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Einhorn Wins a Legal Skirmish but Still Could Lose the War

By Rachelle Dragani MacNewsWorld ECT News Network
Feb 25, 2013 12:04 PM PT

A U.S. federal judge ruled in favor of hedge fund manager David Einhorn Friday, forcing Apple to remove a bundled proposal that was supposed to be voted on at this week's annual shareholder meeting.

Einhorn Wins a Legal Skirmish but Still Could Lose the War

Einhorn began pushing back against the company's proposed charter earlier this month when he filed a lawsuit claiming that Apple's bundled votes would ask shareholders to consider separate matters in one ballot.

Einhorn's claims met with agreement from U.S. District Judge Richard Sullivan in Manhattan, who ruled the proposal "impermissibly bundles 'separate matters' for shareholder consideration."

Part of that bundle included what Einhorn said was Apple's ability to issue preferred shares. The lawsuit is part of his larger campaign to convince the company to return some of its US$137 billion cash pile to shareholders. In a conference call with investors last week, Einhorn introduced "iPrefs," his preferred stock proposal that he says could add value to the shares.

Apple CEO Tim Cook recently defended Apple's extra cash and disputed Einhorn's claim that the company has a "Depression-era mentality." Cook called the lawsuit a "silly sideshow."

Apple did not respond to our request to comment for this story.

What Now?

Einhorn was wise to use a lawsuit to go after the way Apple had structured the proposals in its charter, said Robert Heim, securities attorney at Meyers & Heim LLP.

"Einhorn did make a strong case that Apple improperly bundled a number of shareholder proposals together, and that under the SEC rules shareholders were entitled to vote on each proposal separately," he told MacNewsWorld.

The judge's ruling in this case, however, is limited only to those bundled charters. Apple still has the authority to do what it wants with its cash, Heim added, and Einhorn's courtroom victory can't directly change that.

"It is very unlikely that a court would step in and direct Apple's board to issue preferred shares or to otherwise distribute the cash," he noted.

The Media Campaign

It's also unlikely that even with Friday's court ruling, Einhorn's public crusade advocating for iPrefs has changed the minds of many shareholders, Heim said.

The media attention is nothing new for one of the world's most scrutinized companies. Apple has historically done little to fuel media flames or squash any rumors that constantly surround it

That media ambivalence is probably one of the main reasons Einhorn is making his charge so public, but his efforts may still be futile.

"Einhorn likely feels that since Apple is a notoriously private company, it may be more susceptible to public attacks," Heim said. "In some instances this strategy can work, especially where a company's management is not popular with shareholders. However, I don't believe Apple is one of those instances. Apple's management and board have the support of a number of large institutional investors, and very few investors have come out to publicly support Einhorn."

Even if Einhorn doesn't get his iPrefs, though, the buzz surrounding his charge will probably force Apple to make some kind of move -- even if just a public statement, said Aswath Damodaran, professor of corporate finance at the Stern School of Business at New York University.

"I don't think Einhorn can win, partly because he seems alone in this fight," he told MacNewsWorld. "But I think that he may win - as will other Apple stockholders - even by losing. Apple will have to do something to respond, and that something may include an increase in dividend or a stock buyback."

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