David Einhorn is suing Apple to make them give shareholders a separate vote over whether shareholders should have a vote over whether Apple can issue preferred stock. I guess that requires some unpacking. Let’s start at the end, with the preferred stock. Here is Einhorn’s plan:

For example, Apple could initially distribute to existing shareholders $50 billion of perpetual preferred stock, with a 4% annual cash dividend paid quarterly at preferential tax rates. … Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4%, our calculations show that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share. Further, Greenlight believes additional value may be realized when Apple’s price to earnings multiple expands, as the market appreciates a more shareholder friendly capital allocation policy.

What do you think? I vote yes. (I mean, I think it’s a good idea. The voting is more complicated.) My math is here and ties closely to Einhorn’s:


The math is super straightforward though it can and should boggle you conceptually if you think about it. If you’re a company and you dividend to your shareholders $X worth of stuff, then you’ve reduced the value of your company by $X, and so shareholders should be neutral. The main assumption here is that levering up by issuing this preferred would not lower Apple’s P/E multiple from an already pretty low 10.3x;1 Einhorn’s intuition – that the multiple might expand due to a more shareholder-friendly payout policy – is, y’know, intuitive, but then, value really shouldn’t be sensitive to just slicing up bits of paper. If you could just create $30bn of value by issuing preferred stock, everyone would do it. The response “only Apple can create $30bn of value by issuing preferred stock” is surely right but theoretically troubling. [Update: Here you can read Einhorn discussing these questions with Henry Blodget.1.5 ]

But that’s not the issue here. The issue here is that Apple’s board is asking shareholders to vote to eliminate the board’s right to issue “blank check” preferred stock:

The Company’s existing Articles permit the Board to issue shares of preferred stock having voting, conversion and other rights to be determined by the Board in its sole discretion. This is referred to as “blank check” preferred stock because it does not require shareholder approval. The Company has not issued shares of preferred stock since 1997, when it issued 150,000 shares of Series A Non-Voting Convertible Preferred Stock. Those shares were redeemed in full shortly thereafter. The Board does not intend to issue preferred stock in the future and believes that it is appropriate to eliminate this provision from the Articles. If the proposed amendment of the Articles is approved by the Company’s shareholders, any future issuances of preferred stock would require shareholder approval.

Blank-check preferred stock is normally something that corporate-governance advocates hate,2 which is presumably why Apple is proposing to get rid of it. It’s combined, on the proxy, with allowing majority voting for directors, another governance hot button, as well as some administrative trivia.3 Having blank-check preferred allows directors to adopt a poison pill when threatened with a takeover, which is a governance no-no; it also allows for various other flavors of takeovery shenanigans like, for instance, AIG’s takeover by the government without shareholder approval.

I posit that this is not relevant to Apple. Still, good governance is good governance and if you’ve got nothing else going on you might as well clean up sections of your charter that you never use. Even if a certain activist shareholder has been lobbying you since May to start using them again.

There are many layers of triviality between what’s happening here – lawsuit to unbundle proxy proposals – and what Einhorn wants – shareholder value enhancement through paper-shuffling. Viz.:

  • Apple is asking shareholders to vote on whether to adopt a bunch of charter reforms, including eliminating blank check preferred, in a single vote. Einhorn supports some of these (majority voting), but not the blank-check amendment, and Apple refuses to hold separate votes. So he’s suing to force them to. Will he win? I’m sure there’s legal authority on the circumstances that require you to separate proxy proposals from each other but some things are just too boring to think about. [Update: DealBook has the complaint if you're interested.]
  • Win or lose, there’s still a vote. The other proposals bundled with the blank-check amendment are, as Einhorn argues in his letter to shareholders, not really of critical urgency, so if you think that the blank-check amendment is a bad idea then you can vote no on the whole package with a clean conscience.
  • Even if the shareholders vote to eliminate blank-check preferred, the board can still issue Einhorn’s proposed preferred stock. It just has to get a shareholder vote first.
  • But of course if the board doesn’t want to issue the preferred, giving it more or less power to do so with or without a vote is sort of irrelevant. Einhorn can sue to unbundle some proposals, but he can’t sue to force them to issue the preferred.4
  • So the lawsuit, and the vote, and everything else, are in some sense meaningless: no result on any of them is likely to change the substantive outcome of “will Apple issue preferred stock, or not?”

