Einhorn case against Apple rests on unusual legal tactic

Fri Feb 8, 2013 9:42pm EST
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By Nate Raymond

NEW YORK (Reuters) - Hedge fund star David Einhorn wants to force Apple Inc to share some of its huge cash reserves with investors, but his lawsuit rests on a U.S. securities rule that has little legal precedent.

Einhorn's Greenlight Capital sued the iPad and iPhone maker in U.S. District Court in Manhattan on Thursday to try to prevent Apple from eliminating preferred stock from its charter. The suit is part of Einhorn's bid to pressure Apple to use some of its $137 billion in cash to issue perpetual preferred shares that pay dividends to existing shareholders.

The suit contends Apple violated Securities and Exchange Commission rules that prohibit companies from "bundling" unrelated matters into a single proposal for a shareholder vote.

Establishing that Apple violated the rules could be tricky. Little to no case law exists on the question and the SEC's own rule is relatively general with little guidance, legal experts said.

Still, James Cox, a professor at Duke University School of Law, thinks Einhorn "has a hell of good case."

"I think he's got Apple in the crosshairs," he added, saying that it "strikes me as a fairly dramatic case of bundling."

The hedge fund manager is seeking an injunction to block a February 27 shareholder vote on the proposal, saying Apple violated Section 14 of the Securities Exchange Act of 1934. Arguments are to be heard before U.S. District Judge Richard Sullivan on February 22. Apple has until February 15 to file a response with the court.

The proxy proposal at issue, Proposal No. 2, seeks to amend Apple's articles of incorporation in three ways: by providing for majority voting for directors, establishing a par value for Apple stock and eliminating its ability to issue preferred stock.   Continued...

David Einhorn, president of Greenlight Capital, speaks during the Sohn Investment Conference in New York, May 16, 2012. REUTERS/Eduardo Munoz