General Motors Company (NYSE:GM) is under increased scrutiny from Greenlight Capital this week after the hedge fund accused the automaker of misrepresenting its stock plan.
In a press release, Greenlight also nominated three candidates for GM’s board of directors and reiterated its desire for the company to split its stock into two separate classes.
Greenlight, a hedge fund led by billionaire investor David Einhorn, has owned shares of General Motors on and off for several years and currently holds a 4.9% stake in the carmaker. Just two weeks ago, the fund announced its plan to “unlock substantial value” for General Motors shareholders, and now it claims that GM has purposefully misled ratings agencies about the idea.
“Greenlight believes that GM has embarked on a campaign specifically designed to mischaracterize the Plan and mislead investors and credit rating agencies about its merits,” Greenlight said.
In today’s statement, Greenlight accused GM of making several detrimental changes to a term sheet sent by the fund. Greenlight believes that these changes were misrepresented as being a part of its original plan when GM met with ratings firms.
A Unique GM Stock Split Is Under Consideration
At the core of Greenlight’s plan is a unique version of a stock split that would see the carmaker divide its common stock into two classes, with one focused on receiving current dividends and the other poised to cash in on the company’s growth.
“[The] Dividend Shares would receive the current dividend, and the Capital Appreciation Shares would participate in the remaining earnings, cash flows and future growth of the Company,” said Greenlight Capital.
A company splitting its common stock into two separate classes is hardly a new concept, and there are several massive publicly-traded companies today that offer at least two types of stock. The difference between the two options typically relates to whether the shareholder is granted voting privileges or not.
Overall, stock splits are usually an attempt to generate new interest in a company’s stock. While creating a whole new class of stock can help achieve other goals, a standard stock split is normally a way for companies to attract smaller investors by lowering its share price, even if the underlying value of the company has not changed.
Greenlight’s proposal is a unique take on the stock split concept, but it could achieve the same goal. For years, General Motors has attracted an army of passive investors that are more than happy with sitting back and collecting the company’s relatively-high dividend, which currently pays out at about 4.5%.
By creating one class of stock that receives this dividend, GM can still satisfy these investors, but its growth-focused class might attract a new batch of investors who would support the automaker in pursuing new initiatives.
The next few years are poised to be huge for the automotive industry, and the advent of electric vehicles, as well as the rollout of self-driving cars, could push General Motors to try many new things. The company will want investors that believe in this mission.
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