Teaching Moments in the Area of Corporate-Securities Law: The Dell Buyout and the Apple/Einhorn Dispute (Part 3)
The battle between David Einhorn and Apple is in many ways an even more interesting teaching moment. The battle not only involves interpretations of the proxy rules (something inevitably reviewed in any securities class) but also the application of the blank check stock provisions (a staple of many classes on corporations or business entities).
Blank check stock provisions are common (one suspect universal). They provide management with the authority to create, by board resolution, a new class of stock. The description of the new class is filed with the applicable state office and becomes part of the articles of incorporation. In other words, the provision represents the most significant example of the board having the power to amend the articles of incorporation without shareholder approval (there are other more ministerial amendments that boards can also make).
Blank check stock provisions are viewed as necessary because boards need the flexibility to quickly adopt new classes of stock. An investor who wants to invest but insists on a dividend preference may not want to wait around for the new class of stock to be approved by shareholders, something that can entail a time consuming process. Less discussed, there is the risk that shareholders will not approve the new class. Particularly in the case of a preference class of stock, common shareholders may view themselves as disadvantaged by the new class and not approve its creation.
Because these provisions augment board authority, any effort at repeal would most likely come from shareholders. Shareholders might be willing to deprive the board of the authority to act quickly to create a new class of stock in order to have a veto over the creation of a new class that they might find disadvantageous. Boards, on the other hand, would generally oppose efforts to eliminate blank check stock provisions (something, as an article amendment, they have to initiate) since it reduces their discretion in connection with the management of the company.
Lesson number 1 in the classroom is that anything taught as a general rule likely has exceptions. Thus, the battle lines in the Apple-Einhorn conflict took the traditional positions with respect to blank check stock provisions and stood them on their head.
On the one hand, the Apple board has proposed a repeal of the blank check stock provision, effectively agreeing to reduce its own authority. The approach is opposed by a shareholder of Apple, David Einhorn. Einhorn wants the board to retain the authority to issue new classes of stock, even those that could be disadvantageous to common stock holders. Thus, Einhorn wants more authority for the board and less for shareholders.