CORRE OPPORTUNITIES FUND, LP et al v. EMMIS COMMUNICATIONS CORPORATION et al
Filing
82
ORDER denying 12 Plaintiffs' Motion for Preliminary Injunction. Signed by Judge Sarah Evans Barker on 8/31/2012. (PGS)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
CORRE OPPORTUNITIES FUND, LP,
ZAZOVE ASSOCIATES LLC, DJD
GROUP LLLP, FIRST DERIVATIVE
TRADERS LP, and KEVAN A. FIGHT,
Plaintiffs,
vs.
EMMIS COMMUNICATIONS
CORPORATION, JEFFREY H.
SMULYAN, PATRICK M. WALSH, J.
SCOTT ENRIGHT, SUSAN B. BAYH,
GARY L. KASEFF, RICHARD A.
LEVENTHAL, PETER A. LUND, GREG
A. NATHANSON, and LAWRENCE B.
SORREL,
Defendants.
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1:12-cv-491-SEB-TAB
ORDER DENYING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION
This cause is before the Court on Plaintiffs’ Motion for Preliminary Injunction
[Docket No. 12], filed on April 16, 2012, pursuant to Rule 65 of the Federal Rules of
Civil Procedure. Plaintiffs, Corre Opportunities Fund, LP, Zazove Associates LLC, DJD
Group LLLP, First Derivatives Traders LP, and Kevan A. Fight, seek a preliminary
injunction barring Defendants, Emmis Communications Corporation (“Emmis”), Jeffrey
H. Smulyan, Patrick M. Walsh, J. Scott Enright, Susan B. Bayh, Gary L. Kaseff, Richard
A. Leventhal, Peter A. Lund, Greg A. Nathanson, and Lawrence B. Sorrel, from, inter
alia, holding a Special Meeting to vote on the Proposed Amendments set forth in
Emmis’s March 13, 2012 Preliminary Proxy Statement and from voting, directing others
to vote, or taking any action on votes cast for the Proposed Amendments.
A hearing was held on July 31 and August 1, 2012, at which the parties presented
evidence and oral argument. Having considered the parties’ briefing, the documentary
and testimonial evidence, and oral arguments, the Court hereby DENIES Plaintiffs’
motion for injunctive relief.
Factual Background
Relevant Rights and Protections of Preferred Stock
In 1999, Emmis issued 2,875,000 shares of 6.25% Series A Cumulative
Convertible Preferred Stock (“Preferred Stock”) for $50 per share, raising approximately
$144 million. Docket No. 43 ¶ 23. Plaintiffs are all shareholders who own, or manage
funds that own, more than 800,000 shares of Emmis’s Preferred Stock.
Emmis’s Articles of Incorporation sets out the rights and protections associated
with the Preferred Stock, which include, inter alia: (1) a right to cumulative annual cash
dividends at a rate per annum equal to 6.25% of the stock’s $50 liquidation preference;
(2) a bar on Emmis’s ability to pay dividends to its common stockholders or to repurchase
securities ranking junior to or ratably with the Preferred Stock unless Emmis is current on
the Preferred Stock dividend payments; (3) a right to sell the stock back to Emmis at $50
per share, plus any outstanding dividends, if the Company goes private; (4) the right to
elect two Emmis directors if dividends are not paid for six consecutive quarters; and (5)
2
the requirement that any issuance of senior-ranking stock or any adverse amendment to
the terms of the Preferred Stock be approved by two-thirds of the outstanding Preferred
Stock. Exh. 7.
Attempts to Take Emmis Private
In 2006, Emmis CEO, Jeff Smulyan, proposed to take Emmis private by
purchasing the Company’s common stock at $15.25 per share. However, a committee of
disinterested directors of the Board of Directors (“the Board”) rejected his proposal and
Emmis remained a public company. Smulyan Dep. at 20. Two years later, in October
2008, Emmis, like other entities in the radio and media industry, was hit hard by the
nationwide financial crisis and was forced to cut its workforce, reduce employee benefits,
and cut wages and salaries. Emmis also ceased paying dividends to its Preferred
Shareholders at that time and has not paid dividends since.1 Docket No. 43 ¶ 24. The
current amount of accrued unpaid dividends is $12.12 per share. Hornaday Dep. at 30.
In 2010, two years after the financial crisis, the market price of Emmis’s Common
Stock had fallen to less than $3.00 per share. Smulyan Dep. at 23. Mr. Smulyan, fueled
by the belief that the Common Stock was undervalued by the market, proposed another
go-private transaction. As part of that deal, Emmis asked the Preferred Shareholders to
relinquish their right to sell their stock back to Emmis at $50.00 per share plus unpaid
1
In August 2009, the holders of Emmis’s senior debt demanded that loan covenants be
amended to prohibit the Company from paying dividends on the Preferred Stock. This
prohibition continues today. See Exh. 800 § 10.4; Exh. 801 § 5.
3
dividends (which would have eliminated any potential profit from the go-private
transaction) and instead requested that they exchange their shares for subordinated debt
instruments. Exh. 600 That proposed amendment to the terms of the Preferred Stock
failed to win the required two-thirds’ approval, however. See Exh. 601. As a result,
Emmis’s financier, preferred holder Alden Global Distressed Opportunities Master Fund
(“Alden”), pulled out of the deal, and the initiative collapsed. The pullout eventually led
to litigation between Alden and Emmis. Momtazee Dep. at 144-45; Smulyan Dep. at 3132.
Emmis’s Proposal to Acquire Preferred Stock Using Total Return Swaps
In the summer of 2011, Emmis’s senior management was contacted by a few of the
Preferred Shareholders who sought liquidity for their shares. Hornaday Dep. at 45;
Smulyan Dep. at 47; Walsh Dep. at 56-58. According to Defendants, Emmis recognized
the benefits to its capital structure of repurchasing its Preferred Stock at the thenprevailing market rate. Repurchasing the Preferred Stock for approximately 25 cents on
the dollar would be treated by credit rating agencies as the extinguishment of debt at a
substantial discount, making it easier for Emmis to refinance senior debt at lower interest
rates, which would in turn have the effect of improving the Company’s overall financial
health, increasing the value of Emmis’s common stock and possibly the remaining
Preferred Stock as well. Hornaday Dep. at 33-34, 64-65; Walsh Dep. at 52, 55-56;
Momtazee Dep. at 143-44.
In September 2011, Emmis’s senior management negotiated with Zell Credit
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Opportunities Master Fund, LLC (“Zell”) for financing that would enable Emmis to
repurchase the Preferred Stock. At approximately that same time, in September and
October 2011, Emmis began approaching its ten largest Preferred Shareholders2 to
determine whether there was interest in selling. In mid-October, after a sufficient number
of the approached Preferred Shareholders had expressed interest in selling their shares at
the current market value, Emmis finalized a loan commitment of up to $35 million with
Zell (the “Zell Financing”) to fund those purchases. Hornaday Dep. at 68-69; Walsh Dep.
at 58-60; Exh. 803.
Emmis’s senior management presented the proposal to repurchase Preferred Stock
using the Zell Financing at the Board’s October 25, 2011 meeting. Management
explained that repurchasing Emmis’s Preferred Stock at a discount with funds borrowed
from Zell would benefit the Company. At that meeting, in addition to the presentation
made by the senior management team, Emmis’s financial advisor, John Momtazee of
Moelis & Company along with outside legal counsel advised the Board regarding the
proposal. See Exh. 18; Exh. 407.
One of the goals of the purchase proposal was not simply to acquire Preferred
Stock, but also to preserve the voting rights of the Preferred Stock it did acquire. Under
Indiana law, any shares of Preferred Stock that Emmis acquired through outright
2
Those contacted by Emmis included Plaintiffs Zazove, DJD, and Kevan Fight. Other
Preferred Shareholders contacted included Q Investments, Third Point, Valinor, and Alden, all of
whom eventually entered into direct sale or total return share transactions with Emmis, and
Deutsche Bank, Bradley Radoff, and Luther King, none of whom entered into deals with Emmis.
5
purchases would have to be retired and could not be voted. Thus, the Preferred Stock
repurchase proposal included the possibility of using total return swap (“TRS”)
transactions3 and TRS Voting Agreements rather than ordinary purchase agreements,
which proposal was presented to the Board as a way to preserve the voting rights of the
Preferred Stock. Exh. 18. Basically, Preferred Shareholders would be offered a price per
share for certain interests in their Preferred Stock; and, although they would lose the
economic rights in those shares, they would retain record ownership of the stock. In
addition, Emmis would enter into voting agreements with these Preferred Shareholders
pursuant to which they would agree to vote their shares as Emmis directed. It was
proposed that Emmis would make this offer only to its largest holders of Preferred Stock,
and the Board was informed that, if Emmis succeeded in acquiring two-thirds of the vote,
the use of the total return swaps “would allow flexibility” to seek amendments to the
terms of the Preferred Stock. Exh. 314.
