Emmis finds loophole for board on Smulyan buyout

Jeff Smulyan and his financial partner have paved the way to complete their $90 million Emmis Communications Corp. buyout
by seizing on a little-used provision of state law that excuses the company’s board from having to vote on the proposal.

The letter of intent signed by partner Alden Global Capital conditions the deal on the board’s exercising its right
under Indiana’s “special circumstances statute” to send the proposal directly to shareholders without a
board recommendation.

Indiana law normally requires board approval for buyouts. But the language cited by New York-based Alden provides an exception
for conflicts of interest or special circumstances. What qualifies isn’t spelled out in the law, and Emmis would not
elaborate why the company believes its board’s circumstances fit.
 

Smulyan-Jeff-mug Smulyan

The maneuver could go a long way toward ensuring that the proposal Smulyan announced April 26 to take Emmis private doesn’t
meet the same fate as a buyout proposal he unveiled four years ago. That deal bogged down at the board level over price. As
talks dragged on, credit market soured, and Smulyan ended discussions.

Corporate governance experts have long said Smulyan’s status as the company’s controlling shareholder creates
thorny conflict-of-interest issues. Though the 63-year-old owns less than 20 percent of the shares, most of his stock has
special voting rights. The turbocharged shares push his voting rights to 70 percent.

The upshot: Smulyan, Emmis’ chairman and CEO, single-handedly has the power to elect or vote out nearly all the board
members—clout that has spawned questions about whether “independent” directors truly are so.

That issue has especially dogged director Susan Bayh, a former charitable-giving consultant for Emmis who is married to Sen.
Evan Bayh. Smulyan has raised money for him is an unabashed supporter.

Given those dynamics, board members four years ago were hypersensitive to appearing to be patsies for the CEO, some shareholders
believe, and thus snubbed an offer they should have accepted.

Indeed, Smulyan’s 2006 offer of $15.25 per share—a bid that valued the entire company at $567 million—looks
rich by today’s standards. The stock plunged as low as 24 cents last July and rallied to around $2.30 before Smulyan
unveiled his new, $2.40-per-share buyout offer. Though part of the decline is the result of a $4-per-share special dividend
Emmis issued in late 2006, most stems from a sharp downturn in radio advertising.

Regulatory filings show that when Smulyan was trying to seal a deal in 2006, he dangled as much as $16.80 a share. When nothing
came of those discussions, an institutional shareholder fired off a letter scolding the special board committee negotiating
with Smulyan for inaction.

“Why would the special committee of the board of directors of a struggling public company in a struggling industry
spurn repeated efforts to take the company private at a substantial premium?” asked New York-based First Eagle Investment
Management. “We believe the answer lies in an extreme overreaction to perceived conflicts of interest arising out of
Mr. Smulyan’s personal and professional ties to board members.”

These days, the board faces at least as daunting a minefield. In 2006, six of eight directors qualified as independent under
NASDAQ rules. Now, only four of eight do. Independent directors normally are supposed to hold a majority of board seats at
NASDAQ companies, though Emmis is exempt from that rule because of Smulyan’s status as controlling shareholder.

Within hours of Smulyan’s April 26 announcement of his new offer, law firms began girding for battle. At least eight
issued press releases saying they were looking into filing breach-of-fiduciary-duty suits. “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.

But even if the board did shop the company, the exercise probably would have been pointless because Smulyan’s turbocharged
shares on their own give him the votes to shoot down a competing offer.

He has the extra voting rights on nearly all matters except a going-private transaction. In that scenario, each of his shares
has a single vote, putting him on equal footing with rank-and-file shareholders.

Yet even with the diminished voting power, Smulyan probably can garner enough support to close his deal—in part because
other shareholders recognize this might be the best they can get.

It all adds up to some strange dynamics that, understandably, have put minority shareholders on edge and drawn out an army
of attorneys.

“I think that with the controlling shareholder and absence of a board recommendation, it is something that shareholders
need to look at with special scrutiny,” said Richard Shevitz, a Cohen & Malad attorney not involved with Emmis.•

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