Judge Sarah Evans Barker of the United States District Court, Southern District of Indiana, has ruled in favor of Emmis Communications in a suit filed by dissident preferred shareholders.
“We were confident in our position, and the federal court has confirmed it,” said Jeff Smulyan, President and CEO of Emmis Communications. The ongoing dispute in Federal Court had targeted Emmis, its directors, CEO Jeff Smulyan and other executives over plans to strip the preferred stock of its dividend payments.
They’re were also sued by Emmis in an Indiana state court, where the company seeked a declaratory ruling that it is legal under Indiana securities law for Emmis to exercise the voting rights of preferred shares not quite retired in full value swaps and of 400,000 new preferred shares allocated to an employee bonus program. In 2012, an injunction against Emmis by the shareholder group was turned down in court.
Here is a copy of the judge’s ruling. Get your reading glasses, because this is a long one:
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
CORRE OPPORTUNITIES FUND, LP,
et al.
Plaintiffs,
vs.
EMMIS COMMUNICATIONS
CORPORATION,
Defendant.
No. 1:12-cv-00491-SEB-TAB
ORDER ON PENDING DISPOSITIVE MOTIONS
This cause is now before the Court on Defendant’s Motion for Judgment on the Pleadings on Count VIII [Docket No. 98], filed on November 21, 2012; Defendant’s Motion for Partial Summary Judgment [Docket No. 118], filed on March 15, 2013; and Plaintiffs’ Motion for Partial Summary Judgment on Counts IV and VII [Docket No. 111], filed on March 8, 2013. For the reasons detailed in this entry, we GRANT Defendant’s Motions and DENY Plaintiffs’ Motion.
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. 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 set 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) 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.
Attempts to Take Emmis Private
In 2006, Emmis President and 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 certain 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 any dividends since.
The current amount of accrued unpaid dividends is $12.12 per share.
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 dividends (which would have eliminated any potential profit from the go-private transaction) and requested that they instead 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. That pullout eventually led to litigation between Alden and Emmis.
Emmis’s Proposal to Acquire Preferred Stock Using Total Return Swaps
In June 2011, Emmis entered into an agreement to sell some of its radio stations (“the Merlin Transaction”), which closed on September 1, 2011, resulting in $120 million. 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.
Not long before the Merlin Transaction closed, 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 47-48; Walsh Dep. at 56-58. According to Emmis, the benefits to its capital structure of repurchasing its Preferred Stock at the then-prevailing market rate were obvious.
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. The Merlin Transaction gave Emmis access to funds to repurchase the Preferred Stock and reduce the “overhang” on its Common Stock.
In September 2011, after the Merlin Transaction closed, Emmis’s senior management negotiated with Zell Credit Opportunities Master Fund, LLC (“Zell”) for financing that would enable Emmis to repurchase the Preferred Stock. At approximately that same time, in September and early October 2011, Emmis began approaching its ten largest Preferred Shareholders (as determined by a Nasdaq listing) to determine whether there was interest in selling. In mid-October, after a sufficient number of the approached Emmis’s senior management and presented the proposal to repurchase Preferred Stock using the Zell Financing at the Board of Director’s (“the Board”) 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 advisors, John Momtazee and Carlos Jiminez of Moelis & Company along with outside legal counsel advised the Board regarding the proposal.
Besides acquiring the Preferred Stock, another goal of the purchase proposal was to preserve the voting rights of the Preferred Stock it acquired. Under Indiana law, any shares of Preferred Stock that Emmis acquired through outright purchases would have to be retired and could not be voted. Thus, the Preferred Stock repurchase proposal 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.
Plaintiff Corre was not on the Nasdaq list because of an exemption, but Corre contacted Emmis in November 2011 after learning that Emmis was repurchasing its Preferred Stock. Another Preferred Shareholder, Sugar Loaf, also contacted Emmis and, in November 2011, entered into a total return swap transaction with Emmis.
That included the use of total return swap (“TRS”) transactions 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. 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.
After the proposal was presented, the Board deliberated, asking questions of Smulyan, CFO and COO Patrick Walsh, and outside counsel. Following discussion, 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.
Gale did express concern regarding what Emmis planned 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 the accompanying TRS Voting Agreements.
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 their discussions with the ten targeted Preferred Shareholders about the acquisition of their shares. On November 10, 2011, Emmis signed the loan agreement with Zell and the following day announced it would acquire Preferred Stock from certain holders pursuant to TRS transactions.
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 provided 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 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 the 8-K form filed on November 15, 2011, Emmis had already acquired 645,504 shares of Preferred Stock, mainly through TRS transactions, and, by that date, had secured the ability to direct the vote of approximately 23% of the Preferred Stock..
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 voting control to 56.8%.
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 recount 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.
The Board did, however, approve by an 8-1 margin a modified “Dutch auction” tender offer for its Preferred Stock at the November 22 meeting. Id. Gale, the Preferred Shareholders’ representative on the Board, was the only dissenter.
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 following day, on December 1, 2011, Emmis submitted its tender offer filing to the SEC, stating 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 in this litigation 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.
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 over which Emmis controlled the vote to 60.6%.
