On Friday in New York, US District Judge Richard Sullivan ruled to block a shareholder vote at Apple's upcoming annual meeting concerning how preferred stock may be issued. Earlier this month, hedge fund manager and activist investor David Einhorn sued Apple to prevent the vote from being considered without unbundling the vote into its component parts. The proposal would abolish Apple's ability to issue preferred, dividend-paying stock at will, and is bundled with a motion to facilitate majority elections for the company's board of directors and another to add a "par value" to Apple shares. This bundling, Einhorn charges in his lawsuit, violates SEC rules for shareholder proxy proposals.
In response to the judge's ruling, Einhorn's Greenlight Capital issued the following statement:
This is a significant win for all Apple shareholders and for good corporate governance. We are pleased the Court has recognized that Apple's proxy is not compliant with the SEC's rules because it bundles different matters in Proposal 2. We look forward to Apple's evaluation of our iPref idea and we encourage fellow shareholders to urge Apple to unlock the significant value residing on its balance sheet.
Since May 2012, Greenlight has proposed several times that Apple issue preferred stock with a large dividend to return more of the company's accumulated cash to its shareholders. On Thursday, Einhorn took a public conference call to detail his proposal, which he calls "iPrefs." "Here's the product that Apple doesn't yet know it needs," he said. Einhorn proposes that Apple use its current powers to issue preferred stock with a face value of 50 dollars and a 50 cent quarterly dividend in perpetuity. Einhorn says this would return $47 billion of cash to Apple shareholders. The proposal blocked by the judge today would make it much more difficult for Apple to create such a class of stock.
Last week, Tim Cook called the lawsuit "a silly sideshow"
The lawsuit and an accompanying public letter by Einhorn urging shareholders to reject Apple's proposal were met with a rare public response by Apple. Apple's response urged shareholders to approve the bundled proposal (called "Proposal 2") but left room for some kind of increased dividend down the line.
Last week, CEO Tim Cook dismissed the lawsuit as "a silly sideshow." Judge Sullivan disagreed, stating on Wednesday that Greenlight's case would likely succeed on its merits. Still, the decision today to grant Greenlight's motion and ordering a stop to the vote is remarkable, since it suggests that Apple moving forward with the vote would cause irreparable harm to the shareholders.
Apple has a few options. It can appeal the judge's decision and seek to have the injunction on the vote lifted. It can present the same issue to the shareholders for a vote, but unbundle the governance elements from the proposal to eliminate "blank check" preferred stock. But this cannot be done before the scheduled shareholder meeting on February 27th.
Greenlight Capital owns 1.3 million shares of Apple. At its current share price of $450, those shares are worth slightly less than $600 million. At its peak price of $702 in October, those same shares were worth more than $900 million. It's that falloff in share price, coupled with the judge's ruling, that could suddenly give Einhorn's proposals real traction with other shareholders.
Update: Apple has pulled Proposal 2 from consideration for the February 27th shareholder meeting and issued this statement:
We are disappointed with the court’s ruling. Proposal #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 #2 at our annual meeting next week.