Factbox: Perpetual preferred shares at center of Einhorn's Apple lawsuit

Thu Feb 7, 2013 9:55pm EST

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(Reuters) - Hedge fund manager David Einhorn's Greenlight Capital filed suit against Apple Inc on Thursday and demanded that it dole out a bigger piece of its $137 billion cash pile to investors.

Einhorn's lawsuit targets a proposal by Apple to eliminate from its charter the right to issue "blank check" preferred stock at its discretion. He urged Apple shareholders to vote against the plan at the company's annual meeting on February 27 and put forward a proposal of his own for the company to issue preferred stock with a perpetual 4 percent dividend.

Apple countered by saying eliminating that clause from its charter does not preclude the issuance of preferred stock in the future and that it is trying to ensure that any such action first goes to a shareholders' vote.

The following are facts about perpetual preferred shares:

Preferred shares are essentially stocks that act like bonds. They pay a fixed dividend and rank ahead of common shares in order of payment should a company's assets be liquidated in a bankruptcy or if the company decides to suspend payment of its dividend.

Unless preferred shares are issued with a call option or are otherwise convertible, preferred shares are perpetual by nature.

These shares often do not have any voting rights.

Typically, preferred shares are not classified as debt on a company's balance sheet and companies generally do not receive any tax benefits from issuing preferred shares.

Issuers of perpetual preferred shares will always have the right to redeem the stock, according to Investopedia.

Perpetual preferred shares are most often issued by financial institutions, real estate investment trusts and to members of a company founder's family, according to Kenneth Winans, a San Francisco-based financial adviser who focuses on preferred shares.

Corporate investors often opt for preferred shares over bonds because up to 80 percent of the dividend is tax-free, said John Manley, chief equity strategist at Wells Fargo Advantage funds.

These shares are typically less liquid than either bonds or common shares, but tend to be less volatile than common shares because of their payout provisions, according to Wells Fargo's Manley.

(Compiled By David Randall and Michael Erman; Edited by Edwin Chan and Mary Milliken)

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