The recent law suit against tech giant Apple by David Einhorn’s hedge fund Greenlight Capital has sparked a discussion on the extent of the shareholders’ influence over a company’s management. Where does shareholder control right, which is inherent in share ownership, become meddling in the director’s business of running the company and watching out for its best interest? It appears that idea behind Greenlight Capital law suit is not only to lay a hand on Apple’s pile of cash, but also to push the boundaries of (minority!) shareholder involvement in company management. It is also considered a test case for a radical solution to the issue of cash piles hoarded on technology companies balance sheets. Apple, similarly to other tech giants, hoards billions of cash ($137 billion)[1], which Mr Einhorn and his hedge fund are attempting to unlock. Last spring, Apple announced a plan to return $45 billion to shareholders over three years, in the form of share buybacks and a dividend for its common stock. Mr Einhorn has suggested an alternative solution which is supposed to be a compromise for the company and its shareholders, namely, that Apple issues perpetual preferred stock. Preferred stock is a hybrid between debt and equity – it pays a regular and guaranteed dividend (with priority over ordinary stock), yet carries no voting rights. Because it’s stock, it still ranks below debt in bankruptcy proceedings. This solution would allow Apple shareholders gain access to the cash pile, without Apple actually distributing it in a form of dividend, which not only gives the company more, but also saves it from a stigma of a mature company as opposed to a young company on an accelerated growth path. Technology giants such as Apple attract shareholders by their rapid growth, which can only continue because instead of sharing their wealth with its shareholders, the company invests its profits in development and expansion. Paying out a large dividend can be a reputational issue for Apple because it would send a signal that it has turned into a mature company, which no longer has any new prospects to invest into, but decides to distribute its cash to investors instead. Greenlight Capital’s legal action is against the proposed changes to Apple’s charter that would prohibit the company from issuing preferred stock[2]. In support of his motion, Mr Einhorn compared Apple to his grandmother, whose experience of surviving the Great Depression made her so tight with money that she would not leave voice mail messages for fear of using extra cellphone minutes.[3] According to the Financial Times, Greenlight Capital is a top-100 shareholder with a 0.12 per cent. stake in Apple[4]. Clearly, despite Mr Einhorn’s reputation of a guru among investors, his hedge fund is only a minority shareholder in the company. Corporate governance rules aim to strike the right balance in a company construction between shareholders (owners) and directors (managers). Shareholders, even minority ones, are granted control rights over the company, which is reflected in their ability to, among others, examine the company books, appoint directors and take part in decision making process in relation to the most significant company matters, such as change of the company charter. However, it is not their role to replace the directors in taking decisions with respect to the functioning and financing of the company, including, as in the case at hand, how its capital should be allocated. It’s just not the shareholder’s call. Directors and officers have always been best suited to take such decisions and their role in this respect has been inherent in a corporate structure. Shareholders will always be biased by self-interest which could overshadow the interest of the company as a whole. In addition, the shareholders’ lack of financial expertise (although I don’t want to discredit Mr. Einhorn’s investing skills) will always be second guessing what directors can decide based on their experience and skill. In Greenlight Capital’s letter to Apple shareholders Mr Einhorn wrote: “We understand that many of our fellow shareholders share our frustration with Apple’s capital allocation policies. Apple has $145 per share of cash on its balance sheet. As a shareholder, this is your money”.[5] No, Mr Einhorn, this cash is not shareholders’ money, it’s Apple’s money. Shareholders don’t own company’s assets, the own company’s shares, which are in essence a bundle of ownership and control rights, but not with respect to the company’s assets, but to the company as a whole. No matter how much publicity and followers Mr Einhorn might have, this still does not affect it’s role in Apple’s structure – that of a shareholder – a minority shareholder. [1] Greenlight Capital Letter to Apple Shareholders,New York,7 February 2013 http://www.ft.com/cms/1ffe782c-713d-11e2-9d5c-00144feab49a.pdf [2] T. Bradshaw, D. McCrum, D. Gelles Apple under Pressure on $137bn Cash Pile Financial Times,7 February 2013 http://www.ft.com/cms/s/0/b4171642-7136-11e2-9d5c-00144feab49a.html#axzz2LG2W5CXp [3] The case is Greenlight Capital LP v. Apple Inc., 13-cv-900, U.S. District Court, Southern District of New York (Manhattan). [4] M.J. De La Merced Einhorn Sues Apple Over Plan to Discard Preferred Stock New York Times,7 February 2013 http://dealbook.nytimes.com/2013/02/07/einhorn-to-sue-apple-over-plan-to-discard-preferred-stock/ [5] C. Smythe & A. Satariano Apple Says It Will Fight Greenlight’s Bid to Block Vote Bloomberg,14 February 2013, http://www.bloomberg.com/news/2013-02-13/apple-says-it-will-fight-greenlight-s-bid-to-block-vote.html