Emmis wins appeals court ruling in 'zombie shares' dispute

Emmis Communications won an appeals court decision in a dispute with some of its preferred shareholders over "zombie shares" and more than $10 million in unpaid dividends.

The 7th U.S. Circuit Court of Appeals on Thursday upheld a lower court's ruling that Emmis, an Indianapolis radio station owner, didn't violate Indiana law by buying up and voting its own shares during the battle with the dissident investors.

"It has been a long road, but we are incredibly gratified that the 7th Circuit upheld Judge (Sarah) Barker's ruling, and denied the arguments made by dissident preferred shareholders," said Jeff Smulyan, chairman and CEO of Emmis.

The decision should end a long-running fight between Emmis and several of its preferred shareholders led by Corre Opportunities Fund LP. It began after Emmis stopped paying dividends on preferred stock during the recession in 2008.

Two years later, Emmis tried to go private and buy out preferred shareholders. The proposal failed to get enough support. By 2011, preferred shares in Emmis had fallen in value to less than $13 a share from their original price of $50.

Emmis, which is owned by Smulyan, eventually bought up a majority of preferred shares, transferred them to an employee trust and voted to strip preferred shareholders of their rights. More than $10 million in preferred dividends have gone unpaid since 2008. The dissident shareholders were trying to force Emmis to pay up.

Barker rejected the plaintiffs' argument that the stock buyback amounted to an "illegal sham" carried out using "zombie shares" that should have been retired when they were repurchased by Emmis.

Some of the original charges against Emmis, including breach of fiduciary duty, were not part of the appeal. The only appeal arguments were that Emmis illegally voted shares that were no longer outstanding and that the bought shares were improperly held in a trust.

In a 3-0 vote, the appeals judges said neither argument was persuasive under Indiana corporate law.

Call Star reporter Jeff Swiatek at (317) 444-6483. Follow him on Twitter: @JeffSwiatek.