* Manhattan federal court to hear arguments on Feb. 22
* Little case law exists on "bundling" rules in proxies
* CalPERS, ISS support shareholder proposal
By Nate Raymond
NEW YORK, Feb 8 Hedge fund star David Einhorn
wants to force Apple Inc to share some of its huge cash
reserves with investors, but his lawsuit rests on a U.S.
securities rule that has little legal precedent.
Einhorn's Greenlight Capital sued the iPad and iPhone maker
in U.S. District Court in Manhattan on Thursday to try to
prevent Apple from eliminating preferred stock from its charter.
The suit is part of Einhorn's bid to pressure Apple to use some
of its $137 billion in cash to issue perpetual preferred shares
that pay dividends to existing shareholders.
The suit contends Apple violated Securities and Exchange
Commission rules that prohibit companies from "bundling"
unrelated matters into a single proposal for a shareholder vote.
Establishing that Apple violated the rules could be tricky.
Little to no case law exists on the question and the SEC's own
rule is relatively general with little guidance, legal experts
Still, James Cox, a professor at Duke University School of
Law, thinks Einhorn "has a hell of good case."
"I think he's got Apple in the crosshairs," he added, saying
that it "strikes me as a fairly dramatic case of bundling."
The hedge fund manager is seeking an injunction to block a
Feb. 27 shareholder vote on the proposal, saying Apple violated
Section 14 of the Securities Exchange Act of 1934. Arguments are
to be heard before U.S. District Judge Richard Sullivan on Feb.
22. Apple has until Feb. 15 to file a response with the court.
The proxy proposal at issue, Proposal No. 2, seeks to amend
Apple's articles of incorporation in three ways: by providing
for majority voting for directors, establishing a par value for
Apple stock and eliminating its ability to issue preferred
Einhorn is represented by law firm Akin Gump Strauss Hauer &
Feld, Greenlight's long-time outside counsel. No lawyer for
Apple is yet listed on the court docket and a representative
declined to say who would represent Apple in the case.
On Friday, the California Public Employees Retirement
System, the biggest U.S. public pension fund and owner of 2.7
million Apple shares, and influential proxy voting firm ISS
Proxy Advisory Services both urged investors to vote in favor of
the shareholder proposal in question.
"All shareholders should have a vote," Anne Simpson, CalPERS
Senior Portfolio Manager and Director for Corporate Governance
said on CNBC. "We don't want the board cutting a deal on the
side with a hedge fund out of fear of a lawsuit that will cancel
the annual meeting.
"This is a big issue that needs to be thought through
carefully and we want the board to come to all shareholders and
give a chance to have their voice heard."
ISS, which issues recommendations on how shareholders should
vote on proxy proposals, generally believes the "bundling" of
proposals was not in the best interest of shareholders, but
supported the elimination of "blank check" preferred shares due
to their potential to be misused as a takeover defense.
"Though many investors have viewed Apple's cash holdings as
excessive and wanted to see more of it returned to shareholders,
that view may not be universally held: other investors may
prefer to see the cash (or at least a large portion of it)
deployed for investments and acquisitions," it said in its
HOW WILL APPLE RESPOND?
It is unclear how Apple will respond in its formal reply to
the lawsuits. On Thursday, Apple said Einhorn's lawsuit was
misguided and that adoption of Proposal No. 2 would not preclude
preferred share issuances in future.
"Currently, Apple's articles of incorporation provide for
the issuance of 'blank check' preferred stock by the Board of
Directors without shareholder approval," Apple said. "If
Proposal #2 is adopted, our shareholders would have the right to
approve the issuance of preferred stock."
Einhorn, a well-known short-seller and Apple gadget fan,
said in an interview with CNBC the company harbored a
"Depression-era" mentality that led it to hoard cash and invest
only in the safest, lowest-yielding securities.
Apple nearly went broke in the 1990s before Steve Jobs
returned and engineered a sensational turnaround, with products
such as the iPhone and iPad that became must-haves for consumers
around the world. The company's near-death experience has led
Apple to be exceptionally conservative with its cash.
Greenlight in its complaint said it supports two of the
proposals, but not getting rid of preferred stock. Einhorn deems
preferred stock superior to dividends or share buybacks and has
separately put forward a proposal for an issuance of Apple
preferred stock with a perpetual 4 percent dividend.
But as Apple's proxy proposal is structured, Greenlight
said, shareholders have "no choice but to either vote in favor
of an amendment they oppose, or against an amendment they
Few lawsuits have ever been filed challenging proposals
under the rules, a situation some legal experts attributed to
the normally passive nature of shareholders.
"In most cases you're not going to get a lot of complaining
about bundling," said Brian Slipakoff, special counsel at law
firm Duane Morris in Philadelphia.
In one of the few related lawsuits, the 2nd U.S. Circuit
Court of Appeals in New York in 1999 recognized an implied
private right of action by shareholders suing over alleged
anti-bundling rule violations.
That precedent could back Einhorn in his legal standing to
bring the case. The appeals court ruling was cited by Greenlight
in additional court papers filed late on Thursday.
Francis Vasquez, a lawyer with the law firm White & Case who
is not involved in the case, said Apple might argue that because
the stockholder proposals in Proposal 2 are all amendments to
the charter, they are properly related.
The California company has another five proposals up for a
vote, which are not being challenged by Einhorn and do not
involve amending Apple's charter. Those measures focus on
matters such as director elections and executive compensation.
"Apple's first argument likely is going to be, 'Look, these
are all amendments we put in one place, they don't have to do
with the other items,'" Vasquez said.
The anti-bundling rules date from 1992. John Coffee, a
professor at Columbia Law School, said the idea was to "prevent
managements from bribing shareholders with a sweetener into
voting for a proposal they would otherwise reject."
The case is Greenlight Capital LP, et al., v. Apple Inc.,
U.S. District Court, Southern District of New York, 13-900.