Apple’s plan may, in part, have something to do with its prior dispute with Greenlight Capital regarding how to allocate Apple’s pile of cash. While Greenlight’s goal was transfer some of the money on Apple’s balance sheet into shareholder’s pockets by having Apple distribute at no cost to its shareholders a new class of dividend-paying preferred stock, their dispute also
highlighted the SEC’s proxy statement unbundling rules. The lawsuit that followed ended up with Apple withdrawing a proposal that many characterized as being a benefit to shareholders from a corporate governance perspective.
At the end of December 2012, Apple filed its preliminary proxy statement. One of the proposals Apple intended to submit to its shareholders was to amend its charter to (i) eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock and (iii) establish a par value for its common stock. It does not appear that the preliminary proxy statement was reviewed by the SEC because the definitive was filed 10 days later.
In response, Greenlight filed a lawsuit and urged shareholders to vote against the proposal. Other shareholders supported the proposal (including CalPERS, who even filed a notice in support), viewing it as another step in good corporate governance. When asked about it, Apple’s CEO, Tim Cook, thought the lawsuit was a “silly sideshow.”
Greenlight sought to enjoin Apple from submitting the proposal to its shareholders because the proposal did not comply with the SEC’s unbundling rules. These rules require that the form of proxy identify clearly and impartially each separate matter intended to be acted upon, and that the proxy card provide shareholders with an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter to be acted upon. See Exchange Act Rules 14a-4(a)(3) and 14a-4(b)(1).
Apple defended the proposal by arguing that: (1) the proposal related to one action - amending the articles; (2) there is precedent for bundling similar proposals; (3) the SEC did not comment on the proposal; (4) the proposal does not group material matters; and (5) all of the amendments are pro-shareholder.
The court granted Greenlight’s motion for preliminary injunction. While Apple could have unbundled the matters and made the effectiveness of any one or more of the proposals conditioned upon the approval of one or more of the other proposals, Apple instead withdrew the proposal.
Some of the court’s reasoning for rejecting Apple’s second, third and fifth arguments is well-known, but nevertheless serves as a good reminder. With respect to the second argument, the court noted that there is “a vast difference between compliant proxies and non-compliant but unchallenged proxies.” With respect to third argument, the court, pointing to Exchange Act Rule 14a-9(b), noted that neither the filing of a proxy statement with the SEC nor the SEC’s review of a proxy statement is deemed a finding by the SEC that such material is compliant with SEC rules. With respect to the fifth argument, the court, while not necessarily agreeing that all of the amendments were pro-shareholder, stated that the whether the unbundling rules apply does not depend on management’s view of the benefits of the proposal to shareholders.
If there is such a thing, Greenlight's allegations were a welcome respite from the other proxy statement lawsuits that have surfaced the past couple of years related to say-on-pay and proposals to increase authorized stock and to increase shares available under equity plans (though Apple was also sued with respect to its say-on-pay proposal). That said, the Apple decision may be another avenue that the plaintiff bar pursues. Currently, the Second Circuit has held that an implied private right of action exists under Rules 14a-4(a)(3) and 14a-4(b)(1) (Koppel v. 4987 Corp., 167 F.3d 125, 134-138 (2d Cir. 1999)). In light of the Apple decision and the creativity that the plaintiff bar has demonstrated to come up with causes of action, companies need to carefully consider the bundling rules.