## Facts

- Emmis Communications Corporation (Emmis) issued Series A 6.25% cumulative convertible preferred stock with class protections, including: restrictions triggered by unpaid preferred dividends, the right of preferred holders to elect directors upon arrearages, and a requirement that two-thirds of the outstanding preferred approve amendments that would adversely affect preferred rights.
- In October 2008, Emmis stopped paying dividends on the preferred stock, creating dividend arrearages and activating contractual and governance constraints tied to nonpayment.
- Emmis later pursued transactions and financing flexibility that required modifying preferred-holder protections, but a prior effort failed to obtain the necessary two-thirds preferred approval.
- Emmis adopted a strategy to obtain voting control of the preferred class without acquiring full economic exposure by entering total return swaps (TRSs) with large preferred stockholders.
- Under the TRSs, the counterparties retained record ownership of the preferred stock (and thus voting rights) while shifting the economic return to Emmis; the counterparties also entered voting agreements giving Emmis the ability to direct how the shares would be voted.
- Through TRSs and voting agreements, Emmis gained control of 56.8% of the preferred vote.
- Emmis then repurchased preferred shares through more conventional buybacks, reducing the number of outstanding shares and increasing Emmis’s voting control to 60.6%.
- Emmis created an employee-benefit-plan trust and caused 400,000 new preferred shares to be issued to the trust, with the shares to be voted as directed by Emmis’s board. This pushed Emmis’s voting control above the two-thirds threshold needed to approve amendments affecting preferred rights.
- After achieving more than two-thirds control, Emmis’s board proposed amendments to the articles of incorporation that would remove or severely restrict preferred-holder rights, including rights relating to dividends, board representation, and redemption/repurchase features.
- Corre Opportunities Fund, L.P., and other preferred holders whose shares were not subject to Emmis’s voting-control arrangements sued in federal district court and sought a preliminary injunction to stop the shareholder vote on the proposed amendments, asserting federal securities-law violations (along with state-law theories).

## Issues

1. Whether Emmis’s TRSs, voting agreements, repurchases, and issuance of preferred shares to a board-directed trust constituted a deceptive or manipulative practice actionable under federal securities law (including Exchange Act § 10(b) and Rule 10b-5) in connection with the proposed charter amendments and vote.
2. Whether Emmis’s disclosures in connection with the recapitalization plan and shareholder vote were materially misleading under the federal securities provisions invoked by plaintiffs.
3. Whether plaintiffs satisfied the requirements for a preliminary injunction—especially likelihood of success on the merits of the federal claims and irreparable harm—so as to justify enjoining the vote.

## Decision

- The court denied the preferred stockholders’ motion for a preliminary injunction.
- The court ruled that plaintiffs had not shown a sufficient likelihood of success on their federal securities-law theories challenging Emmis’s vote-control strategy.
- The court concluded that, on the record presented, the alleged wrongs were primarily matters of corporate voting and fiduciary obligations typically addressed under state corporate law rather than federal antifraud provisions.

## Legal Principles

- A claim under Exchange Act § 10(b) and Rule 10b-5 requires deceptive or manipulative conduct (such as a material misstatement or omission) in connection with the purchase or sale of securities; aggressive corporate tactics are not enough without deception of the type targeted by the federal antifraud rules.
- “Manipulation” under federal securities law generally concerns conduct that deceives investors or distorts the market through artifices, not merely the separation of voting power from economic exposure through disclosed derivatives and contractual voting arrangements.
- Federal disclosure liability turns on whether challenged statements or omissions were materially misleading in context; plaintiffs must identify specific disclosure defects and show materiality.
- Preliminary injunctive relief is an extraordinary remedy; a weak showing on the merits of the federal claims and the availability of other remedies weigh strongly against stopping a shareholder vote.

## Conclusion

In this preliminary-injunction decision, the district court refused to halt Emmis’s vote on charter amendments that would cut back preferred-holder protections, holding that plaintiffs had not demonstrated a likelihood of success on their federal securities-law claims attacking Emmis’s use of TRSs, voting agreements, repurchases, and a board-directed trust to obtain a two-thirds preferred voting bloc, leaving the core dispute largely to state corporate law.


Corre Opportunities Fund, LP v. Emmis Communications Corporation, 892 F. Supp. 2d 1076 (2012)