On January 20, 2012, with the term of the Zell Financing set to expire within two weeks, Emmis applied 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 with a voting agreement allowing Emmis to direct the vote of those shares thereby reaching 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 thus, they declined to invest.
Once these 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 would issue the 400,000 shares of Preferred Stock, which could be voted as directed by the Board. On February 29, 2012, senior management as well as Emmis’s general and outside counsel presented this idea to the Board. The independent directors also received legal advice from an outside law firm that had been advising the disinterested directors since 2006. At a follow-up meeting on March 8, 2012, outside counsel described the details of the proposal to the Board, and Emmis CFO Walsh advised the Board regarding the accounting treatment of the Preferred Stock to be issued to the benefit plan. Exh. 804; Exh. 805. Following these discussions, the Board voted 8-1 (with Gale again being the lone dissenter) to adopt the resolutions authorizing the Board to create the Retention Plan Trust. At all times relevant to this litigation, none of the independent directors had a financial interest in the Trust nor were any general partners, directors, officers, or trustees of the Trust.
According to Emmis, two purposes existed 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 with8 Indiana law allows corporations to vote their own shares when held “in or for an employee benefit plan.”
Upon approval of the Retention Plan Trust by Emmis’s shareholders, the 400,000 shares of Preferred Stock issued to the Trust would be placed in a bonus pool to be paid out proportionately to eligible employees who remained with Emmis for two years, based on each eligible employee’s base salary. Emmis’s executive officers were not eligible to participate in the Retention Plan Trust.
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.
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, thereby giving Emmis control of over two-thirds of the Preferred Stock.
Board Approval and Disclosure of Proposed Amendments
At the February 29 and March 8, 2012 Board meetings when the Retention Plan Trust 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) by an 8-1 vote, Gale again being the lone dissenter.
Emmis filed a preliminary proxy statement on March 13, 2012, in which it disclosed for the first time the exact terms of the Proposed Amendments. The preliminary proxy statement indicated that the Proposed Amendments would: (1) eliminate Emmis’s obligation to pay Preferred Stock dividends accumulated since October 2008; (2) change the Preferred Stock from “Cumulative” to “Non-Cumulative” so that dividends would not accrue on the Preferred Stock unless declared by the Board, thereby eliminating the right of Preferred Shareholders to elect directors in the event of nonpayment of dividends; (3) 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; (4) eliminate the right of the holders of the Preferred Stock to require Emmis to repurchase all of their shares upon certain going-private transactions; (5) remove the ability of Preferred shareholders to convert their Preferred Stock to common stock upon a change of control at specified conversion prices; (6) provide the Preferred Stock will not vote as a separate class on a plan of merger or similar transaction, except as otherwise required by law; and (7) change the conversion price adjustment applicable to certain merger and other transactions.
The March 13 preliminary proxy statement also disclosed Emmis’s 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. Finally, the preliminary proxy 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 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.
The Instant Litigation and Subsequent Developments
On April 16, 2012, Plaintiffs filed their original Complaint against Emmis and the members of its board along with a motion for preliminary injunctive relief, alleging that the 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 laws governing the conduct of Indiana corporations. On May 18, 2012, Plaintiffs filed their first Amended Complaint. On June 29, 2012, Emmis filed its definitive proxy statement setting the shareholder meeting to consider adoption of the Proposed Amendments for August 14, 2012.
The Court held a hearing on Plaintiffs’ request for preliminary injunctive relief on July 31 and August 1, 2012, at which the parties presented evidence and oral argument.
On August 1, at the preliminary injunction hearing, Emmis agreed to adjourn the August 14 meeting until after August 31, 2012, allowing the Court sufficient time to rule on Plaintiffs’ motion for preliminary injunction. On August 31, 2012, the Court entered its Order Denying Plaintiffs’ Motion for Preliminary Injunction.
After the Court issued its August 31 denial of injunctive relief, Emmis’s shareholders met and approved the Proposed Amendments, which took effect on September 4, 2012, when Emmis filed the amended Articles containing the approved Proposed Amendments with the Indiana Secretary of State. On September 19, 2012, Emmis exercised its early termination option with respect to the TRS, meaning that Emmis updated its books to reflect that the TRS counterparties were no longer the record holders of the shares subject to the TRS confirmation, and that those shares were no longer outstanding. As a result, the TRS Stock assumed “authorized but unissued status.”
On October 15, 2012, Plaintiffs moved to amend their First Amended Complaint.
That motion was granted on October 18, 2012, and Plaintiffs filed their Second Amended Complaint, which removed the individual board members as defendants and asserted additional claims for damages against Emmis. Emmis filed its Motion for Judgment on the Pleadings on Count VIII of the Second Amended Complaint on November 21, 2011.
On March 7, 2013, Plaintiffs filed a Motion for Partial Summary Judgment. Emmis followed suit on March 15, 2013, filing its own Motion for Partial Summary Judgment. These motions are now fully briefed and before us for ruling.
Legal Analysis
I. Motion for Judgment on the Pleadings
A. Standard of Review
Emmis’s motion for partial judgment on the pleadings is governed by Federal Rule of Civil Procedure 12(c). This rule allows a party to move for judgment “[a]fter the pleadings are closed[,] but early enough not to delay trial.”
