Apple Loss to Einhorn Raises Pressure for Investor Payout

By Christie Smythe

Scott Eells/Bloomberg

David Einhorn, president and co-founder of Greenlight Capital Inc., on Bloomberg Television in New York, on Feb. 7, 2013. Einhorn and Greenlight have urged Apple to issue high-yielding preferred stock in order to help shift the value of a $137 billion stockpile of Apple's cash to investors.

David Einhorn’s Greenlight Capital Inc. winning a court order blocking an upcoming Apple Inc. (AAPL) shareholder vote increases pressure on the iPhone maker to return some of its growing cash hoard to investors. 

U.S. District Judge Richard Sullivan in Manhattan yesterday granted Greenlight’s request to stop a Feb. 27 vote that would require shareholder approval before the company could issue a new class of preferred shares. Following the ruling, Apple said it would pull the proposal from its shareholder meeting.

Einhorn has used the lawsuit to drum up support among fellow investors to get Apple to return some of its $137.1 billion incash and investments back to shareholders. The push comes as Apple’s stock has declined 36 percent from a record in September on concern that growth is slowing.

“It’s a shame that you have to go through the legal system, but we’re happy that there is a real message being sent to management that they should consider an alternative strategy” for the cash, said Keith Goddard, president of Capital Advisors Inc., an Apple investor who supported Einhorn’s lawsuit.

Apple has been grappling with investor criticism about its cash for years. Near bankruptcy before co-founder Steve Jobs returned to the company in 1997, the cash balance swelled from successful products such as the iPod, iPhone and iPad. While the company tried to address the matter last year by announcing a dividend, investors such as Einhorn have been seeking more.

Preferred Shares

Greenlight, which says it holds more than 1.3 million Apple shares, claimed that grouping the provisions violates U.S. Securities and Exchange Commission rules. The New York-based hedge fund and its founder have urged Apple to issue high- yielding preferred stock to carve out more cash for investors.

The proposal would eliminate the power of Apple’s board power to issue preferred stock, Greenlight alleged in its complaint. Apple argued the change would only prevent the company from offering the stock without consent of investors.

The court ruled Apple improperly bundled the vote, called Proposal No. 2, with other unrelated issues.

“We are disappointed with the court’s ruling,” Apple said yesterday in a statement. “Proposal No. 2 is part of our efforts to further enhance corporate governance and serve our shareholders’ best interests. Unfortunately, due to today’s decision, shareholders will not be able to vote on Proposal No. 2 at our annual meeting.”

‘Silly Sideshow’

Apple Chief Executive Officer Tim Cook has said the company would ask for shareholder approval if it decided to issue preferred shares even if its proposal didn’t get approved at the shareholder meeting. He said Feb. 12 that Apple has more cash than it needs to operate the business, calling the legal tussle with Einhorn a “silly sideshow” and “distraction.”

Greenlight commended the court for its ruling.

“This is a significant win for all Apple shareholders and for good corporate governance,” Jonathan Doorley, a spokesman for Greenlight, said in an e-mailed statement.

Erik Gordon, a business professor at the University of Michigan at Ann Arbor, said the ruling is “a small win that keeps Einhorn in the game and his preferred stock proposal on the table.”

“The Apple board won’t be able to hide behind a supposed stockholder prohibition against issuing the preferred,” he said in an e-mail. “The board will have to face its responsibility to consider the proposal and approve or decline it.”

Shareholder Approval

Apple has met with Einhorn to discuss his proposal and concerns. In one meeting with Apple executives, Einhorn said that requiring investor approval for issuing preferred stock could create a “roadblock that was not needed” to his plan for sharing the value of the company’s cash with shareholders, according to a declaration filed by Apple Chief Financial Officer Peter Oppenheimer.

Einhorn said he wanted to “take the risk away,” according to the filing.

The California Public Employees’ Retirement System said it continues to support the company’s effort to implement majority shareholder approval for issuing preferred stock.

“We encourage Apple to reintroduce these measures as soon as is practical so that all investors can be heard,” Anne Simpson, senior portfolio manager and director of global governance for the pension fund, said in an e-mailed statement. “We applaud the company’s commitment to strengthening shareholder rights.”

Majority Voting

Along with the preferred-share proposal, Apple included measures that would facilitate majority voting in director elections and establish a par value for the company’s common stock.

Greenlight’s lawyer, Mitchell Hurley, told Sullivan during a hearing that the hedge fund supports the other two items.

Sullivan’s order also addressed a request for an injunction by investor Brian Gralnick, who objected to the alleged bundling in Proposal No. 2 and an alleged lack of explanation for computing certain executive compensation in a separate proposal. The judge said he didn’t think Gralnick was likely to prevail on the compensation matter.

The case is Greenlight Capital LP v. Apple Inc., 13- cv-00900, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Christie Smythe in Brooklyn atcsmythe1@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net; Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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