Corre Opportunities Fund, LP v. Emmis Communications Corporation

Emmis Communications Corporation (Emmis) (defendant) sought to reacquire its preferred stock through a method called total return swaps, which allowed stockholders to retain ownership rights—including voting rights—in exchange for relinquishing their economic rights. Emmis executed total return swaps with the largest of its preferred stockholders, who also agreed to let Emmis direct their votes. Using this combination of total return swaps and voting agreements, Emmis gained control of 56.8 percent of the voting rights in the preferred stock. This put Emmis within reach of controlling the votes of a two-thirds’ majority of outstanding preferred stock, which was necessary to approve amendments that would adversely affect the interests of the preferred stockholders. This level of control then became a guiding strategy. Emmis executed a more conventional repurchase of preferred stock that reduced the number of outstanding shares, thus raising the percentage of shares of which it controlled the votes to 60.6 percent. Finally, Emmis created an employee-benefit-plan trust in which 400,000 shares of preferred stock were issued, to be voted as directed by the Emmis board. This gave Emmis control of more than two-thirds of the vote of the preferred stock. The Emmis board then proposed amendments to the articles of incorporation that would remove or severely restrict the rights of the preferred stockholders, including the rights to receive dividends, elect directors, and require the repurchase of their shares. Corre Opportunities Fund, L.P., and other preferred stockholders whose shares were not under Emmis’s control (the preferred stockholders) (plaintiffs) brought suit in federal district court to enjoin the vote on the proposed amendments.