Having failed to persuade the board of directors at Emmis Communications to reverse its decision to help fund CEO Jeff Smulyan’s lawsuit against it, Alden Global Capital has now filed its own lawsuit against Emmis, Smulyan and each of the directors. Smulyan had sued Alden for walking away from their joint deal to buy out other shareholders and take Emmis private.
According to the lawsuit that Alden filed Wednesday (2/16) in a New York State court, the directors of Emmis breached their fiduciary duty to shareholders, including Alden, by agreeing to provide funds for Smulyan’s company, JS Acquisition (JSA) to pursue its lawsuit over the abandoned buyout.
“Specifically, the Directors agreed to loan JSA up to $200,000 (the “Loan”) to pursue certain dubious claims against Alden in exchange for a limited portion of any recovery obtained in the lawsuit. It is almost certainly because Smulyan could not obtain traditional funding for this extraordinarily risky venture that he elected to raid the coffers of Emmis – a company that is currently so cash-strapped that it has publicly disclosed that it may not be able to meet its upcoming financial covenants and debt obligations. Indeed, Emmis has confirmed in press releases and public filings that it is actively selling off its assets in order to raise sufficient cash to remain in compliance with its looming financial obligations,” Alden stated in its lawsuit.
“Shockingly, the Directors unanimously approved this extremely wasteful, related-party transaction, which, undoubtedly, inures to the exclusive benefit of Smulyan at the expense of Emmis’s other shareholders. The Directors’ decision to allocate precious cash to fund their CEO’s personal lawsuit constitutes (1) an abdication of fiduciary responsibility; (2) clear violations of the Directors’ fiduciary duties of loyalty and care; and (3) corporate waste. It puts at incredible risk Emmis’s already-sparse capital at a time when Emmis needs to raise cash, not throw it away. Furthermore, the Loan is illegal – it violates Section 402 of the Sarbanes-Oxley Act, which prohibits companies from extending loans to directors and executives, and the Board’s failure to disclose the Loan as additional compensation to Smulyan constitutes an independent violation of the disclosure requirements contained in the 1934 Securities Exchange Act,” the lawsuit charged.
The lawsuit seeks an injunction which would block the transfer of the funds and require JSA to return to Emmis any funds already transferred. Alden claims the New York court has jurisdiction because Emmis owns radio stations there. Emmis and JSA are based in Indiana and the lawsuit against Alden was filed there.
Although it is not at issue in this particular lawsuit, Alden denies that it broke its contractual obligations to fund the Emmis buyout, but rather that it and JSA were simply unable to come to terms with dissident holders of Emmis’s preferred stock. Smulyan has claimed there was a binding deal reached with the preferred holders, but then Alden backed out.
Reached late Wednesday by RBR-TVBR, Smulyan said he had not been served with the lawsuit. However, he said, “We feel really comfortable with our position.”
RBR-TVBR observation: Alden claims to be representing the interests of its fellow shareholders, but we’re pretty sure they would rather have taken Alden’s cash for their stock by completing the buyout last year.