The proposal was approved by unanimous vote of the directors, including all of its
independent directors as well as the Preferred Shareholders’ representative on the Board,
David Gale. See Exh. 18 at 1. Gale did express concern regarding what Emmis planned
3
Plaintiffs’ expert witness, Edward Adams, explained that total return swaps are
financial derivative contracts in which: “Party A agrees to pay the total returns to Party B in
exchange for Party B making generally periodic payments to Party A. So if the asset goes up in
value from 50 to a hundred dollars, then Party A is going to pay that to B. If it goes down in
value, Party B’s got to pay that to A. So what happens in a total return swap is Party B doesn’t
really own the asset. It owns the economics of the asset. Party A continues to own the asset and
vote it. Party B has the economics, so if it goes up, Party B benefits. If it goes down, Party B
pays.” Tr. Vol. 1 at 226.
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to do if it acquired voting control of two-thirds of the Preferred Stock. However, after
being informed that the Board would not take any action on that issue at that meeting, he
ultimately voted in favor of the Preferred Stock repurchase proposal, including the use of
TRS transactions and accompanying TRS Voting Agreements. Gale Dep. at 32, 42-43.
Emmis’s Acquisition of Preferred Stock Using Total Return Swaps
With authorization from the Board, Emmis’s senior management finalized the Zell
Financing and proceeded with the discussions with the ten targeted Preferred
Shareholders about acquisition of their shares. On November 10, 2011, Emmis signed the
loan agreement with Zell and the next day announced it would acquire Preferred Stock
from certain holders pursuant to TRS transactions. Exh. 235; Exh. 803. Because at that
point Emmis had entered into these discussions with only ten of its Preferred
Shareholders regarding the acquisition of their shares, the announcement that Emmis
made on November 11 was the first notice to the remaining Preferred Shareholders of
Emmis’s acquisition plans. On November 14, 2011, in a 8-K filing submitted to the
Securities Exchange Commission (“SEC”), Emmis disclosed that it had secured the Zell
financing and that it had “entered into securities purchase agreements with certain holders
of its Preferred Stock,” and that, “[t]he transactions will settle pursuant to the terms of
total return swaps ..., the terms of which provide that until final settlement of these
arrangements, the seller agree[d] to vote its shares in accordance with the prior written
instructions of Emmis.” Exh. 604. Emmis further disclosed that it “may enter into
additional transactions to purchase its Preferred Stock in the future. Id. According to an
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8-K form filed on November 15, 2011, Emmis had already acquired 645,504 shares of
Preferred Stock, mainly through TRS transactions,4 and, by that date, had secured the
ability to direct the vote of approximately 23% of the Preferred Stock. Exh. 605.
One week later, on November 22, 2011, as part of a broader agreement to settle all
litigation related to its pullout from the 2010 go-private transaction, Alden Capital agreed
to enter into a TRS transaction with Emmis involving over 1,000,000 shares of Preferred
Stock. These shares represented approximately 34% of the outstanding Preferred Stock
and increased the percentage of shares over which Emmis had secured voting control to
56.8%. Exh. 607. Defendants claim that it was only at this point that Emmis’s senior
management first believed that the Company might be able to gain control of two-thirds
of the outstanding shares of the Preferred Stock.
On that same day, the Board met to discuss the merits of a tender offer and the
implications of acquiring voting control over at least two-thirds of the outstanding
Preferred Stock. The minutes of that meeting state that no decision was being made at
that time “with respect to any possible amendments to the terms of the preferred stock,”
and that, “such a determination, if any,” would be made at a separate meeting. Exh. 6.
The Board did, however, approve by an 8-1 margin5 a modified “Dutch auction” tender
4
Adam Peach of Q Investments, one of the Preferred Shareholders approached by
Emmis, preferred that Emmis make a straight purchase of its Preferred Stock rather than by
using a TRS and Emmis agreed to structure the transaction in such a manner. Enright Dep. at
58-59.
5
Gale, the Preferred Shareholders’ representative on the Board was the only dissenter.
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offer for its Preferred Stock at the November 22 meeting. Id.
The Dutch Auction Tender Offer
On November 30, 2011, Emmis announced that it would conduct a modified Dutch
auction tender offer to purchase up to $6 million in Preferred Stock at a price between
$12.50 and $15.56 per share. The next day, on December 1, 2011, Emmis submitted its
tender offer filing to the SEC. In that filing, Emmis stated that if it succeeded in
obtaining two-thirds of the vote, it “may elect to, among other things, amend various
provisions applicable to the Preferred Shares.” Exh. 609. By December 12, 2011, in
response to the disclosures made in Emmis’s December 1 filing, four of the five Plaintiffs
had entered into a formal lockup agreement in an attempt to gain a blocking position by
controlling at least one-third of the vote of the Preferred Stock.6 See Exhs. 221, 230, 238,
308.
On January 5, 2012, Emmis announced that it had purchased through the
December tender offer 164,400 shares of Preferred Stock. Because those shares were
purchased rather than acquired through TRS transactions, they were retired and returned
to the status of authorized but unissued Preferred Stock, thereby reducing the number of
shares of outstanding Preferred Stock, which in turn increased the percentage of shares
6
There is evidence in the record that Plaintiffs suspected that Emmis’s plan was to gain
voting control of two-thirds of the Preferred Stock in order to amend its terms at or before the
time that Emmis filed its tender offer statement. On November 22, 2011, Plaintiffs Zazove,
Corre, and Fight expressed this belief to the SEC by letter. Exh. 219. Representatives of
Plaintiffs DJD Group and First Derivative testified by deposition that they had a similar
understanding following the December 1 tender offer statement. Exh. 904 at 58-59; Exh. 909 at
14, 23, 26.
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over which Emmis controlled the vote to 60.6%. See Exh. 616 at 14.
On January 20, 2012, with the term of the Zell Financing set to expire within two
weeks, Emmis used the last of those funds to purchase and retire an additional 25,700
shares of Preferred Stock at prices of up to $30 per share. Emmis announced the
acquisition in its January 30, 2012 Form 8-K, stating that the total of “authorized but
unissued” shares had reached 452,680, and that, if it reissued 390,604 of those shares to a
third party with a voting agreement allowing Emmis to direct the vote, it would have
voting control over two-thirds of the Preferred Stock. Exh. 611. In the Form 8-K, Emmis
further disclosed that, if it were able to acquire voting control, it “may elect” to use that
power to amend the rights of the Preferred Shareholders. Id.
Creation of Employee Retention Plan Trust and Reissuance of Preferred Stock
In January 2012, Emmis entered into negotiations with its lenders, Zell and
Canyon Capital Advisors, whereby Emmis proposed to reissue to the lenders
approximately 400,000 shares of Preferred Stock which amount was needed to reach the
two-thirds threshold. However, in early February 2012, Zell and Canyon concluded that
the possible return on an investment in the Preferred Stock was not worth the risk of
litigation with the lockup group and declined to invest. See Exh. 12; Exh. 13.
Once negotiations with Zell and Canyon stalled, Emmis’s senior management
decided to create an employee benefit plan trust (“the Retention Plan Trust”) to which it
could issue the 400,000 shares of Preferred Stock, which would be voted as directed by
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the Board.7 On February 29, 2012, senior management presented this idea to the Board,
which approved the plan at its March 8, 2012 meeting. Exh. 804; Exh. 805. According to
Defendants, there were two purposes for creating the Retention Plan Trust; first, to enable
Emmis to acquire voting control over two-thirds of the Preferred Stock, and second, to
provide a means of retaining and rewarding employees who remained with the company
for at least two years.8 Enright Dep. at 26.
Before the proxy for approval of the Retention Plan Trust was tendered, Emmis
made a separate filing on March 13, 2012, announcing its intention to conduct a vote
amending the rights of the remaining Preferred Shareholders by using the shares that it
planned to issue to the not-yet-created Trust. The March 13 filing also noted that the
shares in the Retention Plan Trust would vote in favor of the proposed amendments. Exh.
24. On April 2, 2012, the Trust, with Mr. Smulyan as Trustee, was approved by
shareholder vote. Emmis then contributed 400,000 shares of Preferred Stock in return for
a voting agreement allowing the Company to direct the vote of those shares, giving
Emmis control of over two-thirds of the Preferred Stock. See Exh. 613 at 69.
Board Approval and Disclosure of Proposed Amendments
At the February 29 and March 8 Board meetings when the Retention Plan Trust
7
Indiana law allows corporations to vote their own shares when held “in or for an
employee benefit plan.” IND. CODE § 23-1-30-2(c).
8
At the time the Retention Plan Trust was created, Emmis already had other employee
benefit plans in place, including a 2010 Equity Compensation Plan with 2.2 million shares of
Emmis common stock available for grant. Exh. 613.
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was discussed and adopted, the Board for the first time also discussed the details of
specific Amendments to the Articles of Incorporation affecting the terms of the Preferred
Stock (at the February 29 meeting) and approved the Proposed Amendments for
consideration by the Company’s shareholders (at the March 8 meeting). Exh. 804; Exh.
805. The Proposed Amendments would, inter alia: (1) eliminate Emmis’s obligation to
pay Preferred Stock dividends accumulated since October 2008; (2) change the Preferred
Stock from “Cumulative” to “Non-Cumulative”; (3) eliminate the right of Preferred
Shareholders to elect directors in the event of nonpayment of dividends; (4) remove the
restrictions on Emmis’s ability to pay dividends or make distributions on or repurchase its
Common Stock or other junior stock prior to paying accumulated dividends or
distributions on the Preferred Stock; and (5) eliminate the right of the holders of the
Preferred Stock to require Emmis to repurchase all of their shares upon certain goingprivate transactions. See Exh. 24.
