David Einhorn Wins Round 1 Of iPrefs Battle; Not Clear There's A Round 2

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So David Einhorn won his lawsuit against Apple today, which means that Apple will be forced by a court order to issue $236 billion of "iPref" 4% perpetual preferred stock next week, which I currently see bid at 4.06% in the gray market for $10 million lots.

Hahaha no of course it doesn't mean that. It means nothing! Except that everyone is kind of peeved. There are some things you could say against Calpers corporate-governance guru Anne Simpson's position on Apple/Einhorn, but she's not wrong about this:

“I came off the call deeply puzzled,” Anne Simpson, the pension fund’s director of global governance, told DealBook in an interview after [yesterday's Einhorn] call [pitching iPrefs]. “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."

Right? David Einhorn thinks that Apple's board should issue a ton of preferred stock, because this would be Good For Shareholders, and Apple's board is skeptical but willing to consider the possibility that it might be Good For Shareholders, and one thing that might help them reach that conclusion is if lots of shareholders voted in favor of Einhorn's idea. One problem with that is that Einhorn's idea wasn't up for a vote, but he kind of put it up for a vote, by convincing everyone that a vote on a series of dull dull dull charter cleanup questions (removing blank check authority! changing the par value of the stock!) was actually a referendum on a massive iPrefs issuance. If you like iPrefs, vote against changing the par value of the stock: crystal clear.

But then he also sued to take it off the ballot. And he won. So it's off the ballot. And now you can't vote for iPrefs. The advanced move here would be for Einhorn to call another conference call and say "okay, well, now a vote for Proposal 6 - 'a shareholder proposal entitled "Board Committee on Human Rights"' - will count as a vote in favor of iPrefs," but I suspect that would be too confusing.

It's hard to argue with the judge's opinion finding in favor of Einhorn. There is an SEC rule requiring that the proxy must "identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters," and allow a vote "with respect to each separate matter referred to therein as intended to be acted upon." Apple's Proposal No. 2 combined four matters - establishing majority voting for directors, abolishing blank check preferred stock, establishing a $0.00001 par value for AAPL stock, and "mak[ing] other conforming changes" to the charter - into one proposal. So it's pretty obviously not okay, and that is kind of that.1

But now what? Apple will apparently have its meeting next week, without a vote on Proposal 2, meaning that Apple's board will still have the right to issue preferred stock whenever it feels like it. Hey that's super. No doubt the board will be dying to use that power to print some iShares and make David Einhorn happy.

Or maybe it will go have another vote just to spite Einhorn. From the opinion:

Apple further argues that its own costs will be sizeable – approximately $3 million to amend and reissue the proxy materials for a special vote after the annual shareholder meeting. However, this cost is a direct result of Apple’s failure to comply with SEC rules, represents a tiny sum for a company worth approximately $400 billion, and may be avoided if Apple delays consideration of the items in Proposal No. 2 until its next shareholder meeting. Apple also claims that a delayed vote on Proposal No. 2 would impose a “serious financial burden” on it and its shareholders due to the loss of expense reductions expected from the par value change.2

Of course the judge is right: it would be a little bit amazing if Apple held a special shareholder meeting just to vote on these pretty trivial proposals; they can all comfortably wait 'til next year. I assume they'll have the special meeting anyway.3

What's Einhorn's move from here? Obviously getting a big vote in favor of his idea - sorry, a big vote against a charter amendment to eliminate the board's blank check preferred authority - would have given him some momentum in his quest to get the board to do it. Not that much, maybe - the board would still be able to do exactly what it wanted - but some. But his get-out-the-vote efforts did not seem to be going all that well, since the governance-y types who would ordinarily be more likely to support activist shareholders are also the types who like to get rid of blank-check preferred stock. Governance checklists trump capital-structure gamesmanship on their list of trivial things to devote their energies to.

So he missed his chance to win a vote, but he also avoided the more likely result of losing a vote badly and giving Apple ammunition to tell him to shut up and go away. And he's won a thing, and in some circles winning a thing is as good as, y'know, winning an argument or a substantive vote or something else that's actually important. Now he's got some credibility as ... well, as a guy who can annoy Apple. I don't know that that does much to boost his arguments for iShares. But as a corporate-activist strategy, annoying the board has a long and illustrious history. Sometimes it even works.

Greenlight Capital, L.P. v. Apple, Inc. [Scribd via DealBook]
Judge Sides With Einhorn and Halts Shareholder Vote on Apple Initiative [DealBook]
In Apple Fight, Einhorn Unveils ‘iPrefs’ [DealBook]

1.To get an injunction Einhorn also had to show that it was importantly not okay, or in the law's melodramatic phrase, that Einhorn would suffer "irreparable harm" if Apple held its vote. Now, Einhorn himself argued publicly that there was no problem with just voting against the whole of Proposal 2 if you like his preferred idea: the other proposals, while governance nice-to-haves, don't actually matter. In the lawsuit, of course, Apple argued what Einhorn had said publicly, while Einhorn took the opposite view - that making him choose between voting either against his beloved blank check preferred, or for the hated no-par-value stock, would cause him irreparable harm. So that's a little awkward. But it's not the first time someone said something in a lawsuit that they wouldn't say in real life. That's what lawyers are for!

2.Wait: really? A "serious financial burden"? We talked about the par value thing a little before; you save a little in like state corporate franchise taxes by having a $0.00001 par instead of no par. I guess with nearly a billion shares of stock the savings add up but, still: really? I find it significant that Apple can quantify the $3mm expense to, like, re-print and mail proxies for a special meeting, but didn't attempt to quantify these tax/expense savings on the par value either in the lawsuit or in the proxy. I'm guessing that the annual savings are less than the legal bills of whoever thought this up and wrote it in the proxy.

3.If they do, I hope Einhorn sues them for waste. After all: they said themselves that those proposals aren't urgent and can wait until next year. Everything is nuts.

Related

David Einhorn Said No To A Capital Raise, Kept The Door Open For A Pub Crawl

Remember how David Einhorn got in trouble in England for insider trading on Punch Taverns stock and he was all "what?" and we were all "what?"? Well, you can judge it for yourself because now the entire disputed call with Punch is available online (at the back of this). So go read it, or read the highlights here. The FSA still thinks it's insider trading, but the count of people confused by the whole thing is rising, and now includes the Merrill banker on the call. There's lots of insider traderiness on this side of the pond today too so we should talk about that in a bit. For now, though, two other things. One is quick - no one can resist one part of the call and I can't either so here it is: DAVID EINHORN: Hi, I’m sorry I didn’t get to see you when you were in New York. PUNCH CEO: No, no, we -- well, we’ve -- we’ve only had the chance to speak once, although we have seen [reference to Greenlight Analyst] a few times since then. DAVID EINHORN: Oh, you’re -- you’re -- you’re getting more than -- than I could help with anyway. So, this is good. PUNCH CEO: Okay. That’s fair enough. Well, one day we’ll get you around on a pub crawl around some English pubs. DAVID EINHORN: Oh, that sounds fun. PUNCH CEO: It is. You’re right. English readers: Is it? I just assumed that Punch Taverns are rather grim places, like TGI Friday's but with more ... punching? ... but maybe I'm totally off base here. Also, here is a hypothesis: vice investments do well because, for the same level of profitability, they get more analyst/investor coverage and enthusiasm. Wouldn't you rather go on a pub crawl instead of like a tour of an auto parts factory in Queens? Would that influence your stock recommendations / money allocations? Someone should do a study.