On Friday, February 22, Greenlight Capital, the hedge fund founded and run by David Einhorn, won an order preventing Apple Inc. (AAPL) from moving forward with a shareholder vote on certain provisions, including one designed to limit Apple's ability to issue preferred stock. The move may be seen as a minor victory for the activist shareholder. David Einhorn's Greenlight has urged Apple to issue high-yielding preferred stock in order to transfer some of the value of its $137 billion cash hoard to shareholders. Apple is opposed to Greenlight's proposal, but the pressure from it, as well as Apple's growing cash position makes a pending dividend increase of greater likelihood.
Greenlight, which held 1,582,006 shares Apple as of the end of 2012, filed a suit that claimed Apple's grouping of the provisions violated U.S. Securities and Exchange Commission rules (the lawsuit is captioned Greenlight Capital LP v. Apple Inc., 13-cv- 00900). U.S. District Judge Richard Sullivan, of the Southern District of New York, granted Greenlight's request for an injunction to block that vote on the basis that Apple had intentionally and unfairly packaged multiple provision proposals into a single voting item titled "Proposal No. 2."
In total, Apple's proposal at issue sought to amend Apple's articles of incorporation by changing the language about the election of directors, setting a minimum value for Apple shares and requiring a shareholder vote prior to issuing any preferred shares. Greenlight indicated it would support the first two changes, while it opposes the third. Einhorn's proposed goal is for Apple to issue perpetual preferred stock that would pay a four percent dividend. Apple argued that it is not breaking any law by grouping the matters up for vote, as all three involved changed the company's articles of incorporation.
According to Judge Sullivan's 16-page Memorandum and Order (linked above), the court found Greenlight's argument persuasive and agreed that Greenlight would be irreparably harmed by the proposed bundled vote, and also that it would likely prevail in its ongoing lawsuit alleging the bundling of the items is illegal. Judge Sullivan's decision noted that if the disputed Proposal No. 2 were to pass its vote, Greenlight "will be hampered with an amendment to the articles they oppose and which Apple presented illegally."
The proposal was scheduled for vote at Apple's meeting next week, on February 27, but the measure to eliminate the company's authority to issue preferred stock will now be delayed. Apple will now have to re-submit these matters to individual votes at a later date, or negotiate some other amicable resolution.
In reaction to being awarded this injunction, Greenlight commented:
"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."
Judge Sullivan separately denied a request by another shareholder that wanted Apple to disclose more information about how the company grants stock awards to executives.
While this injunction is unlikely to result in Apple capitulating and initiating a plan in line with what Einhorn has suggested, it will cause the company to revise its plans and also consider initiating some shareholder friendly initiatives that might help Apple prevent other shareholders from voting and/or speaking out against the board.
Many have speculated that Apple is likely to increase its dividend shortly, and such a maneuver may help appease shareholders and eliminate the issue of Einhorn's proposed preferred shares. Apple first announced plans to initiate its dividend in March of 2012, and that anniversary is rapidly approaching. Last month, Apple announced that it hired Luca Maestri, the current Chief Financial Officer at Xerox Corp. (XRX) as Apple's new corporate controller. Maestri's hiring may be an indicator of coming dividend increases. According to Ben Reitzes of Barclays (BCS), "Maestri is a champion of shareholder return." All of this indicates that Apple may announce an increased dividend on the anniversary of its initial dividend announcement, which was on March 19 of last year.