A motion for judgment on the pleadings is subject to the same standard as a motion to dismiss pursuant to Rule 12(b)(6), which, necessarily implicates Rule 8(a) as well. Killingsworth v. HSBC Bank Nev., N.A., 507
F.3d 614, 618-19 (7th Cir. 2007) (noting Rule 8(a)(2)’s requirement of “a short and plain statement of the claim showing that the pleader is entitled to relief”). Therefore, once a claim has been adequately stated, it may be supported by any set of facts consistent with the allegations in the complaint. Bell Atlantic v. Twombly, 550 U.S. 540, 561-62 (2007) (citing Sanjuan v. Am. Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (7th Cir.1994)). Dismissal is warranted if the factual allegations, viewed in the light most favorable to the plaintiff, do not plausibly entitle the plaintiff to relief. Twombly, 550 U.S. at 561-62.
If the parties present matters outside the pleadings on a Rule 12(c) motion, the Court will treat the motion as one for summary judgment under Rule 56. FED. R. CIV. P. 12(d). However, judicially noticed “historical documents, documents contained in the public record, and reports of administrative bodies” may be considered at this stage of litigation without converting the motion into a motion for summary judgment. In re Salem, 465 F.3d 767, 771 (7th Cir. 2006). All uncontested allegations to which the parties had an opportunity to respond must be accepted as true. Alexander v. City of Chi.,994 F.2d 333, 335 (7th Cir. 1993).
B. Discussion
In Count VIII of their Second Amended Complaint, Plaintiffs allege that through its actions, Emmis breached “fiduciary and other duties” it owed to Plaintiffs as shareholders in the Company. Emmis seeks dismissal of Count VIII based on the fact that, while directors of Indiana corporations owe fiduciary duties to the corporation pursuant to Indiana Code § 23-1-35-1(a) and (d), there is no legal precedent suggesting that corporations owe fiduciary duties (or any other duties for that matter) to their shareholders. While Plaintiffs concede that this is ordinarily true, they argue that the situation at bar is unique in that Emmis itself has become the controlling shareholder of Emmis’s stock. Plaintiffs contend that, when faced with such an unprecedented set of facts, Indiana courts would conclude that:
(1) Emmis, having obtained the shareholder control necessary to amend its contract with the preferred shareholders, owed and breached a fiduciary duty to the plaintiff minority shareholders; and
(2) Emmis, in its original role as issuer of the security, owed a duty of good faith with respect to plaintiffs’ accrued dividends, and breached that duty by using unfair, strong-arm tactics to ensure the plaintiffs would never receive those dividends.
We are not persuaded by Plaintiffs’ attempt to extend or amend the terms of Indiana Code § 23-1-35-1(a) and (d). It is undisputed that Indiana law has never recognized the existence of a fiduciary duty owed by a corporation to its shareholders.
Rather, the Indiana Business Corporations law (“IBCL”) imposes on directors the obligation to discharge their duties: “(1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the director reasonably believes to be in the best interests of the corporation.”
However, neither the IBCL, the Official Comments to the IBCL, nor any Indiana appellate decision imposes or recognizes a fiduciary duty owed by the corporation to its shareholders.
In a case such as this, where Indiana corporate law does not provide express guidance, Indiana courts look to Delaware law. See In re ITT Derivative Litigation, 932 N.E.2d 664, 668 (Ind. 2010) (recognizing that the Indiana Supreme Court has “looked to Delaware law when considering cases involving alleged breaches of fiduciary duty”). The existence of a fiduciary duty owed by a corporation to its shareholders has been expressly rejected under Delaware law. E.g., A.W. Fin. Servs., S.A. v. Empire Resources, Inc., 981 A.2d 1114, 1127 n.36 (Del. 2009) (“Under Delaware law, the issuing corporation does not owe fiduciary duties to its stockholders.”) (citations omitted).
Plaintiffs nonetheless argue that this case is distinguishable because Emmis is a “controlling shareholder” of its own stock, which they contend is a situation the law “does not even contemplate.” Pls.’ Resp. at 2. First, we note that, unlike many other states, Indiana law expressly allows a corporation to purchase, own, vote, and otherwise “deal in” its own shares and to vote its own shares held in an employee benefit plan. IND. CODE §§ 23-1-22-2(6); 23-1-30-2(c). Thus, the idea of a company being able to deal in and vote its own stock was specifically contemplated and codified under Indiana law.
Despite the IBCL’s permissive terms in this regard, the statute imposes fiduciary duties only on directors, not on corporations. As such, the IBCL provides no support for Plaintiffs’ argument.
Even if this were not the case, the case law cited by Plaintiffs in support of their controlling shareholder argument is inapposite to the case at bar because those cases involve duties imposed on close corporations10 as opposed to public corporations like Emmis. Under Indiana law, “[s]hareholders of close corporations owe fiduciary duties substantially different from the duties owed by their counterparts in publicly traded corporations.”