Emmis filed a preliminary proxy statement on March 13, 2012, in which it
disclosed the exact terms of the Proposed Amendments and its expectation that the
holders of two-thirds of the Preferred Stock would vote in favor of the Amendments,
based on the terms of the TRS and Retention Plan Trust Voting Agreements. Id. The
preliminary proxy also provided as follows:
The Emmis board of directors, with the exception of Dave Gale who was
appointed as a director by the holders of the Preferred Stock, believes the
Proposed Amendments will have a positive effect on the overall capital
structure of Emmis, which will have a beneficial impact on holders of the
Common Stock. Accordingly, the board of directors, with the exception of
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Mr. Gale, believes that the Proposed Amendments are in the best interests
of Emmis and the holders of the Common Stock and recommends that the
holders of the Common Stock vote FOR the Proposed Amendments.
Id. at 6.
The Instant Litigation
On April 16, 2012, Plaintiffs filed their Complaint as well as the instant motion for
injunctive relief, alleging that Defendants’ acquisition of Preferred Stock through TRS
transactions and the reissuance of Preferred Stock to the Retention Plan Trust violated
various federal securities laws as well as the laws governing the conduct of Indiana
corporations.
Legal Analysis
I.
Standard of Review
The grant of injunctive relief is appropriate if the moving party is able to
demonstrate: (1) a reasonable likelihood of succeeding on the merits; (2) irreparable harm
if preliminary relief is denied; and (3) an inadequate remedy at law. Girl Scouts of
Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., 549 F.3d
1079, 1086 (7th Cir. 2008). If the moving party fails to demonstrate any one of these
three threshold requirements, the emergency relief must be denied. Id. However, if these
threshold conditions are met, the Court must then assess the balance of harm – the harm
to Plaintiffs if the injunction is not issued against the harm to Defendants if it is issued –
and, where appropriate, also determine what effect the granting or denying of the
injunction would have on nonparties (the public interest). Id.
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In determining whether to grant injunctive relief, the district court must take into
account all four of these factors and then “exercise its discretion ‘to arrive at a decision
based on the subjective evaluation of the import of the various factors and a personal,
intuitive sense about the nature of the case.” Id. (quoting Lawson Prods., Inc. v. Avnet,
Inc., 782 F.2d 1429, 1436 (7th Cir. 1986)). This process involves engaging in what is
called the “sliding scale” approach, meaning that “the more likely it is the plaintiff will
succeed on the merits, the less balance of irreparable harms need weigh toward its side;
the less likely it is the plaintiff will succeed, the more the balance need weigh towards its
side.” Abbott Labs. v. Mead Johnson & Co., 971 F.2d 6, 12 (7th Cir. 1992) (citations
omitted). The sliding scale approach “is not mathematical in nature, rather ‘it is more
properly characterized as subjective and intuitive, one which permits district courts to
weigh the competing considerations and mold appropriate relief.’” Ty, Inc. v. Jones
Group, Inc., 237 F.3d 891, 895-96 (7th Cir. 2001) (quoting Abbott Labs., 971 F.2d at 12).
II.
Likelihood of Success on the Merits
A.
State Law Claims
1.
Breach of Contract
Plaintiffs contend that Emmis’s acquisition of Preferred Stock breached Section
3.3 of Emmis’s Articles of Incorporation (“the Articles”), which governs the Preferred
Shareholders’ rights, and that Emmis’s re-issuance of acquired Preferred Stock to the
2012 Retention Plan Trust breached Section 7.3 of that same agreement. We address
these claims in turn.
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a.
Section 3.3
Section 3.3 provides in relevant part as follows:
[N]o Common Stock or any other stock of the Corporation ranking junior to
or ratably with the Preferred Stock as to dividends ... may be redeemed,
purchased or otherwise acquired for any consideration ... by the Corporation
... unless full Accumulated Dividends shall have been or
contemporaneously are paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Preferred Stock for all
Dividend Payment Periods terminating on or prior to the date of such
declaration, payment, redemption, purchase or acquisition.
Exh. 7 at EM 0007061.
It is undisputed that, between October 2011 and January 2012, Emmis acquired
shares of Preferred Stock without first paying accumulated dividends to the Preferred
Shareholders. Thus, we turn to the question of whether Preferred Stock constitutes stock
“ranking junior to or ratably with the Preferred Stock.” When interpreting contract terms,
“[u]nless the terms of the contract are ambiguous, they will be given their plain and
ordinary meaning. Tanton v. Grochow, 707 N.E.2d 1010, 1013 (Ind. Ct. App. 1999)
(citation omitted). Courts are to “construe the contract as a whole and consider all
provisions of the contract, not just the individual words, phrases, or paragraphs.”
Brotherhood Mut. Ins. Co. v. Michiana Contracting, Inc., 971 N.E.2d 127, 131 (Ind. Ct.
App. 2012) (citation omitted).
Plaintiffs contend that Defendants’ acquisition of Preferred Stock without first
paying dividends violated Section 3.3 because the phrase “any other stock ... ranking
junior to or ratably with the Preferred Stock” encompasses the Preferred Stock itself.
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Plaintiffs argue that the plain and ordinary meaning of “ratable” is “pro rata” or
“proportional,” and thus, that shares of Preferred Stock “rank ratably with” other shares
of Preferred Stock as to dividends. In further support of their argument, Plaintiffs point to
Section 7.3 of Emmis’s Articles of Incorporation, which refers to: “shares of preferred
stock which rank ratably with the Preferred Stock (including the issuance of additional
shares of the Preferred Stock).” (emphasis added). Plaintiffs contend that because there
is no indication that the phrase was intended to have varying definitions throughout the
agreement, stock “ranking ratably with Preferred Stock” in Section 3.3 should be
interpreted to include the Preferred Stock itself.
However, as Defendants argue, if the intent of Section 3.3 was in fact to prohibit
Emmis’s acquisition of the Preferred Stock itself, the Section would have provided that
Emmis could only acquire stock ranking senior to the Preferred Stock or added the phrase
“including the Preferred Stock” after “ratably with the Preferred Stock,” as Section 7.3 of
the Articles does. The fact that such language was used in Section 7.3 of the same
agreement demonstrates that when the drafters intended to include Preferred Stock as
stock that “ranks ratably” with itself, they knew how to make that distinction and they
clearly expressed that intent. Because Section 3.3 does not include such a distinction, it
suggests that the drafters did not intend that meaning to be read into the provision.
Moreover, because Preferred Stock is Preferred Stock, it is logical to conclude that stock
that ranks ratably with Preferred Stock must be some other series of stock.
For the foregoing reasons, we find that Plaintiffs have failed to establish that they
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have a reasonable likelihood of success in proving that Defendants’ acquisition of
Preferred Stock through the TRS transactions constituted a breach of Section 3.3 of the
Articles.
b.
Section 7.3
Section 7.3 provides in relevant part as follows:
The affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding Preferred Stock will be required for the issuance of any class or
series of stock, or security convertible into the Corporation’s stock, ranking
senior to the Preferred Stock as to dividends, liquidation rights or voting
rights and for amendments to the Corporation’s Articles of Incorporation
that would adversely affect the rights of holders of the Preferred Stock;
provided however, that any issuance of shares of preferred stock which rank
ratably with the Preferred Stock (including the issuance of additional shares
of the Preferred Stock) will not, by itself, be deemed to adversely affect the
rights of the holders of the Preferred Stock. In all such cases, each share of
Preferred Stock will be entitled to one vote.
Exh. 7 at EM 0007065 (emphasis in original).
Plaintiffs argue that both the Preferred Stock acquired through TRS transactions
and the Preferred Stock reissued to the Retention Plan Trust constitute classes of stock
ranking senior to voting rights of the originally issued Preferred Stock, and thus, because
Emmis did not receive the affirmative vote of two-thirds of the outstanding Preferred
Stock before engaging in such actions, it breached Section 7.3. Basically, Plaintiffs argue
that the “TRS Preferred Stock” and “Retention Plan Preferred Stock” are senior to the
Preferred Stock they own because embedded within each TRS and Retention Plan share is
a vote to eliminate the rights of the Preferred Stock. In other words, Plaintiffs’ argument
is that the embedded voting shares are senior to Preferred Stock because they constitute
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an automatic block of votes, and thus are in essence the same as one super-share with
hundreds of thousands of votes.
In support of their argument, Plaintiffs point to an internal memorandum produced
by Emmis’s accounting firm, Ernst & Young, which concludes with reference to the
Preferred Stock acquired through the TRS transactions that, for accounting purposes,
those acquisitions should be considered “the issuance of a new ‘modified’ preferred
stock.” Exh. 109. However, this characterization for accounting purposes of the TRS
Preferred Stock by Defendants’ accounting firm is largely irrelevant for our purposes, to
wit, in determining whether Defendants’ actions violated the rights of the Preferred
Shareholders, which are governed solely by the Articles and applicable provisions of the
IBCL.
Moreover, the mere fact that newly issued shares will affect the outcome of a
shareholder vote does not automatically transform those shares into a senior class of
stock. As Defendants point out, whenever authorized shares of an Indiana corporation are
available for issuance, shareholders of that corporation bear the risk that the corporation’s
decision to issue new shares of an existing class will alter the outcome of an election.
