Emmis Chases a Strategy to Vote Dead Shares There was an old joke in which a man said that when he died he hoped to be buried in Chicago, so that he could continue to vote. Emmis Communications, an owner of radio stations around the United States, not to mention in Slovakia and Bulgaria, is based in Indianapolis, which may be on its way to becoming the Chicago of capitalism. Put briefly, Emmis and its controlling shareholder have hatched an ingenious plan to make the company's preferred shares all but worthless and strip them of their rights. To do that requires getting two-thirds of the preferred shares to agree, which would normally be impossible. But not if Emmis can persuade a state judge in Indiana to bless its strategy to allow dead shares to be voted. If it succeeds, that strategy could have serious ramifications for investors in other companies. "It is not a good thing," said Charles Elson, a law professor and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Ultimately, the court has to protect the minority investors or the minority shares will be worthless and no one will invest. Here's the situation. Back in 1999, when radio properties were hot, Emmis sold convertible preferred stock at $50 a share. The shares were to pay 6.5 percent a year in dividends. The dividends were cumulative, meaning that if they were not paid the company would still owe them and would have to pay them before any money could be paid to common shareholders. If dividends were not paid for a year and a half, the preferred shares would be entitled to elect two directors. Like all preferred shares, those shares offered investors greater security and higher income than an investment in common stock, but less chance of a big upside if the company did well. If the company went private, it would have to redeem the shares at $50 plus accrued dividends. Emmis has not paid dividends on the preferred since 2008, and a little over $11 in unpaid dividends has accumulated. The market price of the shares collapsed after dividend payments were halted. The provision in the preferred stock contract that allows the terms to be changed with the consent of the owners of two-thirds of the shares is fairly standard. It assumes that investors in a company in trouble might want to cut a deal that gave them something rather than the nothing that they might receive if the company went bankrupt. Emmis is not doing very well, but it has sold some radio stations and is bringing down debt. A big part of its reported profits in the most recently reported quarter - $56.8 million - stemmed from its effective repurchase of most of the preferred shares at a large discount to face value. It stated in its quarterly report that those shares had been "extinguished." But as far as Emmis is concerned, extinguished is not the same as gone. It figures that they can still be voted as the company's board wishes. And the board wishes to extinguish nearly all the rights of the preferred stock. It wants to cancel the unpaid dividends and never pay another dividend again. The only right remaining would be to convert each $50 preferred share into 2.44 common shares. At current prices, the conversion value is about $2. How does Emmis think it can vote the dead shares? It says it did not really buy them, even though they are no longer alive under tax and accounting rules. Instead, the company says, it entered into a "total return swap." The previous owners of the shares got a price - often about $15 or $16 - and no longer have any economic interest in the shares. But Emmis says those owners still have the voting rights and, as part of the swap, have agreed to vote them as Emmis orders. Last week Emmis, which is incorporated in Indiana, asked a state court in Indianapolis to issue a declaratory judgment that its actions were proper. It names as defendants in the suit several institutional investors who own preferred shares and are resisting the company's move.