David Einhorn, the occasionally outspoken hedge-fund manager at Greenlight Capital, has faced public vilification for taking on Apple Inc.’s board. Investors and securities regulators should instead be thanking him for upholding shareholders’ rights.
Martin Lipton, the esteemed corporate lawyer, complained on a Harvard Law School blog that “one of the most successful, long-term-visionary companies of all time is being told by a money manager that Apple is doing things all wrong and should focus on short-term return of cash.” Even the California Public Employees’ Retirement System, the big public-pension fund and self-styled authority on corporate governance, slammed Einhorn while campaigning on Apple’s behalf.
Here’s what Einhorn did. He saw that one of the proposals in Apple’s proxy statement forced shareholders to vote yes or no on a bundle of unrelated issues -- a violation of the Securities and Exchange Commission’s rules. The SEC’s staff had missed the problem and wasn’t doing anything about it. By early February, when Greenlight sued Apple, Einhorn’s only chance to get someone to fix it was through the courts. So that’s where he went, at considerable expense to his fund.
The federal judge who heard the case, Richard Sullivan, ruled that Greenlight was correct. It wasn’t a close call. Apple’s “proxy materials are plainly noncompliant,” Sullivan wrote. Apple had pointed to the SEC’s inaction as a sign it complied with the rules. Sullivan, rightly, slapped down the company’s argument as nonsense.
The principle Einhorn sought to uphold is fundamental: Shareholders should be allowed to vote on important, unrelated issues separately. The SEC’s rules generally prohibit companies from bundling disparate questions together in their proxy statements. Otherwise, companies might try to win passage of unpopular measures by combining them with proposals investors favor. Einhorn complained about a proxy item that combined four distinct proposals for an up-or-down vote, including one revoking the board’s ability to unilaterally issue preferred stock.
Before filing suit, Einhorn asked Apple to withdraw the preferred-stock amendment or break up the proposal into separate voting items. Apple declined. Einhorn has been pitching Apple on a novel idea to issue perpetual preferred shares as a way to boost the value of Apple’s common stock. He has estimated it initially would result in Apple distributing $1.9 billion a year in preferred dividends, a small amount compared with the $137 billion of cash and marketable securities on its books.
Lipton’s blog post didn’t name Einhorn, but it clearly was referring to him. Far from telling Apple it’s doing everything wrong, here’s what Einhorn said in a Feb. 21 slide presentation: “We aren’t here to offer any thoughts on their strategic plans to operate their business -- they are the experts on that.” His main beef is with the company’s strategy for allocating capital. He’s far from alone in criticizing Apple for hoarding cash.
Whether you like Einhorn’s preferred-stock idea is beside the point. (As the judge noted in his order, giving boards unchecked authority to issue preferred shares “has been derided by shareholder rights advocates given its potential use as an anti-takeover tactic.”) Greenlight argued that Apple had violated the SEC’s rules. The judge agreed and issued a preliminary injunction barring Apple from accepting votes on the proposal at issue.
Calpers said it campaigned for the bundled proposal because it supported a part requiring unopposed board candidates to be elected by a majority vote. While that surely is investor-friendly, Calpers can’t also be for violating SEC rules and expect to be taken seriously as a good-governance champion.
The majority-voting provision sought by Calpers almost certainly would have passed if Apple had presented it separately. Now, with the court’s injunction, the pension fund will have to wait a year to try again. Calpers would have been better off joining Einhorn and opposing Apple’s bundling from the outset.
It would be easy to blame the SEC’s staff for dropping the ball here. But they have a tough job. They can’t review every company’s filings every year. Violations go undetected all the time. The SEC doesn’t claim to catch everything.
That’s why Einhorn’s decision to sue is important. Few people have the resources to make companies abide by the rules when the authorities, for whatever reason, don’t require them to.
The next time something like this happens, perhaps the SEC will be more attuned to the issue and won’t let it slide. Or maybe companies won’t be as inclined to try to pull the same trick in the first place. The winner is the investing public.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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