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Apple Sued by Greenlight Capital Over Bundled Proxy Proposals

Joe Mont | February 7, 2013

While urging Apple shareholders to reject a proposed amendment to its charter that would eliminate the issuance of preferred stock, Greenlight Capital, a hedge fund that holds more than 1.3 million shares in the company, is also suing the tech giant over its bundling of corporate governance initiatives into a single proxy proposal.

Greenlight, an Apple shareholder since 2010, has been critical of Apple's capital allocation strategy. In a statement, it lamented the “combination of Apple's low (and shrinking) price to earnings multiple and $137 billion (and growing) hoard of cash on the balance sheet [roughly $145 per share]." Since May, the fund has repeatedly urged the creation of a new security, “a perpetual, high-yielding preferred stock” it claims would “unlock several hundred billion dollars of shareholder value.”

Apple's charter currently permits the board to issue shares of preferred stock with voting, conversion, and other rights determined at its sole discretion. That practice is known as issuing “blank check” preferred stock because it does not require shareholder approval. In its 2013 proxy statement, Apple says it has not issued shares of preferred stock since 1997, “does not intend to issue preferred stock in the future,” and believes that it is appropriate to eliminate this provision. If the proposed amendment is approved by shareholders, “any future issuances of preferred stock would require shareholder approval.”

In a letter to shareholders, David Einhorn, Greenlight's president, said Apple has indicated that it may consider the fund's suggestion, but will nevertheless proceed with “Proposal 2,” which includes the charter amendment, at its annual meeting on Feb. 27. “This is an unprecedented action to curtail the company's options,” he wrote. “We are not aware of any other company that has ever voluntarily taken this step. Furthermore, over 90 percent of the S&P 500 companies have the flexibility to issue similar preferred shares.”

That fight has now evolved into a lawsuit, filed today in the U.S. Federal District Court for the Southern District of New York. The suit alleges that Apple's Proposal 2 ties together three distinct corporate governance proposals – majority voting for directors, establishing a par value for company stock, and the elimination of preferred stock – violating a Securities and Exchange Commission rule that certain items be “unbundled.”

In Apple's corner is the influential California Public Employees' Retirement System, better known as CalPERS, which is supporting Proposal 2 and all three of its included matters. The nation's largest public pension fund, with approximately $243 billion in assets, it owns approximately 2.7 million shares of Apple common stock

Greenlight's letter to shareholders claims that voting against Proposal 2 does not affect the majority voting reform, at least not in the short term, as board members have already agreed to resign from the board if they fail to receive a majority of votes cast “for” their election.