Finally, even if we were to hold that a corporation owed a fiduciary duty to its shareholders, we believe Indiana courts would apply the same deferential standard that the IBCL imposes on directors, rather than the more exacting standards referenced by Plaintiffs that focus on protecting the rights of minority shareholders to the exclusion of other concerns. As noted above, Indiana’s Fiduciary Duty Statute requires that a director
discharge his or her duties in good faith, with the care of an ordinarily prudent person, and in a manner the director reasonably believes to be in the corporation’s best interest.
IND. CODE § 23-1-35-1(a)(1)-(3). Under Indiana law, directors are given wide latitude in determining the best interests of the corporation, and may consider the effects of proposed actions on “shareholders, employees, suppliers, and customers … and any other factors the director considers pertinent.” IND. CODE § 23-1-35-1(d). Apropos to this case, the statute further provides that, in making their decisions, “directors are not required to consider the effects of a proposed corporate action on any particular corporate constituent group or interest as a dominant or controlling factor.”
Clearly, Plaintiffs could (and originally did) pursue a remedy against Emmis’s directors for the actions underlying Plaintiffs’ breach of fiduciary duty claim. However, having now dropped their claims against the directors, Plaintiffs cannot attempt an end run around the deferential standards set out in the IBCL by asserting a breach of fiduciary claim against the corporation itself based on actions authorized and approved by the directors.
Nor can Plaintiffs successfully maintain a claim against Emmis for breach of a duty of good faith based on its role as issuer of the preferred stock. Specifically, Plaintiffs argue that Emmis breached an implied duty of good faith by eliminating their dividend rights. However, the case law Plaintiffs cite in support of this argument is inapposite. Citing the Indiana Supreme Court’s decision in Erie Insurance Company v. Hickman, 622 N.E.2d 515, 518 (Ind. 1993) for the proposition that a covenant of good faith is implied in insurance contracts, Plaintiffs analogize that, because a corporation’s relationship with its shareholders is contractual, a duty of good faith with respect to dividends is implied in that company-shareholder contract. But Indiana law makes clear that “implied covenants of good faith and fair dealing apply only to insurance and employment contracts or where contracts are ambiguous as to the application of the covenants or expressly imposed them.” Coates v. Heat Wagons, Inc., 942 N.E.2d 905, 918 (Ind. Ct. App. 2011). The contract at issue here, to wit, the Articles, is not an insurance or an employment contract, and Plaintiffs have not cited any relevant contractual ambiguity regarding the applicability of an implied duty of good faith.
Accordingly, we find no implied duty of good faith in the contract between Emmis and Plaintiffs. Plaintiffs also cite the Indiana Court of Appeals decision in Cole Real Estate Corp. v. Peoples Bank & Trust Co., 310 N.E.2d 275 (Ind. Ct. App. 1974), in support of the proposition that, under Indiana law, companies owe their shareholders a duty of good faith with respect to the payment of dividends. However, in Cole, the court was not addressing the situation at issue here, to wit, whether a corporation has an implied duty of good faith under contract with regard to dividends. Rather, in Cole, the court held that, pursuant to the then-existing Indiana General Corporations Act, the power to declare dividends was within the discretion of the corporation’s board of directors, and the burden of proof a shareholder must satisfy in seeking to compel the declaration of a dividend was “necessarily stringent.” Thus, a shareholder seeking such relief was required to show that the corporation’s “governing body” failed to act in good faith in exercising its discretion. Id. at 280-82. To the extent that the Cole holding is applicable to the case at bar, it merely supports Plaintiffs’ right to assert a claim against Emmis’s “governing body,” to wit, its board of directors, for breach of their statutory duty to act in good faith per the IBCL. However, having dropped their claims against Emmis’s directors, Plaintiffs lack support for their claim against the corporation premised on an implied good faith duty under contract.
For the foregoing reasons, Defendant’s Motion for Judgment on the Pleadings as to Count VIII is GRANTED.
II. Motions for Partial Summary Judgment
A. Standard of Review
Summary judgment is appropriate when the record shows that there is “no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
Disputes concerning material facts are genuine where the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding whether genuine issues of material fact exist, the court construes all facts in a light most favorable to the non-moving party and draws all reasonable inferences in favor of the non-moving party. See id. at 255.
However, neither the “mere existence of some alleged factual dispute between the parties,” id., 477 U.S. at 247, nor the existence of “some metaphysical doubt as to the material facts,” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986), will defeat a motion for summary judgment. Michas v. Health Cost Controls of Ill., Inc., 209 F.3d 687, 692 (7th Cir. 2000).
The moving party “bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex, 477 U.S. at 323.
The party seeking summary judgment on a claim on which the non-moving party bears the burden of proof at trial may discharge its burden by showing an absence of evidence to support the non-moving party’s case. Id. at 325.