Thus, the only question currently before us is whether the Board had the power to issue
the shares under the Articles, and, in so doing, whether it acted in accordance with the
standards prescribed in the IBCL.
Section 10.2 of Exhibit A to the Articles addresses the reacquisition and reissuance
of the Preferred Stock, providing as follows:
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Shares of Preferred Stock issued and reacquired will be retired and canceled
promptly after reacquisition thereof and, upon compliance with the
applicable requirements of Indiana law, have the status of authorized but
unissued shares of preferred stock of the Corporation undesignated as to
series and may with any and all other authorized but unissued shares of
preferred stock of the Corporation be designated or redesignated and issued
or reissued, as the case may be, as part of any series of preferred stock of
the Corporation, except that any issuance or reissuance of shares of
Preferred Stock must be in compliance with [Exhibit A to the Articles].
Exh. 7 at EM0007072. Section 8.1 of the Articles also empowers the Board to designate
series of preferred shares having the voting rights, preferences, and other rights
determined by the Board. Id. at EM 0007050. These provisions clearly authorize the
Board to reissue previously retired Preferred Stock without first receiving two-thirds
approval as long as it is not senior to the Preferred Stock. In connection with the issuance
of the Retention Plan Preferred Stock, the Board designated the shares issued as Preferred
Stock having the voting rights, preferences and other rights of Preferred Stock, and thus,
those shares were Preferred Stock, not a senior class of stock. There is nothing about the
fact that Emmis can direct the votes of those shares that automatically transforms the
Retention Plan Preferred Stock into a senior class of stock.
For the foregoing reasons, we conclude that Plaintiffs have failed to demonstrate a
likelihood of prevailing on the merits with regard to establishing that Defendants’
acquisition of TRS Preferred Stock or reissuance of Retention Plan Preferred Stock
breached Section 7.3 of the Articles.
2.
Indiana Code § 23-1-30-2
19
a.
Stock acquired through TRS transactions9
Plaintiffs argue that Defendants cannot vote the shares of Preferred Stock they
acquired through total return swaps because they are no longer “outstanding” as defined
by Indiana statute. According to Plaintiffs, regardless of the label Defendants put on
those transactions, they were sales in all respects but name, and consequently, the TRS
shares should have been retired. Defendants rejoin that the total return swaps were not
sales. Emmis made no outright purchases of those shares (because the Preferred
Shareholder counterparties retain record ownership), and thus, that the TRS shares remain
outstanding and retain their voting rights. Defendants maintain that they are authorized to
direct the vote of the TRS shares pursuant to the voting agreements executed by the
Preferred Shareholder counterparties as part of the total return swap.
It is undisputed that the transactions Defendants call total return swaps are not
typical TRS transactions.10 However, the label given to the transaction is largely
immaterial for our purposes. The court’s task here is not to determine whether the
transactions in fact fit the mold of what is traditionally called a total return swap, but
rather to determine whether, regardless of the label given to the transaction, the manner in
which Defendants structured the transactions to ensure the shares remain outstanding is
permissible under Indiana law.
9
Because of the interplay between this state claim and Plaintiffs’ federal claim brought
pursuant to Section 14(a) of the Securities Exchange Act, we address both claims in this section.
10
Defendants’ own expert witness testified that it is “an unusual form of a total return
swap.” Tr. Vol. 1 at 248.
20
The Indiana Business Corporation Law (“IBCL”) expressly allows Indiana
corporations to vote and “deal in” their own shares except as otherwise prohibited in the
statute. IND. CODE § 23-1-22-2(6). Indiana Code § 23-1-30-2(a) grants voting rights to
shares that are “outstanding.” Under Indiana law, issued shares remain outstanding “until
they are reacquired, redeemed, converted, or cancelled.” IND. CODE § 23-1-25-3.
Emmis’s Articles provide that, in accordance with Indiana law, shares that are reacquired
by the company “will be retired and canceled promptly after reacquisition.” Exh. 7 at
EM0007072.
Plaintiffs contend that, although the Preferred Shareholder counterparties retain
record ownership, the TRS transactions are nevertheless tantamount to sales because
Emmis acquired everything of value, to wit, both the economic rights and the right to
direct the vote of the shares pursuant to the accompanying voting agreements.11
However, although they clearly effected a substantial transfer of interest, these
transactions were not complete exchanges of the entire bundle of rights of ownership.
Further, they do not reflect the parties’ intention to transfer all ownership rights, as
evidenced by the fact that the counterparties to the transactions retain record ownership of
the shares, which is one traditional indicia of ownership. See Meridian Mortg. Co. v.
Indiana, 395 N.E.2d 433, 439 (Ind. Ct. App. 1979) (discussing general indicia of
11
In materials submitted to the SEC, Emmis concedes that it represented that the total
return swap “arrangement had the same economic and voting effect as a purchase of those
shares.” Exh. 608 at EM0010759. However, this characterization is not controlling here as to
whether Defendants acted in contravention of the applicable provisions of the IBCL in
structuring the transactions in the manner that they did.
21
ownership as including title, possession, and control). As both parties’ experts conceded
at the hearing, while unusual, nothing prohibits two consenting parties from
disaggregating the bundle of ownership rights and tailoring a transaction in such a
manner. Moreover, although we concede that it is difficult to articulate what concrete
value remains with mere record ownership, it is not meaningless under Indiana law. The
IBCL provides that one definition of “shareholder” is “the person in whose name shares
are registered in the records of a corporation.” IND. CODE § 23-1-20-24. Similarly,
Section 2.10 of Emmis’s bylaws state that “[t]he original stock register or transfer book ...
shall be the only evidence as to who are the Shareholders entitled ... to notice of or to vote
at any meeting.” Exh. 626.
Given these facts, we cannot conclude that Plaintiffs are likely to succeed in
establishing that the TRS Stock is not outstanding, at least not within the meaning of the
IBCL, since record ownership remains with the Preferred Shareholder counterparty. Nor
have Plaintiffs shown a likelihood of success in establishing that Emmis cannot lawfully
direct the vote of the TRS Stock via the TRS Voting Agreements. The IBCL expressly
authorizes voting agreements between two or more shareholders providing for “the
manner in which they will vote their shares.” IND. CODE § 23-1-31-2. Moreover, the
only limitation on the general rule that each outstanding share is entitled to vote is
contained in Indiana Code § 23-1-30-2(b), which prohibits a subsidiary from voting the
shares of its parent if the parent owns a majority of the subsidiary’s shares. The Official
Comments make clear, however, that subsection (b) “does not prohibit ... the voting of a
22
corporation’s own shares in other circumstances where the corporation may have the
power to direct the voting, such as shares owned by a limited partnership of which the
corporation is the general partner.” (emphasis added).
In sum, unlike statutes governing corporations in certain other states, the IBCL
expressly permits an Indiana corporation to vote its own shares. The IBCL also affords
the board of directors broad discretion to act in the best interest of the corporation unless
otherwise prohibited by the statute. Although the manner in which Defendants structured
the TRS transactions to retain the voting rights is admittedly unusual, having clearly been
creatively devised to serve the company’s purposes, we are not persuaded that Plaintiffs
are likely to prevail on a claim that the IBCL prohibits their actions.
Plaintiffs contend that, if the TRS transactions are not deemed sales, then
Defendants violated Section 14(a) of the Securities Exchange Act by failing to file a
proxy solicitation statement in connection with their solicitation of irrevocable proxies
from the Preferred Shareholders who participated in the TRS transactions. The purpose
behind the proxy solicitation rules is to ensure that a shareholder who retains an economic
interest in a corporation but is being asked to relinquish his voting rights receives
adequate notice so the shareholder is able to make an informed decision regarding
whether to relinquish those rights. However, there is an exception set forth in Rule 14a-2
to the general rule, which provides that disclosures required in accordance with proxy
solicitations are not required for “[a]ny solicitation by a person in respect of securities of
which he is the beneficial owner.” 17 C.F.R. § 240.14(a)-2(a)(2). In such cases,
23
disclosures are not required because the voting rights follow the economics of the stock.
Similarly, with regard to the TRS transactions, Emmis acquired both the economic rights
as well as the voting rights of the stock. Accordingly, we hold that Plaintiffs are unlikely
to succeed on their claim that Defendants violated Section 14(a) by failing to file a proxy
solicitation statement under these circumstances.
b.
Stock reissued to Retention Plan Trust
Under Indiana Code § 23-1-30-2(c), a corporation is allowed to “vote any shares,
including its own shares, held by it in or for an employee benefit plan or in any other
fiduciary capacity.” Plaintiffs argue that, despite this clear and unconditional allowance
under Indiana law, Defendants should nevertheless be prohibited from voting the 400,000
shares of the Preferred Stock that they reissued to the Retention Plan Trust because the
Trust is a “sham,” created not for the benefit of Emmis employees, but solely to allow
Emmis to strip away the rights of the remaining holders of the Preferred Stock.
The only authority Plaintiffs cite in support of this argument is the Southern
District of Ohio’s decision in NCR Corporation v. AT&T Co., 761 F. Supp. 475 (S.D.
