Shareholders sue to block deal to take Emmis private

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Two shareholders of Emmis Communications Corp. have sued the company’s board of directors in an attempt to stop Chairman Jeff Smulyan from taking the Indianapolis-based media company private.

The lawsuits, filed in Marion Superior Court this month, say Emmis’ board members have breached their fiduciary duties by making no recommendation on a deal that, they say, will enrich Smulyan at the expense of minority shareholders. Both lawsuits seek class-action status.

The deal, announced April 26, would pay Emmis common shareholders $2.40 per share. Smulyan, who owns 20 percent of Emmis’ common stock but has voting power approaching 70 percent, has teamed up with New York-based Alden Global Capital to buy out other shareholders.

The lawsuits stem from Smulyan's and Emmis’ claim that the deal qualifies for a “special circumstances” exception under the Indiana Business Corporation Law. It normally requires board approval for a company to be acquired but allows for an exception in cases of conflict of interest.

Emmis, which owns FM and AM radio stations around the country, has not specified publicly the reasons its deal qualifies for such an exception, and the lawsuits claim there are no special circumstances.

“The Acquisition Group has premised the Proposed Acquisition on the Board waiving its fiduciary duties to the Company’s public shareholders,” wrote attorney James Knauer, of Indianapolis law Kroger Gardis & Regis in a lawsuit filed May 3. He represents Emmis investor William McQueen, who holds nearly 35,000 company shares.

The second plaintiff, David Jarosclawicz, did not specifiy in his lawsuit how many Emmis shares he owns.

Both suits claim the deal would allow Smulyan to buy up Emmis shares at depressed prices right as the company’s finances have begun to turn around. From the beginning of the year to the day before the deal was announced, Emmis shares had nearly doubled in value to $2.30 apiece.

“The timing of the Proposed Acquisition has been engineered to take advantage of a recent decline in the trading price of Emmis’ shares and if consummated will result in Emmis’ shareholders being cashed out of their interest in the Company at below the Company’s true value,” wrote attorneys from Indianapolis law firm Cohen & Malad LLP, who are representing Jarosclawicz, in their lawsuit dated May 6.

Smulyan tried four years ago to take Emmis private, offering $15.25 per share.

Patrick Walsh, Emmis’ chief operating and financial officer, as well as one of the directors named in the lawsuits, said he could not comment on either the specifics or the merits of the lawsuits.

“These types of lawsuits are filed in the normal course during any publicly held securities transaction,” he said in an interview, adding, “We can’t say we’re surprised.”

Indeed, within hours of the April 26 announcement, at least eight law firms issued press releases saying they were looking to file breach-of-fiduciary-duty lawsuits.

“The investigation concerns whether Emmis’ board of directors failed to adequately shop the company and obtain the best price possible,” Delaware-based Rigrodsky & Long said in its release.

For more analysis of the Emmis deal, click here.


  • Emmis Communications: Business Judgement Rule
    A reasonable question by a minority shareholder is whether the Board of Directors has acted with reasonable judgement and whether it had secured an independent and objection appraisal of the shares. Should the transaction be consumated, the dissenting shareholders should be entitled to the fair value or prorata value of the enterprise at the level of control. I dought the parties would be willing to conclude the sale if forced to disgorge the control premium.

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