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Macworld - Apple is facing yet another lawsuit, but this time it's not over smartphone patents, tablet designs, or any of the other myriad issues that boost billable hours for the company's legal counsel. At stake in this legal dispute is cold, hard cash, and the plaintiff is one of Apple's own shareholders.
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Greenlight Capital is a large investment fund that, according to its own press materials, owns more than 1.3 million Apple shares; that's in the neighborhood of $600 million--certainly not chump change, but still only a tiny percentage of the company's overall 939 million outstanding shares. The fund has been on Apple's case for some time, citing what it calls a "severe under-performance" of the its shares as a reason for the company to do more to "unlock value for [its] shareholders."
Specifically, the fund's managers want the folks in Cupertino to distribute a larger chunk of their $130 billion cash hoard to shareholders using what's called perpetual preferred stock (more about that below), partly in the hope that a higher return will prop up the share price, since it will increase the stock's value to prospective investors.
Greenlight's legal fight with Apple involves matters of corporate governance likely to make the average user's eyes glaze over. Still, the dispute is interesting for a number of reasons, not the least of which is that it comes right before the company's yearly shareholder meeting, which will take place in Cupertino on February 27, a time when the entire board of directors--including CEO Tim Cook--is up for reelection. And while the case may not directly affect Mac, iPhone, and iPad users, its impact could be felt in other ways--so much so that it's worth reviewing exactly what's at issue here.
What is preferred stock anyway?
All public corporations parcel out their ownership in the form of shares, with each share representing an equal amount of rights and responsibilities for its holder. This common stock puts everyone on the same level, granting them ownership of a portion of the company's capital and all the privileges that come with it, including the rights to attend stockholder meetings and to vote in board elections and on resolutions brought forth by other shareholders or by the board itself.
A company can also issue preferred stock; as the name implies, these shares take precedence over common stock shares in several ways: Typically, preferred shareholders may be guaranteed that they will be paid a specific dividend, or that they will be paid out first in the event that the company goes bankrupt. In exchange, they may be asked to give up voting rights, making them passive participants in the company's future in exchange for holding on to their shares and cashing in on the dividends.
Privilege for the few
Why issue preferred stock? Typically, it's done for two reasons. The first is to raise capital without diluting the power of existing shareholders; again, the preferred shares can be issued without voting rights in exchange for a guaranteed dividend. A company may prefer to issue preferred stock instead of bonds) for a number of reasons. For one thing, since a bond is essentially a loan made to the corporation that must be repaid within a fixed maturity period, the company's credit record can suffer and other nasty complications--including bankruptcy--can ensue if the company doesn't have the cash it needs to repay its bondholders. Preferred stock, on the other hand, doesn't need to have a specific redemption date; the company can usually buy back the preferred stock (if it wants to) whenever it's convenient to do so, rather than on a fixed schedule.
Originally published on www.macworld.com. Click here to read the original story.