Corrie Opportunities Fund, LP v. Emmis Communications Corp.

Summarized by Kurt Carlson , Carlson Dash LLC
10 years 7 months ago

Citation:

Corrie Opportunities Fund, LP v. Emmis Communications Corp., Court of Appeals, 7th Circuit (July 2, 2015)

Tag(s):

Ruling:

This ruling set a precedent, as there have been no cases in Indiana courts that interpret the statutes discussed in this case. As long as a share is “outstanding,” it has a vote and in Indiana, a corporation has the power to vote its own shares. Ind. Code §23-1-22-2(6) allows corporations to vote their own shares “except as otherwise prohibited by this article.” The exception “does not limit the power of a corporation to vote any shares, including its own shares, held by it in or for an employee benefit plan or in any other fiduciary capacity.” Because the trust was an “employee benefit plan,” Emmis was entitled to vote those shares in the trust. The Court also ruled that shares in escrow are still outstanding until the transaction is closed and Indiana gives voting rights to record owners, who are free to vote as Emmis Communications Corp. (“Emmis”) directed, in line with their agreement. Ind. Code §23-1-31-2. The Court also made a policy argument, stating that requirements imposed on corporations for issuance of new stock or payment of dividends makes recapitalization more difficult without going through bankruptcy. The Court also asserts it is not the Court’s place to make changes to corporate law: “Doubtless many corporate rules are bad for investors, but the way to find them is by competition and price adjustments, not judicial attempts to suppress federalism.”

Procedural context:

Plaintiffs were owners of preferred stock in Emmis (the “Owners”) and allege that Emmis violated Indiana law by voting some of its own shares. The initial lawsuit included a claim under federal securities law; therefore, the case was heard in federal court even though the federal claim had been ruled upon and dismissed. In addition to the securities law argument, which the Owners lost, the Owners also contended that Emmis violated its fiduciary duty by compromising the rights of one class of investor in order to enrich another class. This argument was rejected by the district court and the Court of Appeals agreed, as corporations do not have fiduciary duties to investors in the state of Indiana. Directors do owe investors a fiduciary duty, however, so the Owners should have brought suit against the directors for breach of the fiduciary duty of loyalty. The Owners’ two main arguments on appeal were that (1) the shares in the swap transactions were no longer “outstanding” and (2) the employee trust should be ignored because the shares were not held in a fiduciary capacity.

Facts:

In 1999, Emmis issued 2.875 million shares of preferred stock at a price of $50 per share with each share promising cumulative dividends of $3.125 per year. In October 2008, Emmis stopped paying these cumulative dividends, the dividends piled up, and the firm was consequently unable to pay dividends on common stock or issue any senior securities. In 2010 Emmis proposed a transaction to the preferred stock owners which, if approved, would take the company private. The proposal failed to get the 2/3 vote necessary to approve the transaction. Many of the preferred stock owners were willing, however, to sell at a discount and cast their votes in favor of Emmis’s plan. About 60% of the preferred shares agreed to sell for $15 and delivered their shares to escrow while agreeing to vote their shares as Emmis instructed in the meantime. The second thing Emmis did to gain control of the vote was repurchase some of the preferred stock and reissue it to a trust for the benefit of the employees; the trustee would vote in favor of the company. Once Emmis controlled more than 2/3 of the votes, the rights of the preferred stock were changed, with the cumulative dividend feature being eliminated. Upon completion of the vote, the shares were transferred out of escrow and retired by Emmis.

Judge(s):

Flaum, Easterbrook, Kanne

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