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Behind the News: '80s anti-takeover law helped sow Emmis win in court

Greg Andrews
September 26, 2012
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Emmis Communications Corp.’s tactics as it plotted to strip preferred shareholders of their rights were “admittedly unusual,” Judge Sarah Evans Barker acknowledged in her Aug. 31 ruling that let the company go forward with a shareholder vote a few days later that did just that.

But if a company was going to press the limits of normal business conduct, Indiana was the right place to do it. That’s because the Indiana Business Corporation Law — enacted in the mid-1980s to help Hoosier companies fight off a wave of attacks by corporate raiders — gives boards of directors unusually broad authority to exercise judgment as they see fit.

As Emmis wrote in a court filing defending its conduct, “Plaintiffs’ argument that they are entitled to a different substantive outcome because they dislike the result dictated by unambiguous statutory and contractual language is a plea properly directed to Indiana’s General Assembly, not this court.”

Corre Opportunities Fund and other preferred shareholders had argued Emmis used a succession of illegal, sham transactions to amass two-thirds voting control of preferred shares late last year and early this year.

Reaching that threshold set the stage for the vote, which wiped out $34 million in unpaid dividends. Emmis CEO Jeff Smulyan had pushed for the changes as a way to boost the company’s long-slumping common stock, which surged following the Sept. 4 vote.

Emmis isn’t out of the woods yet, because the plaintiffs still can press for damages in a full trial. However, Barker’s 48-page ruling was replete with language suggesting she doubts plaintiffs can prevail.

To understand why, it’s helpful to take a trip back to December 1985, when Canada’s Belzberg family was threatening an assault on Arvin Industries Inc., then a powerful Columbus-based auto-parts maker.

In response, Arvin CEO James K. Baker called on his old friend Robert Garton, president pro tem of the Indiana Senate, for help. As The Wall Street Journal later recounted, within weeks Garton had steered a tough anti-takeover measure, drafted by Arvin’s own lawyers, through the General Assembly.

One of Arvin’s attorneys who helped craft the legislation was none other than Jim Strain, who, as a partner at Taft Stettinius & Hollister LLP, now represents Emmis. So the company clearly grasped the legal landscape it was navigating when it decided to get tough with preferred shareholders.

Ted Boehm, who served as an expert witness for Emmis in the lawsuit, knows the terrain as well. Boehm, a corporate lawyer before serving as an Indiana Supreme Court justice from 1996 to 2010, also had a hand in drafting the Indiana Business Corporation Law.

At the time, he said in his deposition for the Emmis suit, “there was considerable concern that the phenomenon of hostile business takeovers that was prevalent was resulting in a severe depletion of locally based businesses in our state.”

The concern was so great, he said, that lawmakers wanted “to make Indiana as hospitable as it could to boards of directors’ governance of the company, and to make it as easy as possible for the board to accomplish what it determined to be in the best interests of the corporation.”

So, asked David Campbell, an attorney with Bingham Greenebaum Doll LLP representing preferred shareholders, “If the board of directors made a decision that it’s in the best interests of the corporation to entrench management and allow management to take over economic control of the company at the expense of preferred shareholders, that’s fine?”

Boehm’s response: “Well, you put it in terms that are slightly pejorative, but ultimately I’d say the answer is essentially yes.”

Trustee, counsel keep jobs

Federal bankruptcy Judge Basil Lorch has refused to remove the high-profile legal team that’s untangling the massive Eastern Livestock Co. fraud.

Indianapolis Business Journal reported Aug. 27 that some parties in the case were seeking the ouster of bankruptcy Trustee Jim Knauer and his legal counsel — Faegre Baker Daniels LLP — over their failure to disclose a potential conflict of interest at the outset of the 21-month-old case.

At issue was whether they should have disclosed their representation of San Francisco-based Wells Fargo, which was a so-called participant in Fifth Third Bank’s loan to Eastern Livestock.

Faegre Baker Daniels and Knauer, a partner with Kroger Gardis & Regas LLP, argued disclosure was not necessary because loan participants don’t count as creditors and have no legal rights in bankruptcy cases.

Lorch, in an Aug. 31 ruling, concluded removal was unwarranted and would delay efforts to recover money for creditors by many months. But in his order rejecting Faegre Baker Daniels’ dismissal, he wrote that the brouhaha served as a lesson “on the wisdom of a forthcoming and openhanded approach to disclosures that goes beyond the minimum required by the law.”•
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Originally published in the Sept. 10, 2012, Indianapolis Business Journal.

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  1. Hail to our Constitutional Law Expert in the Executive Office! “What you’re not paying attention to is the fact that I just took an action to change the law,” Obama said.

  2. What is this, the Ind Supreme Court thinking that there is a separation of powers and limited enumerated powers as delegated by a dusty old document? Such eighteen century thinking, so rare and unwanted by the elites in this modern age. Dictate to us, dictate over us, the massess are chanting! George Soros agrees. Time to change with times Ind Supreme Court, says all President Snows. Rule by executive decree is the new black.

  3. I made the same argument before a commission of the Indiana Supreme Court and then to the fedeal district and federal appellate courts. Fell flat. So very glad to read that some judges still beleive that evidentiary foundations matter.

  4. KUDOS to the Indiana Supreme Court for realizing that some bureacracies need to go to the stake. Recall what RWR said: "No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!" NOW ... what next to this rare and inspiring chopping block? Well, the Commission on Gender and Race (but not religion!?!) is way overdue. And some other Board's could be cut with a positive for State and the reputation of the Indiana judiciary.

  5. During a visit where an informant with police wears audio and video, does the video necessary have to show hand to hand transaction of money and narcotics?

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