NEW YORK - Apple Inc on Thursday confronted its first major challenge from an activist shareholder in years as hedge fund manager David Einhorn's Greenlight Capital filed suit against the company and demanded it dole out a bigger piece of its $137 billion cash pile to investors.
The unusual move comes as the world's largest technology company grapples with a tumbling share price, mounting competition in the smartphone and tablet markets and concerns about its ability to produce new breakthrough products.
Einhorn, a well-known short-seller and Apple gadget fan, said in an interview with CNBC that the company harboured a "Depression-era" mentality that led it to hoard cash and invest only in the safest, lowest-yielding securities.
Apple nearly went broke in the 1990s before Steve Jobs returned and engineered a sensational turnaround, with products such as the iPhone and iPad that became must-haves for consumers around the world. The company's near-death experience has led Apple to be exceptionally conservative with its cash.
Last March, just months after Jobs' death, Apple responded to a barrage of investor criticism over its large cash hoard by initiating a quarterly cash dividend and a share buyback that would pay out $45 billion over three years. At the time, Apple was sitting on $98 billion in cash.
Einhorn's lawsuit filed in U.S. District Court in Manhattan targets a proposal by Apple to eliminate from its charter "blank check" preferred stock. The board now has discretion to issue preferred stock but is asking shareholders at its annual meeting on February 27 to vote on a proposal that would first require shareholder approval.
Einhorn urged Apple shareholders to vote against the plan, and put forward his own proposal for an issuance of preferred stock - which he deems superior to dividends or share buybacks - with a perpetual 4 percent dividend.
Analysts have expected stockholder pressure to increase as Apple's share price declines and its outlook grows murkier. Stock in the company that once seemingly could do no wrong has fallen 35 percent since its September record high through Wednesday. It ended Thursday 3 percent higher at $468.22.
Einhorn, often cited as one of the most committed Apple bulls, remains long on its shares. But the fund manager, whose Greenlight had a sub-par year in large part because of Apple's late-2012 stock swoon, said the company needs to fix its "cash problem."
"It has sort of a mentality of a depression. In other words, people who have gone through traumas ... and Apple has gone through a couple of traumas in its history, they sometimes feel like they can never have enough cash," Einhorn said on CNBC.
Some investors, who have long railed against what they saw as Apple's ultra-conservative attitude toward its cash, rallied around the principle of returning cash to shareholders.
In an interview with Reuters, Einhorn said he had gone to Apple CEO Tim Cook in recent weeks after the company's chief financial officer, Peter Oppenheimer, brushed off his entreaties in September. Cook, who is rarely known to engage investors in exclusive conversations, was unaware of the earlier conversations with Oppenheimer, according to Einhorn.
"When I discussed this with Tim Cook, and actually, the conversation has been going on for the last couple of weeks, he said that he wasn't familiar with my previous conversations with Peter Oppenheimer and whoever Peter Oppenheimer's advisers were. I was surprised by that," Einhorn told Reuters.
But Apple fired back on Thursday afternoon, saying Einhorn's lawsuit over the shareholder proposal was misguided and that striking the "blank check" provision from its charter would not preclude preferred share issuances in future.
"Contrary to Greenlight's statements, adoption of Proposal #2 would not prevent the issuance of preferred stock," it said in a statement. "Currently, Apple's articles of incorporation provide for the issuance of 'blank check' preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock."
A source familiar with the discussions Apple was having with Einhorn said that talks with Einhorn as recently as this week had been cordial, that there had been friendly disagreement only on whether common shareholders should be allowed to vote on something as significant as an issuance of preferred stock.
But the source added that Apple, while willing to consider investors' point of view, will eventually decide in the best interest of all shareholders.
Oral arguments between Apple and Einhorn have been set for February 22 in U.S. District Court for the Southern District of New York. Apple has until February 15 to respond to Greenlight's suit, after which Einhorn has until February 18 to reply.
"We saw that the proxy came out and we saw they were planning to get rid of preferred and then, we said, 'Wait a minute, we are not going to be able to bring this up again in a good way if we allow them to do this. So we should contest it now,'" Einhorn said in the interview.