Playing by the Rules

It’s a nice change. Instead of another hedge funder breaking the law, along comes David Einhorn of Greenlight Capital to enforce it. Unearthing a little-known SEC rule against combining unrelated proxy proposals, Einhorn has been pressuring Apple Inc. to unbundle three proposed charter amendments in its 2013 proxy statement so that shareholders could vote separately on management’s recommended elimination of ‘blank-check’ preferred stock (which is issuable without shareholder approval). Some major institutional shareholders like CalPERS favor management’s proposal because it would deprive Apple’s board of a potential takeover defense. Einhorn, on the other hand, objects to the measure because he wants Apple to issue a new, perpetual preferred stock paying shareholders an annual 4% dividend out of the company’s $137 billion in cash, a hoard which he ascribes to “a Depression-era” mentality. Apple CEO Tim Cook dismissed Einhorn’s regulatory challenge as “a silly sideshow”. The SEC’s anti-bundling rule was originally designed to prevent companies from adding sweeteners to otherwise unpopular proxy proposals so as to assure their passage.

Yesterday, Einhorn’s legal challenge to Apple was argued in the Southern District Court of New York. The Court found in Einhorn’s favor and blocked Apple’s shareholder vote scheduled for next Wednesday. Apple now has to decide whether to simply unbundle its proxy proposals or, more seriously, to rethink its entire position on uninvested cash.

For Einhorn conversely, the ruling itself must have made his day, even if he eventually loses on the preferred stock issue.