Emmis Communications Corp.’s decision to pay some of CEO Jeff Smulyan’s legal fees in a lawsuit arising from his failed bid to take the company private is illegal, charges the financier who backed out of the deal.
New York-based Alden Global Capital informed Emmis directors Thursday by letter that the company’s $200,000 loan toward Smulyan’s breach-of-contract suit against Alden violates the Sarbanes-Oxley Act.
Alden is demanding, on behalf of Emmis and its shareholders, that directors immediately revoke the loan and recover any proceeds that may have been distributed.
If the loan is not rescinded by close of business on Feb. 11, Alden said, it will pursue legal action.
Emmis’ board unanimously approved the expenditure Dec. 24, according to a filing with the Securities and Exchange Commission. If the litigation is successful, the company will be repaid $300,000 from any financial recovery.
Emmis filed the breach-of-contract lawsuit in September against three Alden Global Capital units that backed out of the going-private deal.
JS Acquisition LLC, the company Smulyan formed to take Emmis private, says the transaction failed when Alden changed course after months of negotiations with a group of preferred shareholders, costing the company $10.2 million in fees and other expenses.
Alden and JS Acquisition agreed in April to help take Emmis private. But, in July, nine dissident investors—holding a combined 38 percent of the company’s preferred shares—emerged to block the $90 million deal.
Alden ultimately pulled out of the transaction, citing a “precipitous” drop in radio-industry assets.
Emmis shares opened Monday morning at $1.06 each, down from a 52-week high of $2.45 reached when the deal to take the company private was announced in April.
Shares late last month rebounded above a $1 threshold the company needs to maintain to avoid delisting on the NASDAQ exchange. Emmis shares have closed above $1 for six consecutive business days and need to stay above the amount for 10 days before May 2 to avoid delisting.
Alden touched upon Emmis’ shaky financial status in its letter to directors.
“Given the apparent dire financial situation Emmis faces, the Board’s decision to loan [Smulyan] a portion of the Company’s remaining cash, which at the very best will not be recovered until the end of protracted litigation, has subjected the Company to imminent injury beyond just the loss of the illegally loaned funds,” a lawyer for Alden wrote.
A spokeswoman for Emmis, however, maintains the loan was “well-vetted” by directors and company lawyers.
“We're confident with the Board's position on the issue, and have equal confidence in the outcome,” spokeswoman Kate Snedeker said via e-mail.
Alden insists the loan violates a section of Sarbanes-Oxley that it says prevents executives of public corporations from exploiting their relationships with directors to make a company a lender of last resort.
Further, the loan violates disclosure laws, Alden argued, because Emmis failed to list it as “compensation” to Smulyan.
“We searched Emmis’ public disclosures in vain for rationale justifying handing Mr. Smulyan a hidden bonus for use in pursuing dubious claims against one of Emmis’ most significant shareholders,” Alden’s letter said.
The breach-of-contract suit JS Acquisition brought against Alden is pending in federal court in Indianapolis.
Founded by Smulyan in 1981, Emmis owns more than 20 radio stations in the United States and publishes regional magazines in numerous cities, including Indianapolis Monthly.