Summary judgment is not a substitute for a trial on the merits, nor is it a vehicle for resolving factual disputes. Waldridge v. Am. Hoechst Corp., 24 F.3d 918, 920 (7th Cir. 1994). Therefore, after drawing all reasonable inferences from the facts in favor of the non-movant, if genuine doubts remain and a reasonable fact-finder could find for the party opposing the motion, summary judgment is inappropriate. See Shields Enterprises,
Inc. v. First Chicago Corp., 975 F.2d 1290, 1294 (7th Cir. 1992); Wolf v. City of Fitchburg, 870 F.2d 1327, 1330 (7th Cir. 1989). But if it is clear that a plaintiff will be unable to satisfy the legal requirements necessary to establish his or her case, summary judgment is not only appropriate, but mandated. See Celotex, 477 U.S. at 322; Ziliak v. AstraZeneca LP, 324 F.3d 518, 520 (7th Cir. 2003). Further, a failure to prove one essential element “necessarily renders all other facts immaterial.” Celotex, 477 U.S. at 323.
B. Discussion
We have previously addressed all claims again before us here in the parties’ motions for partial summary judgment in our August 31, 2012 Order denying Plaintiffs’ request for preliminary injunctive relief. After further, careful review of the parties’ summary judgment briefing, a completely developed factual record, and the applicable legal authorities, our initial view as to these issues remains unchanged. Thus, drawing substantially from our August 31, 2012 Order, significant portions of which are incorporated herein, we here modify and extend our preliminary analysis only to the extent necessary to resolve new arguments advanced in the parties’ summary judgment briefing.
1. State Law Claims
a. Breach of Contract Claims
Plaintiffs contend that Emmis=s acquisition of Preferred Stock breached Section 3.3 of Emmis’s Articles of Incorporation (“the Articles”), which section 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 each of these claims in turn below.
i. Section 3.3
In support of their claim that Emmis breached Section 3.3 of the Articles, Plaintiffs rely almost exclusively on the same arguments we rejected at the preliminary injunction stage.
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. There is no dispute that, between October 2011 and January 2012, Emmis acquired shares of Preferred Stock without first paying accumulated dividends to the Preferred Shareholders. Thus, the determinative question is 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.
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 Defendant’s 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.
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 Defendant argues, 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 would have 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 indicates 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 Defendant’s acquisition of Preferred Stock through the TRS transactions constituted a breach of Section 3.3 of the Articles. ii. 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.
It is undisputed that, here, the Board proposed amendments to the Articles for submission to the Preferred Shareholders as permitted by Indiana Code § 23-1-38-3(a); the shareholder vote was then held, and the Proposed Amendments were approved by a two-thirds vote of the outstanding Preferred Stock as required by Section 7.3; and Emmis subsequently filed the amendments with the Secretary of State. These actions clearly satisfied the express requirements of Section 7.3 for amending the Articles. Plaintiffs have pointed us to no other provision in the Articles or the IBCL that imposes any further obligations or that includes qualifications as to who directs the vote.
Plaintiffs, however, do allege that Emmis’s actions nevertheless breached Section 7.3 because the Preferred Shareholders contracted with Emmis for certain rights, including the right to prevent any future adverse changes to their rights by the company unless those changes were approved by a two-thirds supermajority, but, by acquiring and voting its own stock, Emmis eliminated that right without the mutual assent of two-thirds of Preferred Shareholders adversely affected by the amendments. In other words, Plaintiffs contend that, although Emmis may have been entitled to vote on the amendments under the literal terms of the contract, casting those votes breached Section 7.3 because in so doing Emmis stood on both sides of the transaction and thus unilaterally amended the Articles.
It is true that contract formation “requires mutual assent on all essential contract terms.” Buschman v. ADS Corp., 782 N.E.2d 423, 428 (Ind. Ct. App. 2003). However, the contractual element of mutual assent was satisfied here when the original parties to the terms of the Preferred Stock agreed to the unambiguous language of Section 7.3, which governs the manner in which the Articles may be amended. At the preliminary injunction stage, Plaintiffs unsuccessfully argued 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 Section7.3. They have apparently now abandoned this argument, however. assented to the language of Section 7.3, including its procedures for amending the Articles, when they purchased their Preferred Stock. If either party desired additional protections, it could have bargained for them before signing the contract. However, these parties did not do so. We decline to read such additional protections into the contract that the clear and unambiguous language of Section 7.3 does not provide.
Transactions 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(a).
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.”
Plaintiffs maintain that Defendant voted the TRS Stock in violation of Indiana law because the shares were not “outstanding,” as defined by Indiana statute at the time the shareholder vote occurred. At the preliminary injunction stage, Plaintiffs contended that, regardless of the label Emmis put on those transactions, they were sales in all respects but name, and consequently, the TRS shares should have been retired. In their summary judgment briefing, Plaintiffs have shifted the focus of their argument from whether the TRS transactions constituted sales to the question of whether Emmis had “control” over the TRS Stock at the time of the shareholder vote on the Proposed Amendments.
Plaintiffs argue that, although the term “reacquired” is not defined in the IBCL, the plain and ordinary meaning of the term is to have regained control over property. Based on this definition, they argue that Emmis clearly “reacquired” the shares subject to TRS confirmations in 2011, when they obtained both the “economics” of the shares and the right to direct the vote of the TRS Stock. Thus, they maintain that the TRS Stock was no longer outstanding and therefore was not entitled to vote on the Proposed Amendments at the time the shareholder vote stripping the rights of the Preferred Stock occurred.
