Einhorn sues Apple over preferred stock plan

Hedge fund manager David Einhorn sued Apple Inc. Thursday over a plan by the company to make it more difficult to issue preferred shares that pay a dividend—something Mr. Einhorn has urged the company do to return more of its cash pile to investors.

Mr. Einhorn, who runs Greenlight Capital Inc., has been lobbying Apple's board to exercise its authority to issue such shares, though so far it hasn't done so.

Apple's board already has the right to issue preferred stock, but it is asking shareholders at its annual meeting later this month to vote on a proposal that would require shareholder approval to issue the stock.

Mr. Einhorn's lawsuit, filed in the federal court in Manhattan, argues that the very formulation of Apple's proxy statement violates Securities and Exchange Commission rules that allow shareholders to vote on "each matter" in the proposals. The suit seeks a court injunction against Apple's proxy vote, and says he asked twice this week for the company to stop the vote or to "unbundle" the proposal at issue, but was rejected by the company.

Apple said in a statement Thursday that its management team "has been in active discussions about returning additional cash to shareholders." The company said it will evaluate Greenlight's proposal to issue preferred stock, and emphasized that adoption of its own proposal wouldn't prevent the issuance of the security.

Mr. Einhorn is asking Apple to create a "perpetual preferred stock" using operating cash flow. Preferred shares are often viewed as high-yielding securities that are less volatile than common shares and typically pay generous income akin to high-yield bonds. Mr. Einhorn suggests the preferred stock could yield a 4% dividend rate.

Apple's stock is down about 9% since issuing disappointing fiscal first quarter earnings. Shares rose after Apple's statement Thursday, finishing the day up 3% to $468.25.

Apple continues to attract scrutiny from investors about its fast-growing cash stockpile as the company generates strong profits from its computers and mobile devices. While it has recently created a dividend and stock buyback program, some investors believe Apple should deliver more of its cash—which was at $137.1 billion, including short and long-term securities—to shareholders.

"Greenlight is hopeful that when Apple and its advisers review the idea afresh, it will see the merits and act to unlock value for all shareholders," the hedge fund said Thursday.

Mr. Einhorn's firm owns 1.3 million Apple shares and has been an investor since 2010. On Thursday, Mr. said on CNBC that Apple has a hoarding problem and acts like a person with a depression-era mentality that "can never have enough cash."

The hedge-fund manager recently has been deeply critical of some publicly traded companies, speaking out against Chipotle Mexican Grill Inc.'s CMG -1.24%business and publicly proclaiming a short position in Herbalife Ltd. HLF +0.36%But with Apple, Greenlight has been a shareholder since 2010 and described the firm as "a phenomenal company filled with talented people creating iconic products that consumers around the world love."

Still, Greenlight added that it is "dissatisfied" with Apple's current capital allocations, believing that the company's contested proposal unnecessarily limits the board's flexibility to distribute preferred stock.

"We think for every $50 billion of preferred that they issue it will unlock about $32 a share in Apple. If Apple used about half of their earnings towards this program, we think they would be able to issue approximately $500 billion which would unlock about $320 a share," Mr. Einhorn said on CNBC.

When asked about Greenlight's position on Apple, Mr. Einhorn said they were "long," adding "we own more Apple stock now than we ever have before."

(Published by WSJ - February 7, 2013)