preferred Equity units (APEs). Each common shareholder received a single APE share. AMC could then raise money through issue new shares of APE without approval from common shareholders. One issue was that the share price of APE plummeted far below the price of AMC’s common shares.

One reason shareholders voted to convert APE back into common shares is that it was one of the few ways for them to see any short term value. APE’s share price hovers around USD $1.40 while AMC’s common shares are sitting at over USD $4.00. The arbitrage opportunity here is obvious with common shareholders being able to sell their shares and increase their position in the company by purchasing discounted APE shares which eventually are expected to now convert back into the higher priced common shares.

As for the reverse stock split, it’s not a move traditionally undertaken by financially stable companies. In AMC’s instance it will decrease the number of its shares on the open market while increasing its share price. Theoretically, combining 10 shares at USD $4.00 each would create a single share around USD $40. To raise more cash, the company could then issue new shares at that new level (which undoubtedly would decrease in value in the short term due to dilution).

AMC won’t be able to implement on either of the approved plans until at least 27 April when a hearing in class-action lawsuit filed by a group of the companies shareholders is set to be heard in Delaware Chancery Court. The suit relates to shareholders who view the creation of APE in 2022 as an end run around the company’s inability to issue additional common shares.