DealBook: Pleased by Apple’s Move, Einhorn Raises His Bet

Casey Kelbaugh for The New York TimesDavid Einhorn, the hedge fund manager, and his wife, Cheryl Strauss Einhorn, at the Time 100 gala.

When Apple agreed to extensively expand its stock buyback program last month, David Einhorn was pleased.

So pleased, in fact, that he has increased his stake in the iPad maker.

During an earnings call for another company that his hedge fund owns, Mr. Einhorn said that his firm, Greenlight Capital, raised the size of its Apple holdings. The hedge fund owned about 1.3 million shares as of Dec. 31, making it Apple’s 75th-largest investor.

Last month, Apple announced that it would quintuple the size of its share buybacks, to $60 billion, and would increase its dividend by 15 percent. The moves came after Mr. Einhorn publicly pushed Apple to pay out some of its enormous war chest — now totaling some $145 billion — to shareholders.

Here’s what Mr. Einhorn said on Tuesday:

Apple took a major step forward by issuing debt and announcing it will return $100 billion to shareholders over the next three years. This is a vastly more shareholder-friendly capital allocation policy then where Apple stood a few months ago. We have added to our Apple position. Now we just wait for the release of Apple’s next blockbuster product.

DealBook: In Apple Fight, Einhorn Unveils ‘iPrefs’

4:30 p.m. | Updated Apple Inc. has introduced more innovative consumer products than perhaps any other company has in the last decade: the iPod, the iPhone, the iPad.

Eduardo Munoz/ReutersDavid Einhorn, president

Now the hedge fund manager David Einhorn wants the company to roll out what he calls iPrefs, which he says could produce $61 a share in additional benefits for investors.

It’s a cutesy name for the class of perpetual preferred shares that Mr. Einhorn has called on the technology giant to roll out as a way to deliver more cash to its shareholders. And for over an hour on Thursday, Mr. Einhorn, the president of the hedge fund Greenlight Capital, patiently walked listeners through his argument about why those securities made the most sense for returning the company’s $137 billion cash hoard to what he said were its rightful owners.

Flipping through a voluminous PowerPoint presentation, Mr. Einhorn argued that his idea bore merit and deserved shareholder support. He also explained how iPrefs work: Apple would issue one preferred share, carrying a quarterly dividend of 50 cents each, for each outstanding common share.

He conceded that the idea was unusual. But he argued that it was a fresh way to reward shareholders while letting Apple hold on to a still-substantial “rainy day” fund.

“We know they embrace innovation and can recognize it when they see it, even if it isn’t the kind of innovation people usually think of when they think of Apple,” Mr. Einhorn said.

“We hope Apple agrees with us when we say that iPrefs are an innovative idea whose time has come,” he added

The conference call came after several current investors in Apple and a former one in Greenlight called on Mr. Einhorn to halt his fight, which has included suing Apple for what the hedge fund manager called an improper bundling of several shareholder initiatives. The proposal on Apple’s proxy includes the elimination of the company’s ability to issue preferred shares without shareholder consent.

The California Public Employees’ Retirement System, the big pension fund, has urged shareholders to support the so-called Proposal 2, arguing that it actually promotes good corporate governance.

“I came off the call deeply puzzled,” Anne Simpson, the pension fund’s director of global governance, told DealBook in an interview after the call. “He finished off by saying you should vote against Proposal 2 to send a message, but he’s in court trying to prevent Proposal 2 from going ahead.

Calpers had been actively soliciting shareholder support for the corporate governance changes since before Mr. Einhorn filed his suit and believes the proposal will pass handily.

Ms. Simpson is undecided about the merits of the hedge fund manager’s idea, but she took issue with the idea of a big, distracting fight with a company that has already said publicly that it was considering the concept.

“This is really about proper conduct,” she said. “I don’t feel happy that activist funds can use disruptive tactics when the company says that they’re listening and willing to meet.”

And Richard Clayton, the research director of the CtW Investment Group, which represents several unions’ pension funds, added, “What we heard on the call was David Einhorn acknowledge that Proposal 2 does advance shareholder rights.”

