apple: proposal 2, lost lawsuit and shareholder rights

This could be the most ridiculous lawsuit that could have taken place in corporate finance which couldn't be ruled out by the court due to aspects related to certain SEC rules.

I can argue that Einhorn, with all his good intentions, has got it wrong when he says the proposal 2 initiated by Apple at its forthcoming meeting on 27 February 2013 is value destructive and impedes the board's flexibility. He further says that this proposal does not merit shareholder support.

The breach

There is no debate on whether Apple has breached SEC rules relating to the bundling rule since the proposal 2 includes voting relating to 3 aspects put together: majority voting for directors, elimination of preferred stock and establishing a par value for the common stock.

Shareholder rights

All that Apple is trying to do is to seek the approval of its shareholders before it can issue a blank check preferred stock. That means the board is trying to forfeit its present power to issue the preferred stock without shareholders' approval. Apple is in fact acting in good faith and exhibiting good corporate governance. 

Let's face it. If you and I were shareholders of Apple and if the board had the power to issue preferred stock without our approval, would we like it? Put another way, we would really appreciate if we were asked for our approval before the board actually issued any preferred stock. It makes sense because it is for the shareholders to decide on the capital structure. Let's get it right on who owns the business and who makes key decisions.

The ruling

Just how this is against good corporate governance is beyond logic. Agreed, Apple should not have bundled the proposal for voting. Sure, if the matters were not shareholder friendly, the bundling would have been an example of bad corporate governance. This also breached the SEC rules. As a logical follow up, the court ruled against Apple.

Meaningless consequence

But how does it help Einhorn and other shareholders? Apple can simply drop preferred stock matter for the moment and yet not issue preferred stock. It can put the matter separately in a later shareholder meeting. It can actually seek shareholder approval if and when it issues preferred stock. The intention is clear from Apple: it is not going to budge. What has Einhorn achieved here?

It defies logic that a shareholder does not want his approval to be taken on an important matter related to the business he owns. He is urging other shareholders to follow him. Ouch! Shareholders' rights taken for a ride.

Einhorn's rejection of the proposal has nothing to do with his suggestion of perpetual 4% preferred stock. If he is unhappy with Apple's capital allocation strategies, he has every right as a shareholder to be vocal about it. His preference for issue of preferred stock as a means of unlocking value is his personal opinion with good intentions for Apple shareholders.

However, mixing the proposal and 4% preferred stock matter together is not going to help. Even Einhorn is bundling unrelated matters here! 

We can watch the fun and games anyway. We need activist shareholders.