Emmis Preferred Shareholders Fight Bylaw Changes

Emmis Communication Corp., the owner of radio stations in cities including New York and Los Angeles, faced opposition from preferred shareholders in federal court who claim bylaw changes would eliminate their dividends.

Investors including Corre Opportunities Fund LP today asked U.S. District Judge Sarah Evans Barker in Indianapolis for an order blocking an Aug. 14 special meeting. Emmis shareholders are to be asked to approve bylaw changes that would wipe out more than $34 million in accrued and unpaid preferred stock dividends. The proposal would also eliminate such dividends in the future, as well as the preferred stockholders’ ability to elect directors, according to a proxy statement.

All of this, Corre alleged in court papers, 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,” John Barrett, managing partner of New York-based Corre Partners Management LLC, which controls the plaintiff fund, said in a phone interview last week.

Smulyan told the court today 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 to $2.23 in Nasdaq Stock Market trading.

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

Unpaid Dividends

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 whose holders are currently entitled to automatic dividends.

Those dividends, worth 6.25 percent of the preferred shares’ $50 liquidation value, or $3.125, 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 Emmis 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.

‘Every Constituency’

“Emmis management is fulfilling its responsibility,” attorney Richard Kempf told Barker at today’s hearing. “It’s impossible for every constituency to be satisfied.”

The Emmis CEO testified for about 15 minutes today.

“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.”

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 each without officially retiring the shares, in violation of Indiana law, the suing investors claimed in court filings.

Rendered Worthless

Testifying for the preferred stockholders today, Barrett told the court that Emmis Chief Operating Officer Patrick Walsh warned him last year 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.

‘Just Enough’

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.

“Absent a preliminary injunction, plaintiffs and other preferred shareholders will be permanently eliminated from Emmis’s capital structure,” they said.

Today’s proceedings ended without a ruling by Barker. She will hear argument from lawyers for both sides tomorrow.

The case is Corre Opportunity Fund LP v. Emmis Communications Corp., 12-cv-00491, U.S. District Court, Southern District of Indiana (Indianapolis).

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