Ohio 1991), in which the court, applying Maryland law, held that an employee stock
ownership plan (“ESOP”) created by NSR was invalid and unenforceable because the
primary purpose of the ESOP was to thwart a competitor’s takeover offer rather than to
provide employees with benefits, and thus, was in violation of Maryland’s “primary
purpose test.” Under Maryland law, the “primary purpose test” is applied to determine
the validity of stock issuances that have the effect of consolidating or perpetuating
24
management control. See Mountain Manor Realty, Inc. v. Buccheri, 461 A.2d 45, 53
(Md. Ct. Spec. App. 1983). Under that test, transactions can be deemed invalid if a court
finds “that the purpose of the transaction was primarily one of management’s selfperpetuation and that that purpose outweighed any other legitimate business purpose.” Id.
It is undisputed that one purpose of Emmis’s creating the Retention Plan Trust and
reissuing to it the 400,000 shares of Preferred Stock was to sufficiently dilute the number
of Preferred Stock shares to enable Defendants to acquire voting control. However,
Plaintiffs are unlikely to be successful in establishing that such a purpose or strategy
renders the employee benefit plan invalid under Indiana law, thereby preventing
Defendants from voting those shares. Plaintiffs have not pointed to, nor are we aware of
any test under Indiana law similar to Maryland’s primary purpose test. To the contrary,
the IBCL expressly repudiates the application of legal decisions from other states that
apply stricter scrutiny on directors’ decisions than that provided for under Indiana’s
business judgment rule, which states in relevant part as follows:
Certain judicial decisions in Delaware and other jurisdictions, which might
otherwise be looked to for guidance in interpreting Indiana corporate law,
including decisions relating to potential change of control transactions that
impose a different or higher degree of scrutiny on actions taken by directors
in response to a proposed acquisition of control of the corporation, are
inconsistent with the proper application of the business judgment rule under
this article.
IND. CODE § 23-1-35-1(f); see also 20 Indiana Practice § 47.11 n.11 (citing NCR as an
example of a case that would be inapplicable under Indiana law).
Indiana law clearly provides that a corporation may vote its own shares if they are
25
held in an employee benefit plan. It imposes no further qualifications on the creation of
such a plan. In the case at bar, the Board exercised its business judgment in deciding to
approve the resolutions establishing the Retention Plan Trust and in allowing Emmis to
direct the vote of the stock placed therein, a decision of which a majority of the
disinterested directors approved. Although Plaintiffs accuse Defendants of nefarious
motives in creating the Retention Plan Trust, the evidence shows that Emmis employees
have been told that the shares placed in the Trust were placed there for their benefit and
will be available for distribution to employees who remain with the company for at least
two years.12 Given these facts, Plaintiffs have failed to establish that they have a
reasonable likelihood of establishing that the Retention Plan Trust is nothing more than
an illegal sham, the creation of which violates Indiana law.
B.
Federal Claims
1.
Tender Offer Disclosures
Plaintiffs contend that Defendants violated Sections 13(e), 14(e), and 10(b) of the
Securities Exchange Act by failing to file a tender offer statement in October or
November 2011 before soliciting Preferred Shareholders to enter into the TRS
transactions.13 Defendants rejoin that the TRS transactions do not constitute a tender
12
The mechanics of distributing these shares to employees are not completely clear.
Without more, we will not speculate regarding those details, concluding only that the evidence
establishes that the Board acted in accordance with the standards of conduct prescribed in the
IBCL when it created the Retention Plan Trust.
13
In their briefing, Plaintiffs cursorily address a claim brought pursuant to Section 20(a).
(continued...)
26
offer, but rather are privately negotiated transactions that did not require disclosure.
The purpose of the Williams Act amendments to the Exchange Act, which added
Sections 13(e) and 14(e), “was to insure that public shareholders facing a tender offer or
the acquisition by a third party of large block of shares possibly involving a contest for
control be armed with adequate information about the qualifications and intentions of the
party making the offer or acquiring the shares.” Indiana Nat. Corp. v. Rich, 712 F.2d
1180, 1183 (7th Cir. 1983) (citations omitted). The Williams Act requires “‘the
disclosure of pertinent information to stockholders when persons seek to obtain control of
a corporation by a cash tender offer or through open market or privately negotiated
purchases of securities.’” Id. (quoting 113 Cong. Rec. 854 (1967)). Neither the Williams
Act nor the SEC’s regulations define “tender offer,” and, as a result, the Seventh Circuit
has recognized that the term “has been frustratingly difficult to encapsulate.” Lerro v.
Quaker Oats Co., 84 F.3d 239, 246 (7th Cir. 1996).
In assessing whether a tender offer occurred, courts have often applied an eightfactor test for determining what constitutes a tender offer set forth in Wellman v.
Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979), aff’d on other grounds, 682 F.2d 355 (2d
Cir. 1982). The eight factors are:
(1) active and widespread solicitation of public shareholders for the shares
13
(...continued
However, because the specifics of that claim were largely undeveloped, both in the briefing and at the
preliminary injunction hearing, we do not address that claim further at this time.
27
of an issuer; (2) solicitation made for a substantial percentage of the issuer’s
stock; (3) offer to purchase made at a premium over the prevailing market
price; (4) terms of the offer are firm rather than negotiable; (5) offer
contingent on the tender of a fixed number of shares, often subject to a
fixed maximum number to be purchased; (6) offer open only a limited
period of time; (7) offeree subjected to pressure to sell his stock ... [and (8)]
whether the public announcements of a purchasing program concerning the
target company precede or accompany rapid accumulation of large amounts
of the target company’s securities.
475 F. Supp. at 823-24 (citing Hoover Co. v. Fuqua Indus., Inc., No. C79-106 2A, 1979
WL 1244, at *4 (N.D. Ohio June 11, 1979)). This list is not “a mandatory ‘litmus test,’”
however, and “in any given case a solicitation may constitute a tender offer even though
some of the eight factors are absent or, when many factors are present, the solicitation
may nevertheless not amount to a tender offer because the missing factors outweigh those
present.” Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 57 (2d Cir. 1985) (citations
omitted). In making this determination, courts also consider whether, “viewing the
transaction in the light of the totality of circumstances, there appears to be a likelihood
that unless the pre-acquisition filing strictures of [the Williams Act] are followed there
will be a substantial risk that solicitees will lack information needed to make a carefully
considered appraisal of the proposal put before them.” Id.
Of the eight factors set forth in Wellman, only the second factor is clearly met
here: Defendants sought to purchase a substantial percentage of the Preferred Stock,
approaching shareholders holding over 70% of the Preferred Stock, and successfully
acquiring 59.9% of the outstanding shares of the Preferred Stock through the TRS
transactions. The other factors are not so clearly satisfied, however. Although
28
Defendants set out to acquire a substantial percentage of the outstanding Preferred Stock,
they approached only ten out of the approximately 300 Preferred Shareholders. We
simply cannot conclude that in approaching such a small number of shareholders Emmis
engaged in active and widespread solicitation. See, e.g., Stromfeld v. Great Atlantic &
Pacific Tea Co., Inc., 484 F. Supp. 1264, 1272-73 (S.D.N.Y. 1980) (purchasing 42% of
the target’s stock from seven shareholders was not active and widespread solicitation). It
is undisputed that the offered price, at approximately $15/share, was not significantly
over the prevailing market price, and thus, the third Wellman factor clearly is not met
here.
The fourth factor, to wit, whether the terms of the deal were firm rather than
negotiable, also does not suffice here as evidence of a tender offer. It is true that, as a
whole, the evidence establishes that the price per share was fairly well set and that
Defendants were firm in their desire to structure the transactions as total return swaps as
opposed to outright purchases. However, the evidence submitted to us shows that the
terms of the offer were, nonetheless, negotiable. For example, as Defendants point out,
the range in the price per share paid to each of the five shareholders who decided to sell
differed slightly, from $15.00 to $15.75, based on individual negotiations. Additionally,
although Defendants made clear their preference to acquire the shares through total return
swaps, they did agree to an outright purchase with one of the five selling Preferred
Shareholders who would not consent to structuring the transaction as a total return swap.
The fifth and sixth factors also are not satisfied here in that Defendants did not
29
make the offers contingent on purchasing any set minimum or maximum number of
shares of the Preferred Stock nor did Defendants impose any specific time limitation on
those offers. It is true, as Plaintiffs point out, that, based on the amount of financing
Defendants had available and the price per share they offered for the Preferred Stock,
Defendants did not have enough money available to them to acquire all outstanding
shares of Preferred Stock at the offered price. Thus, there was a practical limitation on
the number of shares that Defendants were able to buy, and when the financing ran out,
presumably time would be up, but in any event the offers were not made contingent on
any set threshold nor did the funding available actually limited the purchases to a
maximum number of shares as additional funds remained available after Defendants had
completed the deals with the five Preferred Shareholders who chose to liquidate their
stock.
