There's Nothing to Prefer About This AMC Stock Class

Investors remained in a bearish mood on Monday, starting the new week with fresh declines for the Dow Jones Industrial Average (^DJI -0.11%), S&P 500 (^GSPC 0.02%), and Nasdaq Composite (^IXIC 0.10%). The S&P hit a new closing low for the year, as further sharp declines in the bond market and ongoing volatility in foreign exchange markets raised more worries about the stability of the financial system.

Data source: Yahoo! Finance.

AMC Entertainment Holdings (AMC -3.25%) has been the focal point of attention for retail investors for nearly two years now, and the movie theater operator has done everything it can to capitalize on the loyalty of its shareholder fans. However, today's decision to issue new shares of what the company calls AMC Preferred Equity (APE) only plays into the confusion that many investors seem to have about how AMC has essentially turned its capital structure upside down.

Here come the APEs

AMC has an extensive website devoted to shareholders, including information on promotions and NFTs that owners of the stock can access. However, I couldn't find a press release from AMC for its most recent announcement, instead forcing investors and other interested parties to rely on a filing with the U.S. Securities and Exchange Commission to make its required disclosures.

AMC's filing indicated that it had entered into an agreement that would allow it to sell up to 425 million AMC Preferred Equity units. This represented what it called "a natural next step" following the dividend payment of APE units to shareholders of regular AMC common stock back in August.

At first glance, it'd be natural for investors to think that there'd be something about APE units that would make owning them preferable to AMC common stock. Yet in the documents that created the preferred stock, AMC did its best to make the rights of each share class similar. AMC's preferred and common stock have the same voting rights. Moreover, AMC preferred is convertible one-for-one into common stock if -- and only if -- the AMC board proposes to boost the number of common shares it's authorized to issue and shareholders approve the increase.

Yet at no time have AMC investors actually preferred APE units to common shares. Indeed, APE units fetched less than half the price of an AMC share at Monday's closing prices.

The problem for AMC shareholders

The disparity in the prices of the two types of stock AMC has issued stems from the fact that the existence of APE units allows AMC to take advantage of a loophole in its corporate documents. AMC has wanted to take advantage of high share prices to issue more shares of common stock in the past, and did so to the maximum extent that it was allowed. However, when the movie theater operator sought to increase the number of authorized common shares to make further sales possible, shareholders pushed back. That eventually forced AMC to shift gears.

AMC has made it clear in its offering prospectus that its APE units might never become convertible into common stock. The board has no plans to propose a conversion, and even if it did, shareholders might choose not to approve the proposal. Indeed, the pricing of APE units compared to AMC common shares strongly implies that that's exactly what investors in the two types of stock believe to be the case.

Interestingly, that puts AMC common shareholders into opposition with their APE preferred unit counterparts. For a company that's supposedly looking to unite its investor base against the Wall Street establishment, building a huge rift inside its own shareholder ranks doesn't seem like the best move for AMC.