In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 14-1647

CORRE OPPORTUNITIES FUND, LP, et al.,

Plaintiffs-Appellants,

v.

EMMIS COMMUNICATIONS CORPORATION,

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

No. 1:12-cv-491-SEB-TAB — Sarah Evans Barker, Judge.

____________________

ARGUED DECEMBER 5, 2014 — DECIDED JULY 2, 2015

____________________

Before FLAUM, EASTERBROOK, and KANNE, Circuit Judges.

EASTERBROOK, Circuit Judge. Plaintiffs, who own preferred 

stock in Emmis Communications Corp., contend that Emmis 

violated Indiana law by voting some shares. The suit is in 

federal court because, at its outset, it included a nonfrivolous claim under federal securities law. The district 

court analyzed the federal claim at length before ruling 

against the Owners (as we call the plaintiffs). 892 F. Supp. 2d 
2 No. 14-1647

1076 (S.D. Ind. 2012). The Owners now rely entirely on Indiana corporate law. To keep this opinion manageable, we pare 

away all but the most vital facts; the rest are in the district 

court’s exhaustive opinions. (The district court’s 2014 opinion 

on the state-law issues is not published but is available from 

the court.)

In 1999 Emmis issued 2.875 million shares of preferred 

stock for $50 a share, raising about $144 million. The shares 

promised cumulative dividends of $3.125 a year. A dividend 

is “cumulative” when any unpaid portion carries over to the 

next year. If any dividends on the preferred stock remain 

unpaid, Emmis cannot repurchase any of its common stock, 

or pay dividends on it, and the preferred stockholders can

elect two members of its board of directors. To change any of 

the preferred stock’s rights, Emmis needs the consent of twothirds of the outstanding preferred shares.

In October 2008 Emmis stopped paying dividends on the 

preferred stock. It blames the financial crunch, but the reason is irrelevant. It has not paid anything on the preferred 

shares since then, so the cumulative dividends piled up and 

prevented the firm from paying dividends on common stock

or issuing any senior securities, which has made it hard for 

Emmis to raise new capital. In 2010 Emmis asked the owners 

of the preferred stock to accept a going-private transaction in 

which their stock would be exchanged for subordinated debt 

rather than cash; this proposal failed to get a 2/3 vote, which 

was required because going private entails retiring the 

common stock, a step inconsistent with the preferred shareholders’ rights unless they were first paid $50 a share plus all 

cumulative dividends.
No. 14-1647 3

By 2011 the preferred shares were trading in the market 

at about 25¢ on the dollar, and owners were disaffected. 

Some asked Emmis to repurchase the preferred stock, but 

that was not attractive because even one outstanding share 

would leave Emmis saddled with all of the preferred stock’s 

burdens. Of course, if the number of outstanding shares 

were small enough, Emmis could afford to buy this residue

at par plus all accumulated dividends; but if owners thought 

that Emmis would do that, then they would not sell to Emmis at a deep discount (everyone would want to be the owner whose shares were purchased on the back end, at maximum price), and all the shares would remain outstanding.

Emmis’s management began to search for ways to change 

the terms of the preferred stock. That, too, required a 2/3 

vote, but many owners were willing to sell at a discount, and 

to promise favorable votes as part of the transaction, as long 

as Emmis could ensure that holdouts would not get better 

terms. It ultimately chose two ways to get enough votes.

First, Emmis signed holders of approximately 60% of the 

preferred shares to what the parties call “total return 

swaps.” Emmis promised to purchase each preferred share 

for about $15; Emmis paid, and the owners delivered their 

shares to an escrow. Closing was deferred for five years 

(though it could be accelerated at Emmis’s option, or if the 

shares were delisted and stopped trading). The selling owners agreed to vote their shares as Emmis instructed during 

the interim. Emmis adopted this device because, once it purchased any given share outright, it would have been retired 

and lost voting rights. Ind. Code §23-1-25-3(a). As long as a 

share is “outstanding,” however, it has a vote. Ind. Code §23-

1-30-2(a). And in Indiana, apparently alone among the states, 
4 No. 14-1647

a corporation can vote its own shares. Ind. Code §23-1-22-

2(6). That’s why Emmis set out to acquire voting rights while 

leaving the shares “outstanding.”

Second, Emmis repurchased some of the preferred stock 

in a tender offer and reissued it to a trust for the benefit of 

employees. The trust was established to pay bonuses to 

workers who stuck with the firm through the financial 

downturn. The trustee had instructions to vote this stock at 

management’s direction. Senior managers and members of 

the firm’s board were excluded, which left them free to propose and vote on the deal without a conflict of interest.

