Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, February 11, 2013

Einhorn Raises Issue of Interpeting SEC's Unbundling Rule

As Securities Law Prof Blog readers probably know, David Einhorn through his hedge fund, Greenlight Capital, is a significant SH in Apple.  Einhorn is dissatisfied because he says that Apple has $137 Billion in cash ($145 per share) on its balance sheet and has “an obligation to examine all options to create and unlock additional value” for its SHs. Einhorn advocates that Apple unlock shareholder value by distributing to existing SHs a perpetual,  high-yield preferred stock that would enable SHs to own and trade separately the preferred shares and the existing common shares.

Apple's annual SH meeting is scheduled for Feb. 27.  On the agenda is a management proposal  to amend the certificate of incorporation in several ways (Proposal 2), including eliminating the power of the BOD to issue preferred shares without SH approval.  Specifically,

the amendment of the Company’s Restated Articles of Incorporation would (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.

Greenlight opposes this amendment because it would “hinder [Apple’s] ability to unlock value for shareholders.” It recently sent a letter to SHs, urging them to vote against Proposal 2 because it is “value destructive” and “impedes the boards’ flexibility.”  CALPERS is also soliciting Apple SHs, urging them to support Apple management on Proposal 2 as enhancing SH rights. In a Feb. 7 statement, Apple stated that the company is actively discussing other ways about returning additional cash to SHs and that it will thoroughly evaluate the Greenlight proposal.  Regarding Proposal 2, Apple stated that:

As a part of our efforts to further enhance corporate governance and serve our shareholders’ best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight’s proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock. Currently, Apple’s articles of incorporation provide for the issuance of “blank check” preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders.

 Greenlight has also filed suit in S.D.N.Y. asserting that Proposal 2 violates the SEC’s proxy rules because it contains three amendments to the Certificate of Incorporation, contrary to SEC rules that do not permit the bundling of separate matters presented for SH vote (Rule 14a-4(a)(3), Rule 14a-4(b)(1)).  It seeks a preliminary injunction against the shareholder vote.  The Court has scheduled a Feb. 22 oral argument on the application for a preliminary injunction.

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