Citations
- 792 F.3d 737
Full opinion text
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 shareholders’ 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