There is insufficient evidence before us from which we can conclude that
Defendants exerted untoward pressure to sell on the Preferred Shareholders whom they
had approached regarding the acquisition of Preferred Stock. The only evidence
regarding this factor is the testimony of John Barrett, a portfolio manager with Corre who
was not one of the ten Preferred Shareholders approached by Defendants, but who
contacted Emmis in November 2011, after learning that Defendants were acquiring shares
from some of the Preferred Shareholders. Mr. Barrett testified that he spoke with Pat
Walsh, Emmis’s Vice-President, COO/CFO, who advised him that Corre should sell its
Preferred Stock because Emmis was trying to acquire two-thirds of the Preferred Stock in
30
order to amend the terms and “if that happened, [Corre] didn’t want to be in the
preferred.” Tr. Vol. 1 at 32. Mr. Barrett further testified that Mr. Walsh had said to him
“you’re in a prisoner’s dilemma” and “you don’t want to be the last guy to act because
there might not be room for [Emmis] to buy your shares.” Id. Mr. Walsh testified that he
does not recall making such statements and that “it would have been so not [his] style,”
especially because he had been advised by counsel that, when contacting shareholders,
Emmis could not engage in coercive tactics. Id. at 93.
Even assuming Mr. Barrett’s account to be true, we are not persuaded that such
statements are sufficient to satisfy the seventh Wellman factor. It is true that investors
likely considered the fact that there was limited available financing in making their
decisions whether to enter into transactions with Defendants. However, in assessing
whether a tender offer occurred, courts consider the level of sophistication of the
investors approached. See, e.g., Astronics Corp. v. Protective Closures Co., Inc., 561 F.
Supp. 329, 336 (W.D.N.Y. 1983) (in assessing the seventh Wellman factor, observing
that the investors were “hardly the uninformed security holder[s], unable to fend for
[themselves], who [need] the protection of the Williams Act”) (citation omitted). Here, it
is clear that the Preferred Shareholders with whom Defendants dealt were indeed
sophisticated investors fully capable of assessing the merits of the deal presented to them.
In fact, a number of the Preferred Shareholders who were contacted – including all of the
Plaintiffs contacted – declined to enter into any sale or other transaction with Defendants
and in some cases even purchased additional shares of Preferred Stock. Nor is there
31
evidence to show that any of the five Preferred Shareholders who did decide to make
deals with Defendants were subjected to pressure in an effort to induce them to tender
their shares.
Finally, with regard to the eighth Wellman factor, it is undisputed that the
transactions were not preceded by a public announcement or accompanied by any other
publicity.
In sum, although Defendants’ solicitations were made for a substantial percentage
of the Preferred Stock, Plaintiffs have failed to show a reasonable likelihood of success in
establishing that any of the other indicia of a tender offer arise here. Because the “sole
purpose of the Williams Act [is] the protection of investors who are confronted with a
tender offer,” Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 35 (1977), Plaintiffs have
failed to establish a reasonable likelihood of success on their claim that Defendants were
required to have filed a tender offer statement before undertaking negotiations with
Preferred Shareholders in October and November 2011.
2.
Statements in Schedule TO-I and Form 8-K Filings in December
2011 and January 2012
a.
Plan to Amend Preferred Shareholders’ Rights
On December 1, 2011, Defendants filed a tender offer statement on Schedule TO-I
for the modified Dutch auction tender offer. In that filing, Emmis stated in relevant part
as follows:
Although our Board of Directors has not made any determinations with
respect to making amendments to the terms of the Preferred Shares, if we
32
are able to obtain the ability to direct the vote of at least 66 2/3% of the
issued and outstanding Preferred Shares following the completion of the
[Dutch auction tender offer], we may elect to, among other things, amend
various provisions applicable to the Preferred Shares, including but not
limited to [removing or reducing the liquidation preference, removing the
right to have shares repurchased after a going-private transaction, and
removing the company’s obligation to pay accrued dividends].
Exh. 609 at xii-xiii (emphasis added). This statement remained unaltered in the
amendments to the December 1 tender offer statement that Defendants filed on December
2, 12, and 14, 2011, and January 3 and 5, 2012, and was repeated in Defendants’ January
30, 2012 Form 8-K filing.
Plaintiffs argue that it was false and misleading for Defendants to have represented
merely that they “may elect” to amend the rights of the Preferred Shareholders, rather
than acknowledging that it was in fact their “intent” to amend the Preferred Shareholders’
rights, if they obtained voting control, and thus, Defendants violated Sections 13(e),
14(e), and 10(b). The evidence adduced at the hearing does not support Plaintiffs’ theory,
however. At most, the evidence shows that, by December 1, 2011, Emmis’s senior
management intended to amend the terms of the Preferred Stock, if the company
succeeded in acquiring the requisite two-thirds of the vote. But, it was not clear at the
time the tender offer and subsequent amendments were filed whether the Board, which
would have to authorize any such plan, shared that intention, so the representation that the
Board “may elect” appears to have been accurate.
The cases cited by Plaintiffs in support of their contention that intentions must be
disclosed are inapposite. See Champion Parts Rebuilders, Inc. v. Cormier Corp., 661 F.
33
Supp. 825, 850-51 (N.D. Ill. 1987) (holding that defendants were required to disclose
their “plans and intentions” despite their “then-present inability to accomplish those
plans”); E.ON AG v. Acciona, S.A., 2007 WL 316874, at *11 (S.D.N.Y. Feb. 5, 2007)
(holding that shareholder’s claim that it did not know if business combination would be
achieved “did not relieve it of its duty to disclose that its goal in making its investment
was to achieve the combination”). These cases both dealt with private groups of
shareholders who were not governed by a board of directors. In such circumstances, there
is good reason to require those individuals to disclose their intentions because, once their
intentions are established, no further authorization is required before they can be
implemented. Emmis, on the other hand, could act only with authorization from its
Board.
Here, the evidence discloses that the Board had discussed the possibility of
amending the terms of the Preferred Stock at the time Defendants’ tender offer was filed
on December 1, 2011 and the amendments were filed in January 2012. As of these dates,
the Board had not indicated whether it intended to authorize such a plan, even assuming
voting control was successfully acquired. Further, the Board is not comprised solely of
Emmis’s senior management such that their intention could be directly imputed to the
Board. It is undisputed that the Board did not authorize the plan to amend until March 8,
2012, at which point they made a timely disclosure. It is telling that even when it
authorized the plan, the Board did not authorize amendment of all the provisions
Defendants had previously disclosed that they “may amend.” Thus, Plaintiffs have fallen
34
short in their attempt to show that they have a likelihood of success in establishing that it
was a misrepresentation for Defendants to have disclosed in the Schedule TO-I and Form
8-K filings submitted before March 2012 only that they “may elect” to make amendments
to the Preferred Stock.
b.
Deals with ESPN and Grupo Radio Centro
Plaintiffs also contend that Defendants’ December 2011 and January 2012
Schedule TO-I filings violated Sections 13(e), 14(e), and 10(b), by falsely representing
that:
[W]e currently have no plans, proposals or negotiations that relate to or
would result in ... any purchase, sale or transfer of an amount of our assets
or any of our subsidiaries’ assets which is material to us and our
subsidiaries, taken as a whole; any material change in our present dividend
rate or policy, our indebtedness or capitalization; ... [or] any material
change in our corporate structure or business.
Exh. 609 at 8. This statement was included in Defendants’ December 1, 2011 Schedule
TO-I filing and was not amended in any of Defendants’ subsequent Schedule TO-I filings
made on December 2, 12, and 14, 2011, and January 3 and 5, 2012. Plaintiffs contend
that, contrary to the representations made in this statement, Defendants were at the time
negotiating with Grupo Radio Centro, S.A.B. de CV (“Radio Centro”) and Disney/ESPN
for significant deals worth $85 million and $96 million, respectively. Although the Radio
Centro deal did not close until April 12, 2012, and the Disney/ESPN deal was not
finalized until April 26, 2012, well after Defendants’ December 2011 and January 2012
SEC filings, Plaintiffs argue that because negotiations were occurring at the time these
35
filings were made, Defendants had an obligation to disclose them.
We view the evidence in a slightly different light. The negotiations that resulted in
the sale of an Emmis radio station to Disney/ESPN – that is, the negotiations that
Plaintiffs contend should have been disclosed – did not even commence until “[l]ate
February, early March” of 2012 (Enright Dep. at 33), well after the Schedule TO-I filing
and amendments were filed and the tender offer had closed. There is evidence that
Emmis and Disney/ESPN did engage in prior negotiations, but those talks related to a
possible purchase by Emmis of a different radio station, a deal that never materialized. In
arguing this theory, Plaintiffs appear to be conflating the negotiations relating to two
separate transactions. Plaintiffs do not contend – nor do we find – that the earlier
negotiations required disclosure.
Turning to the negotiations with Radio Centro, the evidence shows that, in July
and August 2011, Mr. Smulyan exchanged emails with Carlos Aguirre from Radio Centro
addressing the possibility of accelerating a put/call agreement that had been negotiated in
2009 between Emmis and Radio Centro; additional emails followed in December 2011 in
an attempt to schedule negotiations to discuss that possibility.14 However, our review of
these emails as well as Mr. Smulyan’s testimony convinces us that they represented
nothing more than initial feelers by him sent in an effort to determine whether Mr.
14
The evidence establishes that contacts between Emmis and Radio Centro between
August and December were slowed in large part due to Aguirre’s (Emmis’s main contact with
Radio Centro) having undergone heart surgery in September 2011.