The two devices together allowed Emmis to control more 

than 2/3 of the votes. (Plaintiffs own most of the remaining 

preferred shares.) Emmis then called on owners of both 

common and preferred stock to vote on whether the terms of 

the preferred stock should be changed. Both groups approved by the required margin. The cumulative feature of 

the preferred stock’s dividends was eliminated; the other 

rights we mentioned earlier also were abrogated. This would 

not have been possible if the documents creating the preferred stock had made a change in its terms a compensable 

event; then all a 2/3 vote could have done would have been 

to replace the favorable terms with a cash payment (equal, 

say, to $50 a share plus accrued dividends). But that safeguard was not there, which is what made this transaction 

economically attractive to Emmis (which is to say, investors 

other than the preferred shareholders). Once the vote had 

been completed, the escrow agent closed the swap transaction, and Emmis retired the preferred shares it received.

As this litigation has proceeded, most of the Owners’ arguments have fallen away. We’ve mentioned the securities-
No. 14-1647 5

law arguments. The Owners also contended, for example, 

that Emmis violated its fiduciary duty by reducing the rights 

of one set of investors in order to increase the wealth of another set. But the district court rejected all of the Owners’ 

state-law arguments.

On appeal the Owners pursue only two arguments. They 

maintain that the shares in the swap transactions were no 

longer “outstanding” for the purpose of §23-1-30-2(a) and so 

lost their votes. And they contend that the trust should be 

ignored because the shares were not held in a fiduciary capacity. We start with the latter argument.

Indiana allows corporations to vote their own shares “except as otherwise prohibited by this article.” Ind. Code §23-

1-22-2(6). One statutory exception is §23-1-30-2(b), which 

provides that a corporation is not entitled to vote its shares if 

they are owned by a second corporation, and the issuing 

corporation owns a majority of the stock of that second corporation. This limits holding-company structures and might 

be thought to rule out some trust structures too, including 

ESOPs (employee stock ownership plans). Subsection 2(c) 

then provides an exception to the exception: “Subsection (b) 

does not limit the power of a corporation to vote any shares, 

including its own shares, held by it in or for an employee 

benefit plan or in any other fiduciary capacity.” That’s the 

rule on which Emmis relied to vote the shares in the trust, 

and the district judge concluded that this was proper.

Plaintiffs do not deny that the structure satisfied the requirements of trust law and that the beneficiaries of the trust 

were employees. Instead they contend that the trust should 

be disregarded because the design was to vote the preferred 

stock in a way that decreased its value, and then exchange 
6 No. 14-1647

preferred for common stock. The Owners depict this as a 

value-reducing transaction. But what has that to do with the 

question whether the shares were held by “an employee 

benefit plan”? It might have been a ground for complaint by 

the employees under Indiana’s law of trusts, but the Owners 

are not among the trust’s beneficiaries and do not invoke 

trust law. Once we conclude, as we have done, that this was 

an “employee benefit plan,” the corporate-law question has 

been answered: Emmis (through the trustee) was entitled to 

vote the shares.

The Owners’ objection to the votes cast by holders of the 

shares subject to the swaps is that even though Indiana allows corporations to vote their own shares, they may vote 

only “outstanding” shares (Ind. Code §23-1-30-2(a)), and 

these shares, the Owners insist, were not “outstanding.” Yet 

they were owned by persons other than Emmis. Having put 

up a lot of money, Emmis understandably wanted the vote, 

which would affect the value of the shares. (Every state’s law 

permits an owner to transfer a vote in connection with an 

economic interest in the shares, such as a pledge to secure a 

loan.) If shares ceased to be “outstanding” as soon as their 

owners delivered them to an escrow, however, they would 

have retained that retired status even if the exchange was 

never completed. Nothing we could find in Indiana law contemplates the possibility of shares drifting in and out of

“outstanding” status as the probability or timing of a completed sale fluctuates.

The Owners observe that Emmis structured this transaction so that it would bear the economic risk of the shares, 

while the original owners no longer faced variability in the 

shares’ market price. That’s true. So if this transaction had 
No. 14-1647 7

been conducted in any state but Indiana, a court probably 

would have said that Emmis could not vote these shares, because it was their beneficial owner even if not their legal 

owner. But Indiana allows corporations to deal in and vote 

their own shares. Indiana gives voting rights to record owners, see Ind. Code §23-1-20-24, and the parties involved in 

the swaps were the record owners, who under Indiana law 

could agree to vote as Emmis directed. Ind. Code §23-1-31-2. 

