Hedge fund star David Einhorn wants to force Apple Inc to share some of
its huge cash reserves with investors, but his lawsuit rests on a U.S.
securities rule that has little legal precedent.
Capital sued the iPad and iPhone maker in U.S. District Court in
Manhattan on Thursday to try to prevent Apple from eliminating preferred
stock from its charter. The suit is part of Einhorn's bid to pressure
Apple to use some of its $137 billion in cash to issue perpetual
preferred shares that pay dividends to existing shareholders.
suit contends Apple violated Securities and Exchange Commission rules
that prohibit companies from "bundling" unrelated matters into a single
proposal for a shareholder vote.
Establishing that Apple violated
the rules could be tricky. Little to no case law exists on the question
and the SEC's own rule is relatively general with little guidance, legal
Still, James Cox, a professor at Duke University School of Law, thinks Einhorn "has a hell of good case."
"I think he's got Apple in the crosshairs," he added, saying that it "strikes me as a fairly dramatic case of bundling."
hedge fund manager is seeking an injunction to block a February 27
shareholder vote on the proposal, saying Apple violated Section 14 of
the Securities Exchange Act of 1934. Arguments are to be heard before
U.S. District Judge Richard Sullivan on February 22. Apple has until
February 15 to file a response with the court.
The proxy proposal
at issue, Proposal No. 2, seeks to amend Apple's articles of
incorporation in three ways: by providing for majority voting for
directors, establishing a par value for Apple stock and eliminating its
ability to issue preferred stock.
Einhorn is represented by law
firm Akin Gump Strauss Hauer & Feld, Greenlight's long-time outside
counsel. No lawyer for Apple is yet listed on the court docket and a
representative declined to say who would represent Apple in the case.
Friday, the California Public Employees Retirement System, the biggest
U.S. public pension fund and owner of 2.7 million Apple shares, and
influential proxy voting firm ISS Proxy Advisory Services both urged
investors to vote in favor of the shareholder proposal in question.
shareholders should have a vote," Anne Simpson, CalPERS Senior
Portfolio Manager and Director for Corporate Governance said on CNBC.
"We don't want the board cutting a deal on the side with a hedge fund
out of fear of a lawsuit that will cancel the annual meeting.
is a big issue that needs to be thought through carefully and we want
the board to come to all shareholders and give a chance to have their
ISS, which issues recommendations on how shareholders
should vote on proxy proposals, generally believes the "bundling" of
proposals was not in the best interest of shareholders, but supported
the elimination of "blank check" preferred shares due to their potential
to be misused as a takeover defense.
"Though many investors have
viewed Apple's cash holdings as excessive and wanted to see more of it
returned to shareholders, that view may not be universally held: other
investors may prefer to see the cash (or at least a large portion of it)
deployed for investments and acquisitions," it said in its Friday
How will Apple respond?
It is unclear how Apple
will respond in its formal reply to the lawsuits. On Thursday, Apple
said Einhorn's lawsuit was misguided and that adoption of Proposal No. 2
would not preclude preferred share issuances in future.
Apple's articles of incorporation provide for the issuance of 'blank
check' preferred stock by the Board of Directors without shareholder
approval," Apple said. "If Proposal #2 is adopted, our shareholders
would have the right to approve the issuance of preferred stock."
a well-known short-seller and Apple gadget fan, said in an interview
with CNBC the company harbored a "Depression-era" mentality that led it
to hoard cash and invest only in the safest, lowest-yielding securities.
nearly went broke in the 1990s before Steve Jobs returned and
engineered a sensational turnaround, with products such as the iPhone
and iPad that became must-haves for consumers around the world. The
company's near-death experience has led Apple to be exceptionally
conservative with its cash.
Greenlight in its complaint said it
supports two of the proposals, but not getting rid of preferred stock.
Einhorn deems preferred stock superior to dividends or share buybacks
and has separately put forward a proposal for an issuance of Apple
preferred stock with a perpetual 4 percent dividend.
Apple's proxy proposal is structured, Greenlight said, shareholders have
"no choice but to either vote in favor of an amendment they oppose, or
against an amendment they support."
Few lawsuits have ever been
filed challenging proposals under the rules, a situation some legal
experts attributed to the normally passive nature of shareholders.
most cases you're not going to get a lot of complaining about
bundling," said Brian Slipakoff, special counsel at law firm Duane
Morris in Philadelphia.
In one of the few related lawsuits, the
2nd U.S. Circuit Court of Appeals in New York in 1999 recognized an
implied private right of action by shareholders suing over alleged
anti-bundling rule violations.
That precedent could back Einhorn
in his legal standing to bring the case. The appeals court ruling was
cited by Greenlight in additional court papers filed late on Thursday.
Vasquez, a lawyer with the law firm White & Case who is not
involved in the case, said Apple might argue that because the
stockholder proposals in Proposal 2 are all amendments to the charter,
they are properly related.
The California company has another five
proposals up for a vote, which are not being challenged by Einhorn and
do not involve amending Apple's charter. Those measures focus on matters
such as director elections and executive compensation.
first argument likely is going to be, 'Look, these are all amendments we
put in one place, they don't have to do with the other items,'" Vasquez
The anti-bundling rules date from 1992. John Coffee, a
professor at Columbia Law School, said the idea was to "prevent
managements from bribing shareholders with a sweetener into voting for a
proposal they would otherwise reject."
The case is Greenlight Capital LP, et al., v. Apple Inc., U.S. District Court, Southern District of New York, 13-900.
© Thomson Reuters 2013