A federal judge is blocking Apple (Nasdaq: AAPL) from conducting a shareholder vote on a package of governance proposals, handing a victory to a rebel investor who is trying to persuade the company to share more of its cash with its investors.
U.S. District Judge Richard Sullivan in New York ruled Friday that Apple was wrong to bundle four amendments to its corporate charter into one proposal for a vote at next Wednesday’s annual meeting. Shareholders should get to vote on the amendments separately, he said.
Greenlight Capital, a hedge fund run by Wall Street maverick David Einhorn, sued Apple over the proposal because it would remove the board’s ability to issue preferred stock without shareholder authorization. Einhorn wants Apple to issue “iPrefs,” preferred shares with a guaranteed dividend, as a way of committing the company to sharing its massive profits with shareholders.
Einhorn has been trying to rally Wall Street to vote against the Apple proposal as a way of showing their displeasure with the company’s capital-allocation policies. Apple has $137 billion in the bank, an unheard-of sum that grows by about $40 billion every year. Investors almost universally want Apple to hand out at least some of that cash, but Einhorn hasn’t gotten much support for his “iPrefs” idea or his “No on Proposal 2” campaign.
Apple and Greenlight didn’t immediately respond to requests for comment Friday.
Last week, Apple CEO Tim Cook said the company’s proposal puts more power in the hands of shareholders, making it difficult to understand why a shareholder would fight it. Calling Greenlight’s campaign a waste of time, Cook said Apple wouldn’t squander money by mailing letters to shareholders to persuade them to vote for the proposal.
The California Public Employees’ Retirement System, the country’s largest pension fund, had said it would vote for Apple’s proposal, because it would have strengthened shareholder rights. Among other measures, it would let shareholders vote against directors.
On a conference call with investors and reporters Thursday, David Einhorn, founder of hedge fund Greenlight Capital, laid out the case for something he calls “iPrefs,” a class of dividend-bearing preferred stock. He wants Apple to issue these shares free to shareholders as way of committing to use its massive profits for the benefit of shareholders.
Einhorn insisted that issuing preferred stock would unlock about $150 a share in value.
“Apple’s attitude towards managing its cash has been exceedingly non-innovative,” Einhorn said.
Apple should use $47 billion to issue preferred stock with a quarterly dividend of 50 cents indefinitely, he said. Shareholders would see a benefit of $61 a share more under this plan than with other ways of returning cash, Einhorn said.
Greenlight holds more than 1.3 million Apple shares, or a stake of less than 1 percent, according to company filings.
Einhorn’s proposal wasn’t on the agenda for Apple’s annual shareholders meeting next Wednesday. Instead, he wants to turn voting on a company proposal —one that attempts to bundle several governance measures— into a referendum on his plan. Among the measures is one that would eliminate the board’s leeway to issue preferred shares without approval from shareholders, something that would make implementing Einhorn’s iPrefs somewhat more time-consuming.
Einhorn intends “to hold governance reforms hostage to his efforts to draw cash out of Apple. This flies in the face of what we know about long-term value creation,” said Simon Greer, CEO of the foundation.
A company with excess cash will usually reward shareholders by raising its dividend or issuing a one-time dividend. It could also buy back more shares. Einhorn believes none of these routes would yield as much shareholder value as the iPrefs, because their 4 percent annual dividend yield would make them attractive to investors that otherwise wouldn’t look at Apple shares, like pension funds and endowments.
“In contrast to the rest of Apple’s business, where innovation is the norm, Apple’s attitude toward managing its cash has been exceedingly non-innovative,” Einhorn said on the call.
Einhorn, 44, been highly successful at “shorting” the stocks of companies that have hidden weaknesses, effectively betting that their value will decline. He shorted Lehman Brothers in 2007, a year before the financial firm went under. More recently, his comments have sent the stocks of Green Mountain Coffee Roasters, Herbalife and Chipotle Mexican Grill plummeting.
Forbes lists his wealth as of Sept. 2012 at $1.2 billion.
(The AP and Bloomberg contributed to this report.)