Apple & Einhorn: The Path to Insanity?

by James Brumley | February 8, 2013 12:53 pm

Let me get this straight … an Apple (NASDAQ:AAPL[1]) shareholder who owns more shares than the company’s CEO is suing the company to not remove a clause from its bylaws that would otherwise allow Apple to do something it likely never intended to do anyway?

And then, as it turns out, the very thing this huge shareholder wants isn’t being taken off the table after all — it’s just being arranged in such a way (if ever necessary) that would actually be more fair and equitable to shareholders than the current plan is?

Only in America.

If the description above was confusing, don’t feel bad; you’re not alone. Yet, as complicated as it may seem, it’s a fair assessment of how things unfurled Thursday after Greenlight Capital’s David Einhorn led his hedge fund to file a lawsuit against Apple, which led Apple to turn around later in the day and explain Einhorn/Greenlight were reading it wrong.

On the surface, it’s just a heated proxy battle. Philosophically, however, it might be another sign that the market has become little more than a high-stakes circus where winners and losers are made on a whim.

I’ll get to the second idea in a moment. Let’s look at the details of the hoopla first.

The Accusation

At the heart of the date is Proposal #2, to be voted on at Apple’s shareholder meeting on Feb. 27. As the proposal stands now (at least according to Einhorn), Apple is seeking to entirely eliminate any possibility that Apple could ever issue preferred stock unless investors explicitly vote to add that possibility back into the charter at a later date.

The move is in complete contrast to Einhorn’s ambitions, who for months has been petitioning the company to issue preferred shares to existing shareholders. Einhorn has even suggested a payout rate of 4% for these preferred shares, though hasn’t explicitly said how much preferred stock should be issued. Presumably, though, it would put cash back in investors hands faster than the $45 billion worth of buybacks and modest dividends the company has planned for this year, and two more years after this one.

Almost needless to say, Einhorn encouraged shareholders to vote against Proposal #2.

The lawsuit, however, goes one step further by seeking a specific legal action. Einhorn is aiming — and says the SEC is on his side — for a bundle of proposals to be unbundled so shareholders can vote on all of them separately on Feb. 27.

The Rebuttal

Only a few hours after Greenlight Capital filed the suit, Apple responded with an explanation[2] that the proposed removal of the existing preferred stock clause from its charter specifically referred to the board of directors’ right to issue so-called “blank check” preferred shares … which don’t need any shareholder approval. The proposal neither precludes nor establishes the company’s ability to issue preferred stock in the future. Any future issuance of preferred stock would simply require an approval from the majority of investors, as is the case with most publicly traded companies.

In other words, Apple graciously said Greenlight’s lawyers didn’t properly read, interpret or explain Proposal #2.

It’s been said (or at least implied[3]) that Einhorn’s tactic has induced Apple to reconsider its stance on preferred stock. Maybe. Or, the media might be filling in some blanks just to keep the story juicy.

It is true that preferred stocks are back on the docket for Apple’s board. The company’s Thursday reads statement reads:

“Apple’s management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock. We welcome Greenlight’s views and the views of all of our shareholders.”

On the other hand, that’s the full extent of Apple’s comment on the matter. Indeed, Apple’s press release went on to make a point of saying:

“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.”

Any other suggestion that Apple is any more open to the idea now than it was before Thursday is conjecture — the company has said nothing beyond the comments above regarding preferred shares.

How the Heck Did We Get Here?

What’s most amazing — even stunning — about the whole thing is that we’re having the conversation at all. A year ago, if you had said David Einhorn was going to start talking about preferred shares to unlock Apple’s value, you would have been laughed out of town. Now Einhorn is at least finding an audience with the idea. That shows you just how far away Apple is from where it was just a year ago.

Still, it’s difficult — not impossible, but difficult — to believe that a $6 billion fund can’t hire enough quality lawyers to figure out that this particular proposal wasn’t a permanent, irreversible ban on any preferred shares. If this really is a case of ineptness, though, then heaven help us all.

More realistically, this is some showboating, some grandstanding. It’s a very odd way of garnering support for Einhorn’s cause, mind you, since most retail investors don’t really understand the issue at hand, and many of them don’t even read the proposals being voted on at shareholder meetings. More than that, many of the other institutional Apple shareholders — like California’s Public Employee Retirement System — actually are in favor of Proposal #2, hinting that the proposal will indeed be approved.

If it’s all just a simple stunt to light a fire under the stock because it poses the possibility that Apple is going to step up its cash-distribution effort, that’s fine. Great, actually. Preferred stock is a tough way to unlock the value Einhorn says he’s trying to unlock, though, leaving most to wonder if Einhorn has something else up his sleeve.

There is one certainty, however — David Einhorn’s first priority is David Einhorn.

The scary part will be if the ploy actually works, or if Einhorn actually manages to convince retail investors to shoot down Proposal #2 simply because he made a lot of noise to that end. If that’s the outcome here, then we might as well acknowledge that stocks have finally become little more than a “tail wagging the dog” venture. (Or in this case, it’s a schoolyard bully picking on the smartest kid in class just to nab his lunch money.)

The next step on that path to insanity is abandoning the Wall Street Journal in favor of the financial advice provided by the National Enquirer.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. AAPL:
  2. Apple responded with an explanation:
  3. or at least implied:

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