updated 10:17 am EST, Wed February 20, 2013
Greenlight Capital suit may succeed on merits, but no injunction yet
In an initial hearing on the lawsuit between David Einhorn's Greenlight Capital and Apple, where the former party is attempting to prevent a shareholder vote on a "preferred stock" proposal, a judge has sided with Einhorn and found that Apple could be breaking US Securities & Exchange Commission rules by "bundling" three issues into one shareholder voting item. At the same time, the judge didn't indicate that he couldn't find any "irreparable harm" in the proposal, lessening chances of an injunction.
Saying that the matter "is a mess no matter what I do," US District Judge Richard Sullivan reserved judgement on the most pressing portion of Greenlight's lawsuit, but said that he would make a decision on a possible injunction before the Apple shareholder meeting, which is scheduled for February 27. He noted, however, that even if an injunction preventing the shareholder vote on this particular proposal was enacted, it would not really affect Apple's current ability to issue -- or decline to issue -- preferred stock, CNN reports.
At the heart of Einhorn's lawsuit is a desire to get Apple to disperse more of its cash hoard to shareholders more quickly. His company's specific proposal puts forth the idea that Apple's board be made to issue a specific sort of "preferred" stock that would pay out a higher dividend than the current $2.65 per quarter per share, which currently allows the company to disperse about $10 billion per year, one of the largest dividend payouts available. The "problem" Einhorn sees is that Apple adds to its huge cash reserves faster than the current rate of dispersal or share buyback programs can give the money out.
Although Einhorn has put forth a specific proposal for what he calls "Greenlight Opportunistic Use of Preferreds" or "GO-UPs" that could see dividends as high as $32 per share, the lawsuit centers around a point of law in its attempt to prevent shareholders from voting on the matter: Greenlight says that the way the proposal is worded "bundles" three separate issues into one vote, which is against SEC rules.
On that point, Judge Sullivan sides with Greenlight and says that Apple may indeed be in violation of the rules, saying that "I do think the likelihood of success is in favor for Greenlight on the merits" of their technical argument. Apple has argued that the SEC has already reviewed the proposal in question and did not raise any objection.
Apple's proxy proposal simply asks shareholders to approve a change in the charter of the company. Currently, Apple's board could issue preferred stock if it wanted to -- but hasn't in over a decade. The proposal from Apple, which it recommends shareholders approve, adds a requirement that any future issuance of preferred stock be approved by a simple majority of shareholders rather than just the board of directors.
Einhorn likely launched the suit because the shareholder approval requirement would doom any chances of a preferred stock scheme that his company could take advantage of in the manner of his current formula. He has also made the (erroneous) claim in literature to stockholders that the proposal removes the company's ability to issue preferred stock. Apple has countered that the "GO-UPs" proposal would only "enhance Greenlight's financials and does not serve the public interest."
Barring any new objections from the SEC itself, Judge Sullivan seems unlikely to issue an injunction -- which would prevent shareholders from weighing in on the matter -- even if he finds that Apple's current proposal is a technical violation of the rules. The court has other options, including forcing Apple to "break up" the proposal or reword it but letting the vote go forward. Should the judge issue the injunction, Apple's current charter would remain in effect.