Emmis rejoins that to have “reacquired” the TRS Stock as defined under Indiana law it would have needed to have acquired more than just “control” over the economics and voting rights of the stock; instead it would have had to have purchased the shares and acquired ownership. According to Emmis, the total return swaps were not sales. Emmis points out that it made no outright purchases of those shares (because the Preferred Shareholder counterparties retained record ownership), rather, that the TRS shares remained outstanding and retained their voting rights. Emmis maintains that it was 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.
That the transactions Emmis calls total return swaps were not typical TRS transactions is a given. However, as we recognized in our prior order, the label given to the transaction is for our purposes largely immaterial. The court’s task 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 Emmis structured the transactions to ensure the shares remained outstanding is permissible under Indiana law.
In support of their argument, Plaintiffs cite to two dictionary definitions of “acquire” (not “reacquire,” which is the term used in the statute), which define the term in the context of “possession” or “control.” Docket No. 112 at 7-8 (citing Black’s Law Dictionary 26 (9th ed. 2009); Merriam-Webster’s Collegiate Dictionary (2012)). Emmis, in response, cites definitions of the term from three other dictionaries that do not reference “control,” but instead define “acquire” with reference to “buying” or “obtaining.” Docket No. 121 (citing Oxford Dictionary; American Heritage Dictionary; and MacMillan Dictionary). Thus, Emmis argues, the plain meaning of “acquire” is closely related to the idea of purchasing or obtaining ownership and, because the TRS counterparties retained record ownership of the TRS Stock at the time of the shareholder vote, it remained outstanding.
It is true that “in order to determine the plain and ordinary meaning of words, [courts] may consult English language dictionaries.” Reed v. Reid, 980 N.E.2d 277, 289 (Ind. 2012). However, we remain cautious when relying on dictionary definitions as words often have different meanings in different contexts and “[d]ictionary definitions are acontextual.” United States v. Costello, 666 F.3d 1040, 1044 (7th Cir. 2012).
Accordingly, we must define “reacquire” in a manner consistent with other provisions in the IBCL, particularly those provisions addressing voting rights.
Unlike statutes governing corporations in various other states, the IBCL expressly allows corporations to vote their own stock unless otherwise prohibited by the statute.
Interpreting “reacquire” to mean “control” would contradict the framework of the unique voting rights provisions of the IBCL, codified at Indiana Code § 23-1-30-2. For example, subsection (a) provides that outstanding shares are entitled to vote, subject to the exceptions set forth in subsections (b) and (d), which prohibit the voting of a corporation’s shares that are held by a subsidiary, if the corporation holds a majority of the subsidiary’s shares and shares that have been called for redemption, respectively. As Emmis points out, if the concept of control dictated when a share had been reacquired, these exceptions would be superfluous because in each case the shares would have already been reacquired by the corporation by virtue of its control over the shares owned by its subsidiary or called for redemption. Accordingly, if control was tantamount to reacquisition, the express prohibitions on voting such shares set forth in subsections (b) and (d) would be unnecessary.
Likewise, Plaintiffs’ definition runs contrary to the Official Comment to Indiana Code § 23-1-30-2(b), which provides that the language in subsection (b) does not prevent the corporation from voting its own stock “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.” Id. As general partner, the corporation in that case would control the shares owned by the limited partnership, which, under Plaintiffs’ definition, would render those shares “reacquired” and thus prohibited from voting. However, the Official Comments expressly provide otherwise.
The IBCL’s definition of “share” also supports the conclusion that “reacquisition” under the IBCL requires more than control over certain rights associated with the stock.
Instead, it is akin to ownership of the entirety of the share’s rights as a whole. The IBCL provides that “[s]hares that are issued are outstanding shares until they are reacquired….” IND. CODE § 23-1-25-3(a). Under the IBCL, a “share” is defined as “the unit into which the proprietary interests in a corporation are divided.” IND. CODE § 23-1-20-23. It follows, then, as Emmis argues, that a share remains outstanding until the entire unit constituting the share is reacquired by the corporation, or, in other words, that the corporation must reacquire the complete set of rights associated with each share.
As we discussed previously, although the TRS transactions 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 retained 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 ownership as including title, possession, and control). As both parties’ experts testified, 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.”
Given these facts, we hold that Plaintiffs have failed to establish that the TRS Stock was not outstanding at the time of the shareholder vote, at least not within the meaning of the IBCL, since record ownership at that time remained with the Preferred Shareholder counterparty. Nor have Plaintiffs established that Emmis unlawfully directed 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, as discussed above, 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 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 interests of the corporation unless otherwise prohibited by the statute. Although the manner in which Emmis structured the TRS transactions to retain the voting rights is by every standard unusual, having clearly been creatively devised to serve the company’s purposes, Plaintiffs have failed to establish that the IBCL prohibits these actions.
ii. 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, Emmis should nevertheless have been 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.
Plaintiffs contend that the Retention Plan Trust is not an “employee benefit plan” within the meaning of the statute. Plaintiffs further argue that, even if it were, the Court should place the public interest over the “strict literal meaning” of the term in interpreting the statute, reading Section 23-1-30-2(c) to exclude a trust that was not created and administered for the benefit of employees. For the following reasons, we remain unpersuaded by Plaintiffs’ arguments.
