The price of Emmis Communications Corp.'s preferred stock plunged nearly 40% Wednesday, Sept. 5, in response to a shareholder vote dominated by Jeff Smulyan, the radio broadcaster's founder and leader, to wipe out $34 million in unpaid preferred-stock dividends.
The shareholder vote, originally scheduled for Aug. 14, was delayed until Sept. 4, in deference to a ruling by U.S. District Judge Sarah Evans Barker about whether certain preferred shareholders should be granted a preliminary injunction to prohibit all shareholders from voting on a host of amendments to Emmis' articles of incorporation. Barker denied the request in a decision issued Aug. 31.
The proposed amendments not only sought cancellation of the unpaid dividends but also removed the right of Emmis' preferred shareholders to vote as a separate class on such issues as mergers, share exchanges and asset sales. For these and other reasons, a group of preferred shareholders led by Corre Opportunities Fund LP filed suit against Indianapolis-based Emmis in April.
Emmis, undeterred, filed a proxy in late June that signaled its intent to pursue a vote on the proposed amendments. The proxy also called for the vote to be held at a special shareholder meeting on Aug. 14.
That's when Corre and fellow plaintiffs prevailed upon Barker to block the vote on grounds that Emmis chairman and CEO Smulyan, as well as the company's board, failed to comply with state and federal disclosure laws. Barker's response was to hold a hearing on the matter on July 31 and Aug. 1.
Barker's ruling on Aug. 31, based on evidence presented at the hearing, consisted of 50 pages that concluded the plaintiffs were unlikely to succeed in their claims or to suffer irreparable harm. About the latter, the judge determined that the plaintiffs are mostly concerned about the value of their preferred shares, for which they "can be made whole with money damages, if they subsequently prevail on their claims."
Despite the Aug. 31 ruling and the Sept. 4 vote, Emmis' boardroom behavior is likely to rankle advocates of corporate governance. Especially irksome to many was the ability of Smulyan to determine the shareholder vote's outcome.
As noted in the company's proxy, Smulyan controls 58.2% of the common-stock vote, primarily through his lock on supervoting Class B shares, whereas the company itself controls 66.8% of the preferred-stock vote, largely through the use of total return swaps that were contested in an amended complaint filed by Corre and others in May.
That complaint accused Emmis of repurchasing preferred shares from select holders but "keeping the vote alive" by having those shareholders enter into agreements that assign their voting rights to Emmis. For accounting purposes, though, the shares underlying the total return swaps were effectively extinguished.
"The result was the creation of what are essentially 'zombie shares' that exist solely for controlling the vote of the preferred stock," the complaint stated, "but are otherwise retired and extinguished as far as Emmis is concerned and provide no ongoing economic benefit to the seller."
The amended complaint also criticized Emmis for creating a 2012 retention plan trust, to which it issued 400,000 shares of newly created preferred stock. The professed intention of the trust was to help retain key employees, but its designated trustee was none other than Smulyan. "Emmis's control of both the 'zombie shares' and the 2012 Retention Plan Trust gave the company the two-thirds vote it needed to eliminate the rights and privileges of the preferred stock and render the shares worthless," the complaint charged.
Smulyan critics often consider Emmis' recent maneuvers a prelude to a third take-private attempt by the radio broadcaster's founder. And while Smulyan himself has said that's not his intent, it's undeniable that a second take-private attempt in 2010 foundered after a so-called locked-up group denied him the two-thirds preferred-share vote necessary for the effort to succeed.
Then, after nearly a half-year of negotiations and concessions finally got the locked-up group behind the plan, the hedge fund serving as Smulyan's financial backer balked. The price of Emmis' common stock collapsed in response, drifting below $1 per share long enough to elicit a Nasdaq notice in February about a possible delisting. It has since recovered to nearly $2.40 per share.
In order to comply with the terms of its senior credit agreement, Emmis Communications Corporation ("Emmis") exercised its early termination option under the total return swap transactions that it had entered into with certain holders of 1,484,679 shares of its 6.25% Series A Non-Cumulative Convertible Preferred Stock (the "Preferred Stock"). The termination was effective on September 19, 2012. As a result, the 1,484,679 shares of Preferred Stock return to the status of authorized but unissued shares, leaving 1,337,641 shares of Preferred Stock outstanding.