Court Will Hear Oral Argument in Einhorn-Apple Proxy Dispute Tomorrow

An interesting, albeit technical, issue under the federal proxy rules will be argued tomorrow in federal district court in Manhattan.  David Einhorn and his hedge fund, Greenlight Capital, seek a preliminary injunction to enjoin Apple from counting the votes cast by proxy on an Apple Proposal to amend its certificate of incorporation at its February 27 shareholder meeting.  According to plaintiffs, the Apple Proposal #2 violates SEC Rule 14a-4(a)(3) and (b)(1), the "anti-bundling rule," which requires that the proxy "shall identify clearly and impartially each separate matter intended to be acted upon.... "

The Proposal in question would amend the certificate of incorporation in (at least) three ways:

(i) eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock, (iii) establish a par value for the Company’s common stock of $0.00001 per share and (iv) make other conforming changes... 

According to plaintiffs, this is really three separate proposals, and they want to vote against only the amendment eliminating preferred stock.  They argue that forcing them to vote up or down on the entire package of amendments is precisely the kind of decision that the SEC unbundling rule is designed to protect them from having to make.  This argument does have the advantage of simplicity.  In a close case, why not unbundle the proposals to give the shareholders the maximum amount of choice?

Apple, however, counters that the motion for preliminary injunction should be denied since plaintiffs are not likely to succeed on the merits: the proposal is a single proposal to amend the certificate of incorporation and does not bundle material matters (i.e., these are technical amendments).  Apple asserts that the proposal does not put the plaintiffs to an unfair choice since all the amendments are pro-shareholder and supported by corporate governance advocates like CALPERS (whose application to file an amicus brief was denied by the court as unnecessary).  Apple also asserts that many corporations have asked their shareholders to vote on single proposals to amend the certificate in several different respects, without objection by the SEC or shareholders.  Finally, Apple argues that the motion for a preliminary injunction should be denied because, in any event, the plaintiffs have not made a clear showing that they would suffer immediate and irreparable harm if the shareholder vote goes forward; if the Proposal is adopted by the shareholders and a court ultimately finds that it violated SEC rules, the Proposal could easily be undone (in contrast to a vote on a merger, which would be infeasible to unwind). 

According to Apple, Einhorn and Greenlight are using this litigation to pressure Apple into acceding to their demand for the creation of a high-yield preferred stock to unlock shareholder value.  Apple is certainly right about the plaintiffs' motivation.  Nevertheless, the question for the court is whether the voting decisions of Apple shareholders are likely to be distorted by the Proposal, which forces them to make a unitary decision, up or down, about several amendments to the certificate of incorporation on different matters. To this securities professor at least, it raises a nice question about what "each separate matter" means.