That, of course, is how corporate-governance conflicts normally go: the substance is hashed out in the court of public (shareholder) opinion and moral pressure on boards, while tangentially related trivia are the subject of lawsuits and shareholder votes. It’s kind of a silly system, but it’s our system and we love it.

And in some ways Einhorn has to be happy that Apple is proposing this amendment. Without it, his dividend plan would just be another idea from a kibbitzing shareholder, which Apple in its majesty would be free to ignore. But the amendment gives Einhorn a piece of trivia to hang a lawsuit on, and the lawsuit might just get him some attention for the substance of his plan.

Greenlight’s Einhorn sues Apple, “dissatisfied” with plans [Reuters]
Apple proxy [EDGAR]
Greenlight solicitation notice [EDGAR]

1. A lesser assumption is that Apple could issue a pref at 4%, i.e. that $50bn face amount of 4% preferred would actually give shareholders $50bn of value. JPMorgan did $900mm of pref this week at 5.45%. JPMorgan is a bank. Apple is Apple. 4% seems okay.

1.5. Here you can ponder: proxy soliciting materials that should be filed with the SEC? Meh.

2. See, e.g., ISS’s shareholder voting guidelines:

  • Vote AGAINST proposals that would authorize the creation of new classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (“blank check” preferred stock).
  • Vote AGAINST proposals to increase the number of blank check preferred stock authorized for issuance when no shares have been issued or reserved for a specific purpose.
  • Vote FOR proposals to create “declawed” blank check preferred stock (stock that cannot be used as a takeover defense).
  • Vote FOR requests to require shareholder approval for blank check authorizations.

3. This one is a little wonderful:

The proposed amendment of the Articles would also amend Article III of the Articles to establish a par value for the common stock of $0.00001 per share.

Currently, the Company’s common stock has no par value. The Company anticipates that establishing a par value of $0.00001 per share will reduce corporate expenses and thus benefit the shareholders. Under the laws of the State of California, which is the state in which the Company is incorporated, a corporation may have par or no par value stock. However, some other states impose qualification or licensing fees on foreign corporations to transact business in such states based upon the authorized capital stock of a corporation. In certain states, the rates at which qualification or licensing fees are assessed differ, depending upon whether the shares of the corporation are with or without par value, with nominal par value shares being assessed at a lower rate than no par value shares, in some cases. The Company believes that adopting a nominal par value for its shares will, in some cases, result in the Company being assessed qualification or licensing fees on a similar basis as other companies that also have a nominal par value for their shares.

So: you should totally do that; if it saves you some licensing fees to say “common stock, par value $0.00001 per share” instead of “common stock, no par value,” then why spend the extra licensing fees? But it’s also pretty much the most trivial thing you can spend your time on: how much can those licensing fees possibly be? Some have worried that the post-Jobs Apple would retreat to making minor tweaks rather than major innovations; I feel like adjusting par value of your stock to save on corporate-franchise taxes is an elegant symbol of that.

4. Trust me on that one.

21 comments (hidden to protect delicate sensibilities)
Show all comments ↓

Comments (21)

  1. Posted by Im_a_Dude | February 7, 2013 at 10:34 AM

    Matt, pls send me a non read-only spreadsheet and all backup data so we can manipulate the numbers.
    thanks.

  2. Posted by iLuvMatt | February 7, 2013 at 10:34 AM

    Is this piece going to be read at the DBDRN?

  3. Posted by J. Livermore | February 7, 2013 at 10:39 AM

    If value wasn't sensitive to slicing and dicing pieces of paper, Wall St would not exist.

  4. Posted by RecordsshowURDUE! | February 7, 2013 at 11:00 AM

    Levine before 10:30am? Someone has a dentist appt in the afternoon!

  5. Posted by Middle Birth | February 7, 2013 at 11:02 AM

    One Shazar to rule them all.

  6. Posted by ACCT 101 | February 7, 2013 at 11:31 AM

    No! A commitment to pay dividends does not constitute a transaction under GAAP, so it wouldn't have the same financial implications.

  7. Posted by Marino's Lovechild | February 7, 2013 at 11:42 AM

    Apple is gunna Finkle yo ass, Einhorn!