Emmis concedes that one purpose in 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 Emmis to acquire voting control. However, Plaintiffs have failed to establish that such a purpose or strategy renders the employee benefit plan invalid or a sham under Indiana law, so as to have prevented Emmis from voting those shares. As we discussed in our prior entry denying Plaintiffs’ motion for preliminary injunctive relief, while other jurisdictions may impose stricter standards on corporate decisions, these standards are not applicable under Indiana law.
Under the “primary purpose” test recognized under Maryland law, for example, transactions can be deemed invalid if a court finds “that the purpose of the transaction was primarily one of management’s self-perpetuation and that that purpose outweighed any other legitimate business purpose….” Mountain Manor Realty, Inc. v. Buccheri, 461
A.2d 45, 53 (Md. Ct. Spec. App. 1983); see also NCR Corp. v. AT&T Co., 761 F. Supp. 475 (S.D. Ohio 1991) (applying Maryland law and holding that an employee stock ownership plan created by NSR was invalid and unenforceable because the primary purpose was to thwart a competitor’s takeover offer rather than to provide employees with benefits). However, 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. IND. CODE § 23-1-35-1(f). In fact, the primary purpose test has been recognized as one such doctrine that is inapplicable in Indiana. See 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 held in an employee benefit plan. It imposes no further qualifications on the creation of such a plan. Plaintiffs urge us to read § 23-1-30-2(c) to exclude a trust whose primary purpose is something other than to benefit employees, citing the fact that, under Indiana law, “legislative intent as ascertained from [a] provision as a whole prevails over the strict literal meaning of any word or term.” Bushong v. Williamson, 790 N.E.2d 467, 471.
However, as noted above, it is clear that the standard Plaintiffs ask us to apply, to wit, the primary purpose test, is inapplicable in Indiana. Moreover, because the statute is clear and unambiguous, it “leaves no room for judicial construction.” St. Vincent Hosp. & Health Care Center, Inc. v. Steele, 766 N.E.2d 699, 704 (Ind. 2002) (citation omitted). There is no language in the statute or any indication in the official comments to suggest that simply because a corporation is motivated by reasons beyond benefitting employees in creating such a plan, it then does not qualify as an employee benefit plan under the statute, and we decline to read that interpretation into § 23-1-30-2(c).
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 Emmis 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. Given these facts, Plaintiffs have failed to establish that the Retention Plan Trust is nothing more than an illegal sham, the creation of which violates Indiana law.
Federal Claims.
Plaintiffs have also brought federal antifraud claims seeking damages as well as declaratory and injunctive relief against Defendant, pursuant to Sections 10(b), 13(e), and 14(e) of the Securities Exchange Act and their associated SEC Rules. Specifically, Plaintiffs contend that Defendant’s December 2011 and January 2012 Schedule TO-I filings falsely represented as follows:
[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.
This statement was included in Emmis’s December 1, 2011 Schedule TOI filing and was not amended in any of Emmis’s 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, Emmis was 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, as well entertaining offers from various potential buyers for approximately $25-$40 million of its European assets. Neither the Radio Centro deal nor the Disney/ESPN deal was finalized until April 2012, well after Emmis’s December 2011 and January 2012 SEC filings. The value. As we observed in our prior order, while the mechanics of distributing these shares to employees are not completely clear, there can be no dispute that the Trust is intended to provide benefits to Emmis employees. Any argument that the reason it does not provide more benefit is due to a breach of duty by the Trustee in connection with the Retention Plan Trust is not an issue before us.
Negotiations for the European assets fell apart at the end of December 2011 and a deal was never reached. However, Plaintiffs argue that because negotiations were occurring at the time the TO-I filings were submitted, Emmis had an obligation to disclose them.
In order to prove any of their federal claims, Plaintiffs must establish “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4); reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008) (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008) (assessing claim brought pursuant to §10(b)).15 Because we find, for the reasons detailed below, that Plaintiffs have failed to establish the fourth element, to wit, that they relied upon Emmis’s misrepresentation (assuming the statement contained in the TO-I filings qualifies as such),16 their federal claims cannot survive summary judgment.
Plaintiffs do not allege that they individually relied on the statements in Emmis’s December and January TO-I filing and amendments in connection with any purchase or sale of Preferred Stock. Instead, they argue that they can satisfy the element of reliance using either a “causal chain” analysis or the “fraud-on-the-market” doctrine. We address these arguments in turn.
Reliance Based on Causal Chain Theory
Plaintiffs maintain that they can establish reliance by demonstrating that the statements made by Emmis were material and were part of a chain of causation that existed between the statements and their loss. See, e.g., Eckstein v. Balcor Film Investors, 58 F.3d 1162, 1170 (7th Cir. 1995) (“Reliance is the confluence of materiality and causation.”). Plaintiffs maintain that knowledge of Emmis’s plans and negotiations to generate approximately $200 million for the company clearly would have been important to the preferred shareholders who sold their stock at depressed prices, and thus, were material. According to Plaintiffs, a causal chain exists between these statements and their injury because a jury could reasonably infer that: (1) the price of the Preferred Stock would have been materially higher had Emmis disclosed its plans and negotiations; (2) the depressed price was what allowed Emmis to seize control of a two-thirds block of the Preferred Stock; and (3) obtaining control over two-thirds of the Preferred Stock ultimately resulted in the elimination of Plaintiffs’ preferred shareholder rights.
