Conventional wisdom says that when a public company’s stock is overvalued, that company should issue new shares. In doing so, the company raises fun

Meme traders have full control over AMC

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2021-07-09 08:30:08

Conventional wisdom says that when a public company’s stock is overvalued, that company should issue new shares. In doing so, the company raises funds before the share price falls. Last year, Tesla rode just such a wave of investor enthusiasm to raise $12 billion in 2020.

Now it’s AMC Entertainment’s turn. Riding its meme-fueled success on Reddit this year, the movie theater chain issued a glut of new shares. While stock issuances typically dilute share price, remarkably, AMC issued more than 100 million new shares without breaking stride: the stock price is now 23 times higher than it was at the start of 2021.

That money may finally be running dry. AMC faces a roadblock as the company’s corporate charter only allows it to issue 524 million shares of common stock. With 513 million shares outstanding, AMC can only issue 11 million new shares before hitting its self-imposed ceiling. To get around the barrier, CEO Adam Aron has asked shareholders to approve 25 million new shares.

Normally, this would not be a big ask, especially if Wall Street agrees that a stock is overvalued. Retail investors seldom have any say because institutional investors are often in control. In the US, the 10 largest institutional investors, like hedge funds or endowments, make up 43% of the average public company’s ownership. Retail investors’ voting power retail is typically so diluted that it rarely factors into management decisions.