A Federal District Court judge is weighing issuing a preliminary injunction on Apple’s shareholder vote on Feb. 27, as he prepares a ruling on whether Apple violated securities rules. The judge, Richard J. Sullivan, has indicated that Mr. Einhorn’s lawsuit appears likely to succeed as a matter of law.

David Einhorns Apple Inc. iPrefs Presentation by

Einhorn Scores Legal Victory Versus Apple in Cash Scuffle

U.S. District Judge Richard Sullivan in Manhattan granted a motion by Einhorn's Greenlight Capital for a preliminary injunction stopping a vote on that proposal, scheduled for the company's February 27 stockholders' meeting.

The decision could hand Einhorn more leverage as he pursues his pitch for Apple to issue what he has called the "iPref": preferred stock with a perpetual dividend that he contends would reward investors and help boost the company's share price.

Greenlight sued Apple on February 7 as part of a broader pitch to unlock more of its $137 billion in cash. The hedge fund manager has lobbied Apple to issue preferred stock with a perpetual 4 percent dividend, and on Thursday made a direct appeal to shareholders on a teleconference.

Apple Chief Executive Tim Cook last week dismissed the lawsuit as a "silly sideshow."

The lawsuit itself challenged a measure called Proposal No. 2 that Apple put forward, which would eliminate its power to issue preferred shares without a shareholder vote.

At issue is Apple's "bundling" of that measure with two other unrelated matters into a single proxy proposal.

Greenlight said it supported two of the proposed amendments, but not the one on preferred shares.

In his ruling, Sullivan said Greenlight and another investor who also sued Apple "are likely to succeed on the merits and face irreparable harm if the vote on Proposal No. 2 is permitted to proceed."

"We are disappointed with the court's ruling. Proposal No. 2 is part of our efforts to further enhance corporate governance and serve our shareholders' best interests," Apple spokesman Steve Dowling said. "Unfortunately, due to today's decision, shareholders will not be able to vote on Proposal No. 2 at our annual meeting next week."

A spokesman for Greenlight called the ruling a "significant win for all Apple shareholders and for good corporate governance."

But not all shareholders were happy. California pension fund Calpers, a major Apple investor and public supporter of Apple's proposal, said implementation of "majority voting and shareholder approval for the issuance of new stock - preferred or otherwise - is worth waiting for."

"We encourage Apple to reintroduce these measures as soon as is practical so that all investors can be heard," Anne Simpson, Calpers' director of global governance, said in a statement.

BUNDLES

The ruling could be a warning for other companies when issuing proxy proposals, said James Cox, a professor at Duke University School of Law.

"It's going to make managers reluctant to bundle things together, because you're never going to know when you send them out if there's an Einhorn out there," he said.

The lawsuit was centered on a narrow issue of whether Apple violated U.S. Securities and Exchange Commission rules by "bundling" the preferred shares item with two other unrelated matters into one proxy proposal.

Greenlight's lawyers contended the SEC rules were intended to protect shareholders from being forced to vote for a proxy proposal involving materially different issues that the investors might not entirely support.

Apple had argued Proposal No. 2, which only dealt with amendments to its charter, constitute a single matter and wasn't bundled. Sullivan called the company's arguments "unavailing."

"Given the language and purpose of the rules, it is plain to the Court that Proposal No. 2 impermissibly bundles 'separate matters' for shareholder consideration," Sullivan wrote.

Judge Sullivan also found that Greenlight would be irreparably harmed without the injunction, since it would be forced to vote against its own interests. Denying Greenlight's motion would prevent it and other investors from exercising their rights to a fair vote, Sullivan said.

Sullivan separately declined to block a vote from going forward on a separate proxy proposal, Proposal No. 4, which sought an advisory "say on pay" vote on Apple executives' compensation.

The proposal had been challenged by investor Brian Gralnick of Pennsylvania, who contends Apple did not disclose enough details about how it made its compensation decisions.

Sullivan rejected that argument, saying Apple's disclosures were "plainly sufficient under SEC rules."

Arnold Gershon, a lawyer for Gralnick at Barrack, Rodos & Bacine, said he was "very pleased" with Sullivan's decision to the extent it enjoined the Proposal No. 2 vote, though said he would have to decide what to do next with regard to the say-on-pay proposal.

Sullivan directed the parties to submit a joint letter by March 1 outlining the next contemplated steps in this case.