36
Aguirre had any interest in engaging in such negotiations. Clearly, the statements made
were neither specific nor concrete nor sufficiently definitive and settled so as to make
Defendants’ December 1 tender offer and subsequent TO-I filings false or misleading.
Based on the evidence before us, it is clear that no negotiations between Emmis
and Radio Centro occurred before January 18, 2012, when Messrs. Smulyan, Walsh, and
Momtazee traveled to Mexico to meet with Carlos Aguirre and his brother and partner,
Francisco Aguirre. At that meeting, a price was agreed upon should Radio Centro decide
to modify the 2009 put/call agreement; the company did eventually agree to that
modification in April 2012, after further negotiations on the full array of matters relating
to the deal. Thus, as with the Disney/ESPN negotiations, it is clear, at least at this point,
that initial negotiations with Radio Centro did not occur until well after the tender offer
had closed.
For these reasons, we conclude that Plaintiffs have failed to show that they are
likely to succeed in establishing that the statements contained in Defendant’s December
2011 and January 2012 Schedule TO-I filing and amendments regarding the lack of any
then-pending plans, proposals, or negotiations were false or misrepresentations. Plaintiffs
also are unlikely to be able to prove that any discussions that occurred between Emmis
and Disney/ESPN or Radio Centro before the Schedule TO-I and amendments were filed
were sufficiently advanced to have triggered a duty to disclose at the time those filings
were made.
37
3.
Statement in January 30, 2012 Form 8-K Filing
We further conclude that Plaintiffs are unlikely to succeed on their claim that
Defendants made false and misleading statements in Emmis’s January 30, 2012 Form 8-K
regarding the issuance of Preferred Stock to a “third party.” In that filing, Defendants
stated that Emmis intended to “issue shares of Preferred Stock to a third party or third
parties who may agree to vote their shares in accordance with the prior written
instructions of Emmis.” Emmis also disclosed that, if it issued 390,304 shares under such
third party voting arrangements, it would secure voting control over two-thirds of the
Preferred Stock. Plaintiffs claim that these statements were a misrepresentation because
Emmis ultimately did not issue Preferred Stock to an unrelated third party, but instead
issued 400,000 shares of Preferred Stock to the Retention Plan Trust.
We regard this argument by Plaintiffs to be a nonstarter. First, we note that the
Form 8-K filed by Defendants did not specify that the third party would be an “unrelated”
entity. Even so, the evidence establishes that, prior to February 12, 2012, Emmis was
indeed negotiating with two unrelated third parties15 about entering into such a deal, but
those negotiations ultimately fell through. Thus, we find no evidence to support the
conclusion that, at the time the January 30, 2012 Form 8-K was filed, Defendants’
statement was false or misleading. Nor have Plaintiffs succeeded in establishing that
15
During both January and February 2012, Emmis attempted to consummate separate
deals, first with Zell and then with Canyon, to acquire 400,000 shares of the Preferred Stock and
agree to vote the shares as directed by Emmis.
38
Emmis had an obligation to file an amended Form 8-K, due at least in part to the fact that
the filing itself included a disclaimer informing investors that: “Emmis does not
undertake any obligation to publicly update or revise any forward-looking statements
because of new information, future events or otherwise.” Exh. 611 at 3.
Moreover, it is clear that the information that was material to an investor in the
market was not whether the Preferred Stock would go to a third party, but that the stock
was expected to be issued to an entity who would vote as Emmis instructed, and that
material information was fully disclosed in the January 30, 2012 Form 8-K. For these
reasons, we hold that Plaintiffs are unlikely to succeed in establishing that Defendants’
statement regarding issuance of Preferred Stock to a third party was false or a
misrepresentation.
4.
Schedule 13E – Going Private Transaction
Rule 13e-3 requires stock issuers who take steps to effect a “going private”
transaction to disclose information relating to that transaction by filing a Schedule 13E-3
before the first purchase of securities or solicitation of a vote in furtherance of such
transaction. See 17 C.F.R. § 240.13e-3. A “going private” transaction is a transaction or
series of transactions involving the purchase of, tender for, or solicitation of proxies
which has “either a reasonable likelihood or a purpose of producing, either directly or
indirectly”: (1) any class of the issuer’s securities to become eligible for termination of
registration; or (2) any class of the issuer’s securities which is listed on a national
securities exchange to be de-listed from the national securities exchange. Id. § 240.13e39
3(a)(3)(ii).
Plaintiffs allege that Defendants violated Section 13(e) of the Securities Exchange
Act by failing to file a Schedule 13E-3 “going-private” disclosure with the SEC before
they began acquiring Preferred Stock. Plaintiffs contend that Defendants’ acquisition of
Preferred Stock was part of a series of transactions designed eventually to take Emmis
private, and thus, Emmis had a duty to disclose before embarking on those transactions.
Although Plaintiffs contend that Mr. Smulyan intends to take the company private once
the terms of the Preferred Stock are amended, Mr. Smulyan in the clearest of terms
testified under oath, both in his deposition and in his hearing testimony, that he has no
such intentions. Tr. Vol. 1 at 196; Smulyan Dep. at 50-51. Relying on this unequivocal
declaration, we conclude that Plaintiffs have failed to establish that they are likely to be
able to prove that Defendants acquired the Preferred Stock with the purpose of effecting a
going-private transaction. Such a conclusion at this point would have to be based on
mere suspicion and speculation.
The only other evidence Plaintiffs put forth in support of this argument is their
reference to Defendants’ May 21, 2012 revised Preliminary Proxy Statement on the
proposed amendments to the terms of the Preferred Stock, which states in relevant part
that “following the effectiveness of the Proposed Amendments ... the likelihood of
success of going private transactions will increase as there will be fewer requirements to
be satisfied with respect to the Preferred Stock in connection with a going private
transaction.” Ex. 616 at 17. Clearly, the fact that, after passage of the amendments, the
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likelihood of success of any subsequently attempted going private transaction would be
increased does not necessarily show that the transactions Defendants engaged in to make
the amendments possible were reasonably likely to produce or were intended to result in a
going-private transaction. We find no support in the evidence for the conclusion that
Defendants’ acquisition of Preferred Stock was intended to or likely to result in either
eligibility for termination of registration or de-listing from a national securities exchange.
5.
Section 13(d) – Beneficial Owner
Section 13(d) and the rules and regulations promulgated thereunder require “[a]ny
person” who is the “beneficial owner of more than 5 per centum” of a class of an equity
security to, within ten days, either file a statement on a Schedule 13D or amend an
existing Schedule 13D. However, this requirement does not apply to “any acquisition of
an equity security by the issuer of such security.” 15 U.S.C. § 78m(d)(6)(C).
Here, Plaintiffs claim that Defendants Smulyan and Enright were required to file
Schedule 13D disclosures in connection with the TRS transactions because they
personally became “beneficial owners” of the TRS stock. Defendants rejoin that neither
Mr. Smulyan nor Mr. Enright was required to file a Schedule 13D because the TRS
transactions on which Plaintiffs base their claim were between the various shareholders
and Emmis, thereby making Emmis the beneficial owner, not Smulyan or Enright. Thus,
according to Defendants, because Emmis is the issuer of the stock, no Schedule 13D was
required to be filed.
Rule 13d-3 provides in relevant part:
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(a) For the purposes of sections 13(d) and 13(g) of the Act a beneficial
owner of a security includes any person who, directly or indirectly, through
any contract, arrangement, understanding, relationship, or otherwise has or
shares:
(1) Voting power which includes the power to vote, or to direct the
voting of, such security, and/or,
(2) Investment power which includes the power to dispose, or to
direct the disposition of, such security.
(b) Any person who, directly or indirectly, creates or uses a trust, proxy,
power of attorney, pooling arrangement or any other contract, arrangement,
or device with the purpose [or] effect of divesting such person of beneficial
ownership of a security or preventing the vesting of such beneficial
ownership as part of a plan or scheme to evade the reporting requirements
of section 13(d) or (g) of the Act shall be deemed for purposes of such
sections to be the beneficial owner of such security.
17 C.F.R. § 240.13d-3. At the adoption of Rule 13d-3, the SEC stated that the
determination of beneficial ownership under the section requires:
[a]n analysis of all relevant facts and circumstances in a particular situation
is essential in order to identify each person possessing the requisite voting
power or investment power. For example, for purposes of the rule, the mere
possession of the legal right to vote securities under applicable state or other
law ... may not be determinative of who is a beneficial owner of such
securities inasmuch as another person or persons may have the power,
whether legal, economic, or otherwise to direct such voting.
Adoption of Beneficial Ownership Disclosure Requirements, Exchange Act Release Nos.
33–5808, 34–13291, 42 Fed.Reg. 12,342, 12,344 (Mar. 3, 1977).
Courts have recognized that the definition of “beneficial owner” under § 13 is
“quite broad,” (e.g., Egghead.Com, Inc. v. Brookhaven Capital Management Co., 340
F.3d 79, 83 (2d Cir. 2003)), which is consistent with § 13’s purpose of “alert[ing] the
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marketplace to every large, rapid aggregation or accumulation of securities, regardless of
technique employed, which might represent a potential shift in corporate control.”
Morales v. Quintel Entertainment, Inc., 249 F.3d 115, 122-23 (2d Cir. 2001) (citation
omitted).
