Apple has issued a rare, rapid public response to a shareholder lawsuit, countering charges by Greenlight Capital's David Einhorn that the company hasn't done enough to return its large cash reserves to shareholders. In sharp but diplomatic language, Apple suggests that Einhorn and Greenlight misunderstand or are misrepresenting an important governance proposal Apple will present to shareholders at their annual meeting on February 27.
Earlier today, Greenlight filed a federal lawsuit against Apple and issued a public letter urging Apple shareholders to vote against a proposal by Apple. "Greenlight is voting AGAINST Proposal 2 in Apple's proxy, which would eliminate preferred stock from Apple's charter and thus restrict the Board's ability to unlock the value on Apple's balance sheet," the letter reads.
Greenlight, a hedge fund with a long Apple position, has been urging Apple to issue a perpetual preferred stock to its shareholders with a larger dividend since May 2012. Apple began issuing a dividend of $2.65 per share in July 2012, but rejected Greenlight's broader proposal in September 2012. The lawsuit seeks to force Apple to divide Proposal 2 into three separate proposals.
In its response, Apple challenges Greenlight's interpretation of Proposal 2:
Apple’s management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital's current proposal to issue some form of preferred stock. We welcome Greenlight's views and the views of all of our shareholders.
As a part of our efforts to further enhance corporate governance and serve our shareholders' best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight's proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight's statements, adoption of Proposal #2 would not prevent the issuance of preferred stock. Currently, Apple's articles of incorporation provide for the issuance of "blank check" preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders.
Last year, Apple announced a plan to return $45 billion to shareholders over three years, buying back stock and issuing a substantial cash dividend for the first time. (Between 1987 and 1995, Apple stock issued a nominal dividend between 6 and 12 cents per share.) "As of next week we will have executed $10 billion of that plan," Apple says in today's letter.
This response gives Apple flexibility to accelerate its buyback plan or change its dividend without completely caving to Greenlight's demands to alter Proposal 2 or face an embarrassing shareholder revolt. It also reflects CFO Peter Oppenheimer's statements to analysts on Apple's recent earnings call that Apple was looking for more ways to return some of its more than $100 billion to shareholders.
Traditionally, Apple's large cash holdings have given them an unusual degree of flexibility. As COO, current CEO Tim Cook was able to secure very favorable prices for components by prepaying in cash — this move helped Apple deliver its iOS devices at consumer-friendly price points and helped secure Cook's reputation as an operational genius. Cash on hand also allows Apple to pursue key acquisitions, like its 2010 purchase of Siri, Inc. Recently, however, Apple's declining share price has disappointed investors like Einhorn, leaving more room to question the company's traditional strategies.
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