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Corre Opportunities Fund, LP v. Emmis Communs. Corp.

United States Court of Appeals, Seventh Circuit

July 2, 2015

CORRE OPPORTUNITIES FUND, LP, et al., Plaintiffs-Appellants,
v.
EMMIS COMMUNICATIONS CORPORATION, Defendant-Appellee

Argued December 5, 2014

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:12-cv-491-SEB-TAB -- Sarah Evans Barker, Judge.

For Corre Opportunities Fund, LP, Zazove Associates LLC, Djd Group Lllp, First Derivative Traders LP, Kevin A. Fight, Plaintiffs - Appellants: Constantine L. Trela Jr., Attorney, Sidley Austin Llp, Chicago, IL.

For Council of Institutional Investors, Amicus Curiae: Jeffrey Mahoney, General Counsel, Council of Institutional Investors, Washington, DC.

For Emmis Communications Corporation, Defendant - Appellee: Richard A. Kempf, Attorney, Steven C. Shockley, Attorney, Taft Stettinius & Hollister Llp, Indianapolis, IN.

For State of Indiana, Amicus Curiae: Thomas M. Fisher, Attorney, Office of The Attorney General, Indianapolis, IN.

For Indiana Legal Foundation, Incorporated, Amicus Curiae: D. Lucetta Pope, Attorney, Faegre Baker Daniels Llp, South Bend, IN.

Before FLAUM, EASTERBROOK, and KANNE, Circuit Judges.

OPINION

Easterbrook, Circuit Judge.

Plaintiffs, who own preferred stock in Emmis Communications Corp., contend that Emmis violated Indiana law by voting some shares. The suit is in federal court because, at its outset, it included a non-frivolous claim under federal securities law. The district court analyzed the federal claim at length before ruling against the Owners (as we call the plaintiffs). 892 F.Supp.2d 1076 (S.D. Ind. 2012). The Owners now rely entirely on Indiana corporate law. To keep this opinion manageable, we pare away all but the most vital facts; the rest are in the district court's exhaustive opinions. (The district court's 2014 opinion on the state-law issues is not published but is available from the court.)

In 1999 Emmis issued 2.875 million shares of preferred stock for $50 a share, raising about $144 million. The shares promised cumulative dividends of $3.125 a year. A dividend is " cumulative" when any unpaid portion carries over to the next year. If any dividends on the preferred stock remain unpaid, Emmis cannot repurchase any of its common stock, or pay dividends on it, and the preferred stockholders can elect two members of its board of directors. To change any of the preferred stock's rights, Emmis needs the consent of two-thirds of the outstanding preferred shares.

In October 2008 Emmis stopped paying dividends on the preferred stock. It blames the financial crunch, but the reason is irrelevant. It has not paid anything on the preferred shares since then, so the cumulative dividends piled up and prevented the firm from paying dividends on common stock or issuing any senior securities, which has made it hard for Emmis to raise new capital. In 2010 Emmis asked the owners of the preferred stock to accept a going-private transaction in which their stock would be exchanged for subordinated debt rather than cash; this proposal failed to get a 2/3 vote, which was required because going private entails retiring the common stock, a step inconsistent with the preferred share-holders' rights unless they were first paid $50 a share plus all cumulative dividends.

By 2011 the preferred shares were trading in the market at about 25¢ on the dollar, and owners were disaffected. Some asked Emmis to repurchase the preferred stock, but that was not attractive because even one outstanding share would leave Emmis saddled with all of the preferred stock's burdens. Of course, if the number of outstanding shares were small enough, Emmis could afford to buy this residue at par plus all accumulated dividends; but if owners thought that Emmis would do that, then they would not sell to Emmis at a deep discount (everyone would want to be the owner whose shares were purchased on the back end, at maximum price), and all the shares would remain outstanding.

Emmis's management began to search for ways to change the terms of the preferred stock. That, too, required a 2/3 vote, but many owners were willing to sell at a discount, and to promise favorable votes as part of the transaction, as long as Emmis could ensure that holdouts ...


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