In support of their contention that Messrs. Smulyan and Enright are beneficial
owners under § 13, Plaintiffs cite the fact that the selling Preferred Stockholders in the
TRS arrangements provided to Mr. Enright an irrevocable proxy and power-of-attorney to
vote their Preferred Stock, and thus, that he has the ability to direct the vote. Plaintiffs
also point to the deposition testimony of Mr. Smulyan, who, when asked who would
determine whether Emmis’s votes would be cast for or against the amendments, replied “I
would be the ultimate decision maker, I would guess, I guess. I’m not sure.” Smulyan
Dep. at 97.
Based on such evidence, we are not persuaded that Plaintiffs are likely to be able
to establish that either Mr. Enright or Mr. Smulyan had a duty to file Schedule 13D
disclosures in connection with the TRS transactions. Although the Preferred
Shareholders who participated in the TRS transactions provided Mr. Enright with an
irrevocable proxy to vote their shares, he would be acting only in his official capacity as
Secretary of Emmis, not in his individual capacity. Plaintiffs have failed to cite, nor are
we aware of a case in which a director or officer of an issuer was deemed to be a
beneficial owner of shares, when the shares were beneficially owned by the issuer and the
director or officer acted solely in his official capacity. Instead, Plaintiffs cite cases with
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facts that are not analogous to ours and address situations in which either the shares were
not purchased by the corporation, and thus, the issuer exception was inapplicable, or,
where the director or officer had personally acquired shares and acted in his individual as
opposed to official capacity. See Bender v. Jordan, 439 F. Supp. 2d 139, 162-63 (D.D.C.
2006) (deeming beneficial owners individual directors who acted in agreement with an
outside investor who purchased shares in the corporation); Podesta v. Calumet Indus. Inc.,
No. 78-C-1005, 1978 WL 1088, at *7, 14-15 (N.D. Ill. May 9, 1978) (holding that
incumbent officers and directors who were personally allocated shares and who formed a
group to fend off a contest for control were beneficial owners and subject to Section
13D’s disclosure requirements).
Nor are we persuaded that Plaintiffs are likely to be able to show that Mr. Smulyan
would be or is a beneficial owner as that term is defined for purposes of Section 13D
disclosures. Although in his deposition, Mr. Smulyan testified that as trustee of the
Retention Plan Trust, he “guess[ed]” he would be the “ultimate decisionmaker” when it
came to directing the vote, both the voting agreements with respect to the TRS
transactions as well as the trust agreement for the Retention Trust provide that the
“trustee” (Smulyan) and the “employee shareholder” (Enright) “shall not take (or refrain
from taking) any action with respect to the Subject Shares other than in accordance with
the prior written instructions of the Company” and that they “shall take (or refrain from
taking) any action with respect to the subject shares in accordance with the prior written
instructions of the Company....” Exh. 5 at EM0032905 (TRS Voting Agreement) and
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Exh. 27 at B2 (Retention Plan Trust Agreement). Given the clear terms of the documents
governing the voting of both the TRS and Retention Plan Trust in authorizing Mr.
Smulyan and Mr. Enright to act only upon the written instructions of Emmis, Plaintiffs
cannot establish that they have a likelihood of success in proving that either Mr. Smulyan
or Mr. Enright possesses the ability to influence or direct the vote in such a way that
requires Section 13D disclosures.16
III.
Irreparable Harm/Inadequate Remedy at Law
Having found that Plaintiffs are unlikely to succeed on the legal merits of their
claim, we turn to the issue of whether Plaintiffs have nonetheless established that, if an
injunction does not issue, they are likely to suffer irreparable harm for which there is no
adequate remedy at law. We conclude that they have failed to make such a showing.
Generally, “[a]n injury compensable in money is not ‘irreparable,’ so an injunction is
unavailable.” Classic Components Supply, Inc. v. Mitsubishi Electronics America, Inc.,
841 F.2d 163, 164-65 (7th Cir. 1988) (citation omitted). In the instant case, we are not
persuaded that, without injunctive relief, Plaintiffs are at risk of suffering any significant
harm for which money damages would not be an adequate remedy.17
16
Plaintiffs also argue that Messrs. Smulyan and Enright are beneficial owners because
they used proxies or other contractual arrangements “as part of a plan or scheme to avoid the
reporting requirements.” 17 C.F.R. § 240.13d-3. However, because Plaintiffs have failed to
adequately develop this argument at this stage in the litigation, we address it no further in this
order.
17
It is true that courts have found that violations of the disclosure requirements can
constitute irreparable harm, e.g., Bender v. Jordan, 439 F. Supp. 2d 139, 176-77 (D.D.C. 2006),
(continued...)
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For example, in the first paragraph of their Amended Complaint, Plaintiffs allege
that, once the proposed amendments become effective, their Preferred Stock will become
“worthless.” Am. Compl. ¶ 1. Our review of the evidence makes clear to us that,
although there are certain aspects of harm at issue that are not purely monetary (e.g., the
loss of entitlement to two directors on the Board following passage of the amendments),
Plaintiffs’ primary, underlying concern is the potential loss of value to their Preferred
Stock they will suffer once the amendments become effective. See Barrett Dep. at 10102; DeFosset Dep. at 35-37; Fight Dep. at 90-91; Hirsch Dep. at 27-28. That obviously is
an economic loss for which Plaintiffs can be made whole with money damages, if they
subsequently prevail on their claims. See In re Guidant Corp. Shareholders Derivative
Litig., No. 1:03-cv-955, 2006 WL 290524, at *15 (S.D. Ind. Feb. 6, 2006) (“[T]he claim
that shareholders will be damaged by receiving less value in terms of the merger
consideration by operation of these challenged provisions is essentially a claim for money
damages and money damages almost always constitute an adequate remedy at law.”).
Plaintiffs argue that, once the amendments become effective, it will be too difficult
to complete an after-the-fact valuation of the Preferred Stock, and thus, money damages
will be inadequate. Although we concede that it is often quite a complicated undertaking
to assess, it is not so difficult or uncommon for courts to engage in conducting such
17
(...continued)
but because Plaintiffs have failed to show a likelihood of success on the merits of any of their
federal disclosure claims, they have failed to establish a risk of irreparable harm stemming from
any lack of required disclosure.
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valuations. In addition, there is no indication that Defendants would be financially unable
to compensate Plaintiffs in money damages, if necessary, based on such a valuation.
Accordingly, we hold that any damage Plaintiffs are likely to suffer in the absence of
injunctive relief is not irreparable and can be adequately compensated for by an award of
monetary damages, should they ultimately prevail after a full assessment of the evidence
pursuant to controlling legal principles.
IV.
Balance of Harms and the Public Interest
For the reasons detailed above, we have found that Plaintiffs have failed to meet
any of the threshold requirements for injunctive relief. We therefore need not address the
balance of harms or public interest factors. Nonetheless, we note that, had Plaintiffs met
the threshold requirements, the balance of harms is, if anything, a toss-up: Defendants
have shown a likelihood that, if an injunction were to issue and the vote be enjoined, both
Emmis’s stock price as well as its efforts to refinance before the November 2012 deadline
could be seriously and adversely affected. As for the public interest, it is served best in
our judgment by allowing the decisions made by this Indiana corporation to stand when,
given the circumstances presented here, they appear to have acted in compliance with
their statutory prerogatives. At this preliminary stage of the litigation, Plaintiffs have
failed to show that Defendants’ actions contravened either the IBCL or the relevant
federal securities disclosure laws.
V.
Conclusion
For the foregoing reasons, we hereby DENY Plaintiffs’ request for injunctive
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relief.
IT IS SO ORDERED.
08/31/2012
Date: ____________________________
_______________________________
SARAH EVANS BARKER, JUDGE
United States District Court
Southern District of Indiana
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Copies to:
David C. Campbell
BINGHAM GREENEBAUM DOLL LLP
dcampbell@bgdlegal.com
Abram B. Gregory
TAFT STETTINIUS & HOLLISTER LLP
agregory@taftlaw.com
Edward Wesley Harris III
TAFT STETTINIUS & HOLLISTER LLP
eharris@taftlaw.com
Richard A. Kempf
TAFT STETTINIUS & HOLLISTER LLP
rkempf@taftlaw.com
Daniel J. Leffell
Paul, Weiss, Rifkind, Wharton & Garrison LLP (NY)
1285 Avenue of the Americas
New York, NY 10019
Michael R. Limrick
BINGHAM GREENEBAUM DOLL LLP
mlimrick@bgdlegal.com
Adam Offenhartz
GIBSON DUNN & CRUTCHER, LLP
aoffenhartz@gibsondunn.com
Gordon L. Pittenger
TAFT STETTINIUS & HOLLISTER LLP
gpittenger@taftlaw.com
Steven C. Shockley
TAFT STETTINIUS & HOLLISTER LLP
sshockley@taftlaw.com
49
James A. Strain
TAFT STETTINIUS & HOLLISTER LLP
strain@taftlaw.com
Wayne C. Turner
BINGHAM GREENEBAUM DOLL LLP
wturner@bgdlegal.com
Aric H. Wu
GIBSON DUNN & CRUTCHER LLP
awu@gibsondunn.com
Patrick Austin Ziepolt
BINGHAM GREENEBAUM DOLL LLP
pziepolt@bgdlegal.com
50
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