Apple shares closed up 1.1 percent at $450.81 on Friday.

The case is Greenlight Capital LP, et al., v. Apple Inc., U.S. District Court, Southern District of New York, 13-900.

(Reporting by Nate Raymond in New York; Additional reporting by Poornima Gupta in San Francisco; Editing by Martha Graybow, Gary Hill, Leslie Adler, Carol Bishopric and Lisa Shumaker)

DealBook: Judge Sides With Einhorn and Halts an Apple Shareholder Vote

Eduardo Munoz/ReutersDavid Einhorn of Greenlight Capital argues that Apple violated securities regulations by bundling shareholder proposals.

9:26 p.m. | Updated

A federal judge on Friday ordered Apple to halt collecting shareholder votes on a contentious proposal to change some of its corporate charter, handing a victory to the hedge fund manager David Einhorn.

The ruling issued Friday touches on a fairly narrow legal point. But it signals a clear victory for Mr. Einhorn, who has taken up a fight with Apple over using some of the $137 billion in its corporate treasury to make additional payouts to shareholders.

Mr. Einhorn’s hedge fund firm, Greenlight Capital, has sued Apple in Federal District Court in Manhattan, arguing that the company improperly tied together several shareholder issues to be put for a vote into one proposal. Such bundling violated rules set by the Securities and Exchange Commission, lawyers for the hedge fund argued.

At the heart of the hedge fund’s complaint was that Apple combined a plan to eliminate its ability to issue preferred stock without shareholder approval with two other initiatives that Greenlight favored. By allowing the vote to proceed, lawyers for the firm argued, Greenlight was being forced to vote against its own interests.

The judge overseeing the case, Richard Sullivan, firmly agreed with that interpretation.

“Given the language and purpose of the rules, it is plain to the court that Proposal No. 2 impermissibly bundles ‘separate matters’ for shareholder consideration,” Judge Sullivan wrote in his order. The judge said at a hearing on Tuesday that he was leaning toward Mr. Einhorn’s point of view on the matter.

His ruling comes just days before the company’s shareholder meeting next Wednesday. It will also prevent Apple from accepting shareholder votes on Proposal No. 2, which had included Apple’s plans to eliminate its preferred shares. Some shareholder rights advocates have contended that preferred shares have been used as an anti-takeover tactic by boards and have pushed for their elimination.

Kevork Djansezian/Getty ImagesTim Cook, the chief of Apple.

Mr. Einhorn’s bigger goal has been to persuade Apple to return some of its billions sitting in cash to shareholders as a way to unlock the company’s value. Greenlight Capital has contended that the company has far more cash than it will ever need, and that preferred shares could provide additional payouts worth about $61 a share, while still leaving the company with an enormous war chest.

“We know they embrace innovation and can recognize it when they see it, even if it isn’t the kind of innovation people usually think of when they think of Apple,” Mr. Einhorn said in a conference call with analysts on Thursday.

Mr. Einhorn said that Apple should issue preferred shares, that would augment a stock dividend and buyback program that the company already has in place.

Although Apple was once the stock market darling for its meteoric rise, in recent months, share prices have sagged.

In a statement on Friday, Greenlight praised the judge’s ruling. “This is a significant win for all Apple shareholders and for good corporate governance,” the firm said. “We are pleased the court has recognized that Apple’s proxy is not compliant with the S.E.C.’s rules.”

Apple will now most likely have to break Proposal No. 2 into its separate elements and resubmit them to a vote.

“We are disappointed with the court’s ruling,” said Steve Dowling, a spokesman for Apple. “Proposal No. 2 is part of our efforts to further enhance corporate governance and serve our shareholders’ best interests. Unfortunately, due to today’s decision, shareholders will not be able to vote on Proposal No. 2 at our annual meeting next week.”

Apple had argued that the plan in its entirety was actually shareholder-friendly, and enjoyed the backing of prominent investors like the California Public Employees’ Retirement System.

Anne Simpson, the Calpers director of global governance, said in a statement: “We continue to support Apple in their efforts, and believe that the implementation of majority voting and shareholder approval for the issuance of new stock — preferred or otherwise — is worth waiting for.”

Ruling for Greenlight Capital in Battle With Apple