However, there is insufficient evidence to support Plaintiffs’ causal chain argument. As we discussed in our prior entry, the state of any relevant negotiations that were occurring at the time of the filing of the December 2011 TO-I statement and its amendments were very preliminary. Even assuming that Emmis’s statement that it had “no plans, proposals, or negotiations” was misleading, it is not at all clear that, had Emmis disclosed the state of those early negotiations in its filings, that disclosure would have resulted in “materially higher” stock prices. Nor is there any indication that had such negotiations been revealed in December 2011 Emmis would have been unable to capture two-thirds of the Preferred Stock.19 This is particularly true given the number of actions taken by Emmis between the December 2011 TO-I statement and the ultimate harm of which Plaintiffs complain, to wit, the amending of the Articles, that Plaintiffs claim caused the same “lost rights and value in the Preferred Stock” as that caused by the federal securities laws violations, including, inter alia, structuring the TRS transactions and creating the Retention Plan Trust. For these reasons, Plaintiffs have failed to establish a viable substitute for their individual reliance theory based on a combination of materiality and causation. Thus, Plaintiffs’ claims brought pursuant to the federal securities laws cannot survive summary judgment on this basis.
Fraud-on-the-Market Doctrine
Alternatively, Plaintiffs argue that they can establish reliance using the fraud-on the-market doctrine. The fraud-on-the-market theory was adopted by the United States Supreme court in Basic, Inc. v. Levinson, 485 U.S. 224 (1988) and rests on the principle that “the market price of shares traded on well-developed markets reflects all publicly available information and, hence, any material misrepresentations.” Id. at 246. Under the doctrine, “[b]ecause most publicly available information is reflected in market price, an investor’s reliance on any public material misrepresentations … may be presumed for purposes of a Rule 10b-5 action.” Id. at 247. The presumption can be rebutted by evidence that “severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff or his decision to trade at a fair market price….”
In order to determine whether the fraud-on-the-market doctrine is an available substitute for individual reliance, courts must determine whether there is evidence demonstrating that the corporation’s stock was traded in a “large and efficient market” during the time period at issue. See Schleicher v. Wendt, 618 F.3d 679, 682 (7th Cir. 2010). Although the Seventh Circuit Court of Appeals has not definitively addressed the factors to be considered in making this determination, district courts within this circuit as well as circuit courts in the First, Fifth, and Sixth Circuits have applied the factors set forth in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989). See, e.g., Schleicher v.
Wendt, 2009 WL 761157 (S.D. Ind. Mar. 20, 2009), aff’d, 618 F.3d 679 (7th Cir. 2010) (applying the Cammer factors and collecting cases).20 The Cammer factors include: whether the stock trades at a high weekly volume; whether securities analysts report on the stock; whether the stock has market makers and arbitrageurs; whether the company is eligible to file SEC registration form S-3 rather than form S-1 or S-2; and whether there are empirical facts showing a causal relationship between unexpected corporate events or public releases and a subsequent response in stock price. 711 F. Supp. at 1286-87.
Here, Plaintiffs have done nothing more than cursorily assert that, because Emmis’s statements regarding having “no plans, proposals, or negotiations” were material and communicated to the public, reliance should be presumed under the fraud on- the-market doctrine. No evidence has been designated nor arguments advanced to establish that Emmis’s stock was being traded in an “efficient market” at the time the December 2011 TO-I filing and January amendments were made. Because Plaintiffs bear 20 In Schleicher, the Seventh Circuit affirmed the district court’s finding that an expert report evidencing price sensitivity with respect to the corporation’s common stock but not its preferred stock was sufficient to establish an efficient market only as to the common stock, citing the fact that the corporation was listed on the New York Stock Exchange and included in the S&P 500 Index, that it had an average market capitalization of over $2 billion; and that its common stock had an average daily trading volume of four million shares. 618 F.3d at 682. No similar showing regarding price sensitivity has been demonstrated here. The burden of proof on the issue of reliance and have invoked the fraud-on-the-market analysis, we agree with Emmis that it was incumbent on them to make such a showing.
Having completely failed in that regard, the fraud-on-the-market doctrine is not available to Plaintiffs as a substitute for the individual reliance theory.
III. Conclusion
For the foregoing reasons, we GRANT Defendant’s Motions for Judgment on the Pleadings as to Count VIII of the Complaint and Partial Summary Judgment as to all other claims. Plaintiffs’ Motion for Partial Summary Judgment is DENIED. Final judgment shall enter accordingly.
IT IS SO ORDERED.
Date: ___0_2_/_28_/_2_0_1_4______________
_______________________________
SARAH EVANS BARKER, JUDGE
United States District Court
Southern District of Indiana