All that’s necessary is that the shares be outstanding—as

these shares were until the transaction closed and Emmis received the shares. Indiana law is distinctive, but it is not our

job to reduce inter-state variance in corporate law.

The reader will note that we have not cited a single decision by an Indiana court. That’s because none interprets the 

statutes we have discussed. The parties have cited a few 

opinions by Indiana’s judiciary, but they do not address 

these statutes and seem to us to have little bearing on the 

transactions Emmis designed. Left to our own devices, we 

would have thought that these novel state-law questions belong in state court. (The parties are not of completely diverse 

citizenship.) But the Owners filed their suit in federal court

under the federal-question jurisdiction and did not ask the 

district judge to send the state issues to state court. The statelaw issues were vigorously litigated, and because neither 

side asked the district judge to relinquish supplemental jurisdiction, 28 U.S.C. §1367(c)(1), (3), we conclude that she did 

not abuse her discretion in resolving all aspects of the parties’ dispute.

The undercurrent of the Owners’ briefs is that the judiciary should not let the common stockholders (who elect the 

board) get away with improving their own position at the 
8 No. 14-1647

expense of the preferred stockholders. As we’ve mentioned, 

the agreements establishing the preferred stock might have 

required compensation if the terms changed, but they did 

not do so. And perhaps there were reasons to omit such 

clauses. Throughout the history of corporate law, several 

kinds of doctrines have made it hard for firms to issue new 

stock, or pay dividends on common stock, while previously 

issued stock (preferred or common) was in arrears. Those 

requirements slowly disappeared from state law because 

they made it hard for firms to recapitalize without going 

through bankruptcy. See Bayless Manning & James J. Hanks, 

Jr., Legal Capital 36–47, 67–95 (2013). For Emmis, which wanted to recapitalize by going private, the alternative to changing the preferred stock’s terms might have been reorganization under Chapter 11, which would have allowed the value 

of that stock to be written down. Maybe that’s why owners 

of more than 2/3 of the preferred stock freely sold to (or 

agreed to swaps with) Emmis; they voted with their wallets 

that the terms they were getting were better than the likely 

outcome of standing pat on the shares’ original contractual 

rights.

But if this is wrong, still it would not be a good reason to 

undermine Indiana’s decision, codified in Ind. Code §23-1-

22-2(6), that corporations may deal in and vote their own 

shares. If as the Owners maintain this was a deliberately 

value-reducing use of that statutory power, then the right defendants would have been the members of Emmis’s board, 

and the right theory would have been that the directors violated their duty of loyalty by using their positions to transfer 

wealth from one class of investors to another. Yet the Owners 

did not sue the directors; their only fiduciary-duty claim was 

against the corporation itself, and the district court held that 
No. 14-1647 9

in Indiana corporations (unlike directors) do not have fiduciary duties to investors. All that remains are arguments 

about the extent of statutory power rather than about the 

propriety of its use, and we’ve explained why Emmis had 

the authority to act as it did.

An amicus brief filed by the Council of Institutional Investors asks us to reverse because, in the Council’s view, Emmis

did not employ “corporate governance best practices.” The 

Council apparently scorns state law and would prefer a synthetic federal corporate common law, or perhaps a requirement that every state use the same principles as Delaware. If 

judges (and state legislators) could be sufficiently sure what 

the best practices are, that would be an attractive idea. But it 

is hard to know the full effects of corporate codes, which 

lead to contractual adjustments and changes in prices. Federalism permits states to adopt different codes, after which 

people can choose which states’ firms to invest in, and at 

what price. See Michael C. Jensen & William H. Meckling, 

Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976); Ralph K. Winter, 

State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251 (1977); Eugene F. Fama, Agency Problems and the Theory of the Firm, 88 J. Pol. Econ. 288 (1980).

Confident assertions along the lines of “state X’s rule Y is 

bad for investors, so Y should be stamped out” have run 

through corporate law and commentary since Governor 

Woodrow Wilson persuaded New Jersey’s legislature to replace investors’ contractual arrangements with mandatory 

prescriptions, and businesses responded not by using New 

Jersey’s rules but by reincorporating in the more permissive 

Delaware. Doubtless many corporate rules are bad for inves-
10 No. 14-1647

tors, but the way to find them is by competition and price 

adjustments, not judicial attempts to suppress federalism. 

The process of competition has yielded substantial benefits. 

See Roberta Romano, The Genius of American Corporate Law

(1993). Indiana’s willingness to allow corporations to vote 

their own shares may be good, or it may be bad, but the ability to negotiate for better terms, or invest elsewhere, rather 

than judicially imposed “best practices,” is how corporate 

law protects investors.

AFFIRMED