  8. Posted by Matt's Dentist | February 7, 2013 at 11:55 AM

    Well not necessarily, Matt was willing to pay an extra 5% for an option on the appointment so that he can postpone it if the Dell proxy is filed. My receptionist said she agreed to it after the 87th slide in the presentation Matt put together explaining why this was a good deal for my practice.

  9. Posted by 2 cubes over | February 7, 2013 at 12:19 PM

    Love going through spreadsheets that aren't mine.

  10. Posted by Guestalt | February 7, 2013 at 12:26 PM

    Matt just posted an interesting article about corporate governance? Guess that means we're due for a Shazar post about McRibs or farts or something.

  11. Posted by Recon | February 7, 2013 at 12:31 PM

    I suggest AAPL just make a bonfire out of their cash so we can all watch this constant P/E theory in practice.

    Einhorn makes no sense…

  12. Posted by J. Paulson | February 7, 2013 at 12:54 PM

    Your prescience is noted, can you do this kind of thing with stocks or other securities, if so, please give me a ring.

  13. Posted by Mike Milken | February 7, 2013 at 1:32 PM

    Well – you can create value by slicing and dicing pieces of paper if those different pieces of paper are subject to different tax treatments (which Einhorn seems to be implying). MM has assumptions y'know, and "NO TAXES" is one of the big ones . . .

  14. Posted by Spanishmoon | February 7, 2013 at 2:17 PM

    I assume you mean Modigliani-Miller (MM), not Mike Milken :)

    2 and 20 is not covered in Finance 101.

    If Whitney Tilson had made Einhorn's argument, people would have thrown up all over him.

  15. Posted by Guest | February 7, 2013 at 4:27 PM

    funny thing about "distributing" $50 billion worth of preferred shares to existing shareholders — no capital is actually raised. so you shouldn't be increasing pf market cap by $50 billion. if it was raised, you'd have to adjust your share count or treat it as debt.

  16. Posted by Guest | February 7, 2013 at 5:07 PM

    The pref div would hit the net income "to common", which is what Matty-Ice is clearly using in his assumptions "LTM net income to common".

    EBITDA isn't a GAAP metric either, but that doesn't stop anyone from using it for valuation purposes.

  17. Posted by nopes | February 7, 2013 at 5:15 PM

    True fact. Value of equity does not change. Still a good idea to give shareholders some benefit of the cash balance while keeping it available to Apple.

  18. Posted by pr1 | February 7, 2013 at 6:11 PM

    Wouldn't the $50bn of Pref be taxable to the shareholders but without any actual cash to pay the taxes with? Sounds like a good thing for the IRS but how would the shareholders feel about that unless they get to sell enough of the pref to fund their tax hit?

  19. Posted by Donny | February 7, 2013 at 8:27 PM

    I like Einhorn but he should be out getting blowj's instead filing lawsuits. Lawsuits are in the shade aka the gay parade.

  20. Posted by Mont Blanc | February 7, 2013 at 11:00 PM

    Finally, somebody with a basic or at last functional understanding of accounting AND finance shows up!!

    I am in no way surprised that Magic Matt flubbed this and flubbed it hard btw, heck, he worked for GS for chrissakes! Those guys are good at humping muppets but not very good at basic finance.

    This whole Einhorn proposal is farcical, issue $50b in pref to do what exactly? Oh, I see, payout 4% p/a, AND THAT LADIES AND GENTLEMEN WILL MAKE OUR STOCK RISE HIGH!!!! (Seinfeld reference)…. Except this proposal is actually more comical that even Mr. Pitt!

    Einhorn has watched this stock give him a double, he sat there put out ridiculous shorts and got long some real turds in '12 and knifed his returns. Soooo, he promptly got high on his own supply of AAPL and started in on the graphics bong about some trillion dollar market cap, five months and 250 points later he is out with some chronic in the tray calling it "creating shareholder value". Easy bro, just put the lighter down and go find a company where management hasn't hit a temporary(?) growth ceiling. Lots of them out there, hell you are only charging 2/20 for said services!!!

    Monty

  21. Posted by gruz wrocław | April 1, 2014 at 11:37 AM

    Someone probably found a good way to get rich :)