Here’s Why David Einhorn is Suing Apple

David Einhorn’s Greenlight Capital fund has sued Apple (NASDAQ:AAPL) in an attempt to block the company from adopting a measure that would enable it to eliminate preferred stock. Einhorn is also hoping to start an investor revolt against the iPhone maker, saying the company needed to be more active in offering its shareholders more value for their investments.

Greenlight holds more than 1.3 million Apple shares.

Apple is set to announce a proposal at its February 27 shareholder meeting that would remove the company’s ability from its charter to issue “black check” preferred stock. According to Einhorn, such a proposal does not conform to regulatory rules and urged Apple shareholders to vote against it during the meeting.

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Greenlight has asked a federal court in Manhattan to stop the company from certifying votes cast on the proposal. According to the fund’s filing, the company deliberately combined this measure with two other proposals, forcing shareholders to vote to accept or reject all three together. Such a measure violated the U.S. Securities and Exchange Commission’s “unbundling rules,” Einhorn said.

In addition, the fund wrote in a filing with the SEC that it was “dissatisfied with Apple’s capital allocation strategy.”

“We believe Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders,” Einhorn said in a statement. “Over the past several months, we have had an ongoing dialog with Apple regarding one option to do so, namely the creation of a new security, a perpetual preferred stock that would be distributed at no cost to Apple’s existing shareholders.”

Apple has about $137.1 billion in cash, according to its latest earning report released in January, and according to Einhorn, that equates to about $145 per share. While Apple did announce the start of a dividend last year and also buys back shares, Einhorn told CNBC that shareholders would like to receive preferred stock with a 4 percent yield.

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This would pay a dividend that would be funded by “a small percentage of the company’s operating cash flow,” he added. Einhorn said he had been having discussions with the company over the past several months, but that it rejected his proposal last September.

On Thursday, Apple reportedly offered to re-evaluate Greenlight’s idea, but refused to withdraw the charter amendment to eliminate preferred stock.

Calling Apple shares “utterly misvalued” at current levels, the fund manager added that the company no longer needed to grow at the near-triple digit rates of the past. Einhorn said Greenlight had owned Apple since 2010 and that it was long on the stock. “We own more Apple stock now than we ever have before,” he said.

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