Alden Global Capital is complaining of the action by Emmis Communications to provide funding to sue Alden over its abandoned deal to take Emmis private. Alden charges that the company funding amounts to an illegal loan to CEO Jeff Smulyan and is demanding that the board of directors rescind its action.
Alden continues to hold a large interest in Emmis by virtue of its 1,162,737 shares of 6.25% series A preferred stock. It is none too pleased that the company’s money is being used to sue it. Alden’s legal counsel sent a letter February 3rd to the Emmis board of directors demanding that the board rescind what Alden claims is an “illegal and prohibited loan transaction” to Smulyan’s JS Acquisition LLC, which was formerly Alden’s partner until the latter walked away from the transaction to buy out all other shareholders and take Emmis private.
An Emmis spokesperson sent this brief comment to RBR-TVBR: “Today we received the Alden letter and forwarded it to Emmis’ Board of Directors. The issue raised in the letter was well-vetted by the Board with input from Counsel when the decision was made. We’re confident with the Board’s position on the issue, and have equal confidence in the outcome.”
Here is the letter that Alden’s attorney sent to the Emmis board on Thursday:
February 3, 2011
Emmis Communications Corporation
One Emmis Plaza
40 Monument Circle, Suite 700
Indianapolis, Indiana 46204
VIA FEDERAL EXPRESS
Attention: Board of Directors of Emmis Communications Corporation
Demand To Terminate and Rescind Illegal and Prohibited Loan Transaction
To the Board of Directors of Emmis Communications Corporation (“Emmis”)
(Distribution list attached):
We represent Alden Global Distressed Opportunities Master Fund, L.P. (“Alden”), which owns Class A Common Stock and other securities issued by Emmis. From your 8-K filed on December 27, 2010, Alden learned that the Board of Directors (the “Board”), during a time at which Emmis is experiencing extreme financial distress, unanimously determined to loan $200,000 (the “Loan”) to a company owned and controlled by Emmis’ founder, CEO and Chairman, Jeff Smulyan, in order to fund litigation for Mr. Smulyan’s benefit. Alden strongly objects to your decision to place valuable corporate assets at risk in order to fund spurious claims through Mr. Smulyan’s personal litigation vehicle, JS Acquisition, LLC.
Despite the Board’s characterization of the Loan in the Company’s December 27 8-K as an “investment,” the Loan was obviously structured in a thinly veiled effort to disguise an illegal personal loan to Mr. Smulyan in violation of Section 402 of the Sarbanes-Oxley Act. No court will be persuaded by your attempt to evade Section 402 simply by calling the Board’s extension of credit to Mr. Smulyan an “investment” rather than a loan nor by your funneling of the Loan through Mr. Smulyan’s wholly-owned company, JS Acquisition. The Loan clearly violates both the letter of Section 402 and the fundamental policy underlying its enactment – preventing executives of public corporations from exploiting their control relationships with the board of directors and the company in order to make the company into the lender of last resort for its executives.
Moreover, the Loan to JS Acquisition clearly stands as evidence of the Board’s violation of its disclosure obligations under the Securities Act of 1934. All funds advanced to Mr. Smulyan’s company under the Loan are plainly “compensation” that must be disclosed. We searched Emmis’ public disclosures in vain for rationale justifying handing Mr. Smulyan a hidden bonus for use in pursuing dubious claims against one of Emmis’ most significant shareholders.
Additionally, the Loan violates the Board’s fiduciary duties of loyalty and care by sanctioning Mr. Smulyan’s self-dealing. As we are certain you have been advised, the Board members lose the shield of the business judgment rule when they endorse a transaction with fellow Board member(s) that the Board cannot prove is entirely fair, both as to process and substance. To be blunt, if this is such a good and fair “investment,” why didn’t some savvy investor, including one of the prolific companies who exist to professionally evaluate and fund litigation, step forward to make the “investment”? The answer to this question points squarely to a “sweetheart” deal that Mr. Smulyan could secure only from a Board he controls. The self-dealing is blatant and unconscionable.
The Loan to Mr. Smulyan’s company is a grossly inappropriate use of Emmis’ corporate funds, constitutes a self-dealing transaction that puts Emmis’ precious capital at incredible risk, cannot meet any measure of fairness to Emmis or its shareholders, violates the fiduciary duties of loyalty and care owed by each member of the Board and is illegal under applicable federal and state laws. The already improper Loan is made more egregious considering the recent reports that Emmis believes “it is unlikely it will be able to maintain compliance with [its] financial covenants after September 1, 2011,” and that the Company cannot ensure that it will have sufficient cash on hand after the end of February. Given the apparently dire financial situation Emmis faces, the Board’s decision to loan an insider a portion of the Company’s remaining cash, which at the very best will not be recovered until the end of protracted litigation, has subjected the Company to imminent injury beyond just the loss of the illegally loaned funds.
Accordingly, we hereby demand, on behalf of Emmis and its shareholders, that the Board immediately take any and all necessary steps to (i) rescind and revoke the Loan; (ii) recover any proceeds of the Loan that may have been distributed to JS Acquisition; (iii) require that Mr. Smulyan and any member of the Board who voted in favor of the Loan immediately reimburse Emmis for all attorneys’ fees and costs incurred in pursuing, implementing, announcing and rescinding the self-interested Loan, including the repayment of all Board fees paid for meetings associated with the Loan transaction and its rescission; and (iv) make all public disclosures that may be necessary in connection with the rescission and termination. This is a formal demand on behalf of Emmis and its shareholders for immediate action, absent which, it is clear that Emmis faces an impending, immediate and real prospect for suffering irreparable harm for which there will be no adequate remedy at law. If the Loan is not rescinded by close of business February 11, 2011, Alden will pursue all available legal remedies, including, without limitation, filing suit on behalf of Emmis for temporary and permanent injunctive relief, recovery of the Loan proceeds and damages, declaratory relief, attorneys’ fees, costs, and expenses.
We look forward to the Board’s immediate action and response.
Very truly yours,
Michael A. Swartzendruber
RBR-TVBR observation: We can predict the board’s response, which would basically be the title of Cee-Lo Green’s hit song, but written in lawyerly prose.