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Emmis shareholders fight bylaw changes on dividends

July 31, 2012

Locally based media company Emmis Communication Corp. began a court fight Tuesday morning, facing opposition from preferred shareholders who say proposed bylaw changes would eliminate their dividends.

Corre Opportunities Fund LP and other investors asked U.S. District Judge Sarah Evans Barker to block a scheduled Aug. 14 special meeting at which Emmis shareholders will be asked to approve bylaw changes that would wipe out more than $34 million in accrued and unpaid preferred stock dividends. The proposal also would eliminate such dividends in the future, as well as the preferred stockholders’ ability to elect directors.

All of this, Corre alleges, is a prelude to Emmis Chief Executive Officer Jeffrey Smulyan’s plan to take the ninth-biggest U.S. radio station operator private through means that violate state and federal disclosure laws.

“Our contention all along has just been leave us alone,” said John Barrett, managing partner of New York-based Corre Partners Management LLC, which controls the plaintiff fund.

Defense lawyers said Smulyan isn’t trying to take the company private and contend the CEO intends only to increase its share value.

"The board of directors [of Emmis] had decisions to make that were difficult decisions to make," Emmis attorney Richard Kempf said at the Tuesday hearing in Indianapolis. "This is not a situation in which everybody wins."

The company faced delisting in February while its share price was below $1, according to the proxy statement circulated to its investors ahead of the Aug. 14 meeting.

With a market capitalization of about $87 million, Emmis has more than 41 million shares of stock outstanding, 2.8 million of which are preferred shares with holders who are currently entitled to automatic dividends.

Those dividends, worth 6.25 percent of the preferred shares’ $50 liquidation value, or $3.125 per share, haven’t been paid since October 2008, the investors said in a court filing. Including those unpaid dividends, each preferred share is worth $62.12, according to the proxy.

That lack of dividend payment, the company said in court papers, was the result of a bargain struck with senior debt holders in August 2009 when the company needed to amend loan terms.

“Emmis properly disclosed what was appropriate to disclose in a timely way,” the company said in a May 29 court filing opposing the investors’ request for injunctive relief.

The CEO’s prior attempts to take the business private in 2006 and 2010 “cost him too much personally and financially to leave him with any interest in another attempt,” company lawyers said.

Smulyan owns almost 60 percent of Emmis’s common stock and controls votes for almost 67 percent of the preferred shares, meaning the votes will probably go in his favor, according to the proxy statement.

Some of that preferred shareholder control was accomplished by way of total return swaps, under which the company created “zombie shares” by effectively repurchasing the voting power over those shares via irrevocable proxy for about $15 a piece without officially retiring the shares, in violation of Indiana law, the suing investors claim.

In asking Barker for an order blocking the Aug. 14 vote, Corre and the other investors said Emmis, Smulyan and other board members have acquired “just enough” preferred shares, or control of votes represented by those shares, to vote them against the interests of the class.

"We believe the balance of harms will heavily favor an injunction here," Wayne Turner, an attorney representing the shareholders, said at the Tuesday hearing.

Smulyan told the court he isn’t trying to take the Indianapolis-based company private. Emmis attorneys in court papers contend the CEO intends only to increase its share value. Emmis rose 8 cents Tuesday, to close at $2.23 per share. The CEO testified for about 15 minutes Tuesday.

“Do you intend to go private?” Emmis attorney Steven Shockley asked him.

“No I don’t,” Smulyan replied. “I’m worn out from two years ago. I just don’t want to do it. I can’t foresee a situation in which that would change.”

Testifying for the preferred stockholders, Barrett told the court that Emmis Chief Operating Officer Patrick Walsh warned him last year that Corre risked its investment being rendered worthless if it didn’t participate in the swaps program.

Barrett said he came away from that conversation believing Walsh had effectively said, “I’m going to annihilate you.”

Later, Kempf questioned Walsh about Barrett’s account.

“Did you intend to threaten him?” the attorney asked.

Walsh replied that he did not.

“There’s no coercion. I’m not allowed to coerce,” he said.

Walsh told the court he believed he had had a pleasant conversation with Barrett, and that Barrett had inquired about the possibility of trading preferred stock for common stock and that he had told the Corre executive no.

He said he asked Barrett if he was trying to sell his stock, and that Barrett replied he liked the company and wasn’t selling his shares.

The proceedings ended without a ruling by Barker. She will hear argument from lawyers for both sides Wednesday.



 

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