Judge hears arguments challenging Emmis sale

A courtroom rather than a corporate boardroom provided the latest setting for the proposed sale of Emmis Communications Corp.,
which has agreed to be acquired for more than $500 million including debt.

The Indianapolis-based public company that owns 23 radio stations in the United States consented in May to a purchase by
JS Acquisition LLC, a private company formed by Emmis Chairman and CEO Jeffrey H. Smulyan.

Emmis shareholders who are challenging the acquisition got their day in court Monday during a hearing on a motion for a temporary
restraining order to block the buyout.

Plaintiffs’ lawyers argued in Marion Superior Court that the Aug. 3 deadline for shareholders to accept a buyout offer
should be delayed until they have more information to make a decision.

JS Acquisition is offering $2.40 a share in cash, a 12-percent premium to the closing price of $2.14 on May 26, the day Emmis’
board unanimously approved the transaction. The offer was announced on April 26.

“We’re not arguing the price,” said Carl Stein, a lawyer at New York-based Wolf Popper LLP. “What
we’re saying is that people should have the right to make a fully informed decision on whether they like the price.”

Stein said Emmis board members breached their fiduciary duty by not revealing key details to shareholders. Among them: Company
debt covenants due in August 2011 are unlikely to be satisfied by a sale of assets or by a bank extension because of the tight
credit markets.

Citing direct testimony from board members, Stein argued that the sale of the company is the only option to avoid bankruptcy.

“Did shareholders know there are leverage problems?” he asked. “Do the shareholders know the options and
that the insiders think they are unlikely?”

The broadcasting and publishing company is loaded down with more than $340 million in debt, and has been awash in red ink.
Including noncash charges, operating losses over the last two fiscal years have totaled more than $500 million.

For its first fiscal quarter ended May 31, Emmis lost $3.9 million, or 10 cents a share, compared with a profit of $11.9
million, or 32 cents a share, in the same period last year. Revenue increased 1 percent, to $60.3 million.

Emmis lawyers argued on Monday that common shareholders are prohibited under Indiana law from blocking corporate transactions.
They instead can show their displeasure with a deal by selling shares on the open market, said Richard Kempf, a lawyer at
the Indianapolis office of Cincinnati-based Taft Stettinius & Hollister LLP.

Kempf further argued directors couldn’t have breached their fiduciary duty because the first lawsuit challenging the
deal, filed on April 27 and the day after the offer was announced, was brought a month before the board approved the transaction.

Kempf told the judge the shareholder suit is nothing more than an attempt to leverage a better sale price.

“Jeff Smulyan, that sneaky fellow, is trying to steal the company for $2.40 a share,” Kempf said. “That’s
what [the lawsuit] boils down to.”

Smulyan tried to take the company private four years ago, but that deal bogged down at the board level over price. As talks
dragged on, credit markets soured, and Smulyan ended discussions.

The 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.

Company shares opened Tuesday morning at $2.09 each.

Emmis has 37.8 million common shares outstanding, valuing the offer at about $90 million without the debt.

The transaction doesn’t need board approval. The letter of intent signed by Smulyan’s financial backer, Alden
Global Capital Ltd., 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 Alden provides an exception for conflicts
of interest or special circumstances. What qualifies isn’t spelled out in the law, and Emmis has not elaborated on why
the company believed its board’s circumstances fit.
 
Marion Superior Court Judge Robyn Moberly took the arguments under advisement and said she expects to make a ruling by the
end of the week.

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