Andrew Harrer/Bloomberg News

You have to marvel at the lengths to which the radio station operator Emmis Communications has gone to strip its preferred stock of voting rights and accrued dividends worth millions. And deal watchers will salivate over the clever legal structures devised by Emmis’s lawyers.

In short, it’s a deal for everyone — except Emmis’s preferred shareholders.

It all started in October 1999, when Emmis Communications issued a publicly traded preferred stock with a yield of 6.25 percent. The preferred stock was issued at a price of $50 a share, raising $144 million.

As is common with preferred stock, it had a number of special rights. In order to protect the preferred shareholders, the stock dividend, which is paid on the $50 a share initial price, accrues yearly, even if it is unpaid. And if the preferred dividend is not paid, holders of the preferred stock are entitled to elect two directors.

Most significant, if Emmis Communications is taken private by management, the holders of the preferred stock redeem the shares at $50 a share plus the accrued dividend.

Because of the unpaid dividends, the redemption price of the preferred stock had grown to $62.12 a share as of April 15, for a total of $178.6 million.

Emmis’s current market capitalization is less than $100 million, and it has only about $5 million in cash on its balance sheet. Emmis cannot afford to pay a dividend, nor can it afford to redeem the preferred stock. Instead, it sits there, a big liability.

The preferred stock has also posed a significant problem for Emmis’s chief executive, Jeffrey H. Smulyan, who controls 59.7 percent of Emmis’s common stock. Mr. Smulyan has twice attempted to acquire the company.

The first time, in 2006, Mr. Smulyan could not obtain the consent of an independent committee of directors to an offer at $15.25 a share that would have bought out the preferred stock at $50 a share.

By 2010, Emmis was not doing as well. Mr. Smulyan made a second offer to buy the common at $2.40 a share and the preferred stock with notes he valued at $30 a share. This bid died when the preferred shareholders refused to accept changes to the terms of the preferred stock.

With Emmis’s current financial situation, Mr. Smulyan cannot take over the company without dealing with the preferred shareholders. Perhaps more important, the company itself is severely restricted from raising additional capital because of the big liability to preferred shareholders.

Enter some very aggressive and creative lawyers. This trick has four steps.

Step 1: In November 2011, Emmis obtained new capital, entering into an agreement to borrow $35 million from the Zell Credit Opportunities Master Fund. Sam Zell is known as an aggressive deal maker, as the terms demonstrate. Emmis is paying an interest rate of 22.95 percent and the notes automatically mature in 2016 requiring that Emmis pay the Zell fund $65 million.

Step 2: With money in hand, Emmis entered into total return swaps and voting agreements with respect to about 61 percent of the preferred stock at a purchase price of $15.25 to $15.75 a share. The total return swaps were agreements to purchase the economic interest of the shares from holders of preferred stock. This left the holders with nothing but the preferred share and the vote.

Emmis then separately entered into a voting agreement with respect to the shares, leaving owners of the preferred stock holding valueless “zombie” shares with almost no rights.

This maneuver is possible because of a quirky Indiana law that can be read to allow a company to vote its own shares so long as they are still outstanding, but not if they are actually purchased and owned by the company. By entering into derivatives in the form of total return swaps, Emmis could claim that the shares were still outstanding and could be voted by Emmis.

Step 3: Emmis still needed to acquire a supermajority interest in the preferred shares, so it established an employee retention plan and issued 400,000 shares of preferred stock to the new trust. Emmis again claimed that it could vote these shares since Indiana law “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.”

Emmis now had the votes to amend the terms of the preferred shares, which otherwise required two-thirds of the preferred shares.

Not surprising, the remaining preferred shareholders sued, including the hedge funds Corre Opportunities Fund and Zazove Associates, claiming this violated Indiana state law and federal securities laws.

But in an opinion issued on Aug. 31, a federal court in Indiana declined to enjoin the shareholder vote since, among other things, it found that the loophole used by Emmis was valid and the stock was outstanding for voting purposes under the Indiana statute.

Step 4: On Sept. 4, Emmis voted its preferred shares to amend the terms of the preferred stock. The result was to gut those shares: the accrued dividend was eliminated and made noncumulative.

In addition, the right of preferred shareholders to appoint two directors was eliminated, as was the right to force a redemption if the company went private or to separately vote on an acquisition. In the wake of these machinations, the preferred stock declined in value to about $9 a share from $20.

Emmis’s maneuvers provide a lesson in the quirks of state law. Emmis got away with this because it was incorporated in Indiana.

Delaware, for example, prohibits a company from voting its own shares, in part to prevent this type of action. In addition, since the terms governing the preferred stock did not specify that Emmis could take these steps, Delaware would probably impose a higher standard. Consequently, the directors would have a fiduciary duty to act in good faith toward preferred shareholders.

A Delaware court probably would have called a foul on Emmis. But while the Indiana court did not address this issue, the tone of its opinion seemed to be that it would not adopt the Delaware approach.

I spoke with Mr. Smulyan, who was very forthright about the steps the company took. He stated to me that the situation “all started with the preferred shareholders, who were mostly hedge funds wanting to be bought out at $50 per share.”

“We checked our rights and felt comfortable under Indiana law that we could undertake this transaction,” he continued. “The preferred shareholders felt they had holdup value and we felt they didn’t. This is Indiana. They always looked at it from a Delaware perspective.”

For preferred shareholders everywhere, the lesson is clear: your rights may not be as certain as you think, and clever lawyers can often find a way to circumvent a contractual right. Expect the terms of preferred shares issued in the future to have protections against maneuvers like the ones Emmis employed.

A second lesson is that trying to hold up a company with legal rights when its finances don’t make sense can often be a losing position.

As for Emmis, Mr. Smulyan has denied under oath that he has any intention of taking the company private, but even Emmis acknowledges that such a move would now be easier.

It may be that Mr. Smulyan will change his mind and proceed. If so, he will be able to pay a much lower price for the preferred stock. In addition, and perhaps what is more significant, the company’s capital structure is much improved, which Mr. Smulyan asserts “saved them from bankruptcy.”

And Emmis’s maneuvering has been so aggressive and clever that Mr. Smulyan and the company can choose to leave the preferred shares outstanding, bereft of the ability to influence Emmis or require it to pay a dividend.

It’s quite a feat.

Corre Opportunities Fund Lp Et Al v Emmis Communications Corporation Et Al