The United States Court of Appeals for the Seventh Circuit recently affirmed a district court decision holding that under Indiana law, an Indiana corporation could vote its own outstanding preferred shares. In 1999, Emmis Communications Corporation issued 2.875 million shares of preferred stock, which included cumulative yearly dividends, i.e., a dividend in which any unpaid portion carried over to the next year. In 2008, Emmis stopped paying dividends to preferred shareholders and in 2010, Emmis asked the owners of the preferred stock to accept a going-private transaction which would exchange their preferred shares for subordinated debt, which proposal was rejected. In 2011, the preferred shares were selling at a substantial discount and Emmis sought a way to change the preferred stock terms to go private. To get control of the voting rights of its preferred stock, Emmis signed 60 percent of preferred shareholders to a “total return swap,” purchased each preferred share at a discount and then the owners delivered the shares to escrow. Closing was deferred five years, and the sellers agreed to vote their shares as Emmis instructed during the interim. Additionally, Emmis repurchased shares of preferred stock in a tender offer, and then reissued them to a trust, which would be used to pay employee bonuses. The trustee was instructed to vote this stock at management’s direction. The “total return swap” and stock reissuance to a trust allowed Emmis to approve the changes to preferred stock needed to execute the going-private transaction. The shareholders holding most of the preferred shares commenced litigation, claiming, inter alia, that Emmis did not have authority to vote the shares as it did. The Seventh Circuit affirmed the lower court’s determination that Indiana’s corporate law is unique in that it allows corporations to vote their own outstanding shares. First, the plaintiff preferred shareholders argued that the court should ignore the shares in the trust because they were not held in a fiduciary capacity. However, the Seventh Circuit held that under Indiana law, a company may vote its own shares when held as an employee benefit plan, which was the case with the shares at issue. Second, the plaintiffs argued that Emmis could not vote the shares held in escrow because they were no longer outstanding once Emmis became the beneficial owner. The Seventh Circuit disagreed, holding that Indiana, unlike most states, allows corporations to vote their outstanding shares as long as it is not the legal owner. The court refused to accept plaintiffs’ “corporate governance best practices,” theory, holding that the corporate laws of the different states protect investors through price and competition.

Corre Opportunities Fund, LP v. Emmis Commc’ns Corp., No. 14-1647 (7th Cir. July 2, 2015).