A bite out of Apple

A key shareholder has scored a court win in a battle to get hold of Apple's cash, reports Hannah Langworth

Technology giant Apple has suffered a blow in a legal battle with one of its most high-profile corporate shareholders. Notoriously aggressive hedge fund Greenlight Capital successfully applied to a US court to get an injunction issued prohibiting Apple from putting a motion known as "Proposal 2" to its investors at an upcoming shareholders meeting.

Greenlight claimed that Proposal 2 violated US corporate law and that its passing would allow Apple to continue, unfairly, to avoid releasing to its shareholders any significant part of its large cash reserves, thought to total around $137 billion (£90 billion).

All or nothing

Proposal 2 asked Apple's shareholders to approve three amendments to its articles of incorporation (essentially the company's constitution).

Greenlight supported the first two amendments, but was opposed to the third: the introduction of a shareholder approval requirement for the issuance of preferred shares, which usually carry special dividend rights. This is because it would like Apple's management to continue to be free to issue preferred shares to its existing shareholders, and hence more of its cash, without the need for a time-consuming and unpredictable shareholder poll. Greenlight has even put forward a proposal stating how it thinks Apple should do so.

But Apple was requiring shareholders to approve all three amendments or none. Greenlight argued this violated US regulation against bundling multiple resolutions together in a way that forces shareholders to vote against their own interests.

Apple argued that it was appropriate to group the three resolutions together as they all related to amending the company's articles, and that they were all in the interests of its shareholders.

Strategic thinking

Apple and Greenlight were arguably using legal processes strategically as much as to determine legal rights and wrongs.

"Apple's strategic play is that they need to get all of the amendments through or none," said a partner at a leading City law firm shortly before the injunction was granted. "And either they didn't think they'd have a problem with any of them, or they thought they'd head it off by bundling them together."

Greenlight, meanwhile, "could have gone down another route; they could have garnered more support in the press, or got more shareholders on board. Their decision to attempt an injunction shows they wanted to underline to Apple how strongly they felt about the issue."

The dispute also needs to be seen in the context of the way in which shareholders in general are increasingly prepared to exercise their legal rights. Greenlight is even facing a potential shareholder rebellion itself, with some of its own investors criticising its stance towards Apple.

"Big fund managers taking a more active role is something we've seen in the US for a long time that is now coming into the UK," says the City firm partner we spoke to. "And it's to be expected, given the economic situation. When times were good, fund managers could pick and choose between companies. But now they don't have as many choices so companies' decisions affect fund managers massively, meaning they're bound to be more active."

Testing times

But, he suggests, this dispute is arguably about Apple specifically rather than the shareholder activism trend in general."With Steve Jobs having passed away, shareholders are wondering if Apple has the right strategy going forward, and what the company is going to do with its cash if it doesn't return it to them." It's also important to put the dispute in the context of Greenlight's specific circumstances too, he says: "Greenlight might be having a complete disaster on lots of other investments so needs to see a return from Apple in order for its returns overall to look ok."

As the dispute involves two such high-profile parties, there has to be a question mark over whether the judge deciding whether or not to grant an injunction was able to fully separate the legal merits of each party's case from these wider contexts.

"I think it's an interesting test," says the City law firm partner we spoke to, "of how the courts look at applying the letter of the law under the microscope of public pressure."

It's probably impossible, however, for anyone, judges included, to see anything Apple-related in isolation from the unrelenting media and public obsession with the company, which is arguably the ultimate source of the business's success - and hence the cash pile at the heart of this dispute.