Apple faces legal action over cash pile An activist hedge fund has thrown down the gauntlet to Apple, pushing it to consider new ways to return billions of dollars to shareholders after the fall of the iPhone maker's share price by more than a third in recent months. The decision by David Einhorn's Greenlight Capital to sue the world's most valuable company is the latest effort to unlock the huge cash piles being hoarded by large technology groups. The 20 largest US companies in this sector, many of which are averse to making big investor distributions, are sitting on close to $500bn of cash and investments. Greenlight on Thursday said it had taken legal action against Apple over proposed changes to its corporate charter that would prohibit it from issuing a new high-yielding class of share, which could pay out billions of dollars from its $137bn cash pile. Mr Einhorn wrote to other Apple shareholders asking them to vote against the changes and support his motion for Apple to issue this preferred stock. Noting Apple's low price-to-earnings ratio after its recent stock-price decline, he 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. Apple holds around two-thirds of its cash overseas and repatriating it would likely incur a steep tax bill, posing a quandary familiar to many US-based technology companies. Dell, which this week proposed a management buyout, is also looking to take advantage of its overseas cash pile. In a regulatory filing on Wednesday, the company said it would aim to free up as much as $7.4bn in cash. Dell holds nearly all of its cash overseas. While describing Apple as a "phenomenal company filled with talented people creating iconic products," Mr Einhorn said proposed changes to Apple's corporate charter do not comply with Securities and Exchange Commission voting rules and "unnecessarily limits the board's flexibility to distribute preferred stock as a means of unlocking shareholder value." Greenlight, which is a top-100 shareholder with a 0.12 per cent stake in Apple, made a proposal to the Cupertino-based company last spring that it should issue perpetual preferred stock to shareholders. Mr Einhorn argued this would be a simple, low-risk way to reward shareholders without compromising the financial and strategic flexibility of the company, or forcing the company to incur tax on repatriating its offshore cash balances. However, Apple rejected this idea last September, according to Greenlight. It has now agreed to discuss the proposal again, Greenlight said, but only after the fund initiated a legal action in federal district court in New York opposing Apple's proposed changes to its charter. Apple had not commented on Greenlight's action at the time of publication. Peter Oppenheimer, Apple's chief finance officer, said during the company's earnings call with analysts last month that returning more cash was "something that we continuously assess." The legal move comes after Calpers, the largest US public pension fund, this week urged shareholders to support the corporate governance changes proposed by Apple at its annual meeting this month. Anne Simpson, head of corporate governance at Calpers, said that the fund still supports removing the board's ability to issue blank cheque preferred stock, as investors could still approve Mr Einhorn's plan separately. It's quite right that the shareholders should make decisions which affect the capital structure. Last year, Apple began paying a dividend for the first time since 1995, and has said it will buy back $10bn worth of stock over three years. "We do consider increasing these programmes and we'll do what we think is in the best interest of our shareholders," Mr Oppenheimer said in January. Mr Einhorn has long been an advocate for Apple stock, arguing that the company is developing an ecosystem of loyal users that gives its business greater resilience than simple manufacturers of consumer electronics who face inevitable competition on price that destroys their profits. However, like several large technology companies that have hoarded cash on their balance sheet, Apple has faced criticism for its use of capital. With an investor base that has traditionally been attracted by growth, paying a large dividend is seen as a signal that a more pedestrian future lies ahead, even if it is difficult to see how a company such as Apple or Microsoft could usefully spend their cash. At an investor conference in May last year, Mr Einhorn debuted an innovative solution to this problem which he called "Greenlight Opportunistic Use of Preferreds." Mr Einhorn suggested that instead of dividends, a company like Apple could issue preferred stock to shareholders. Such securities are a hybrid of debt and equity: they pay a regular dividend, yet carry no voting rights and are ranked below debt in the event of a bankruptcy. It would be a way to give shareholders a claim on Apple's cash pile, without actually distributing it, allowing the company to retain flexibility in its use of cash. No company has yet adopted the scheme. In his letter urging shareholders to vote against the charter changes, Mr Einhorn said that every $50bn of perpetual preferred stock issued by Apple would unlock about $30bn, or $32 a share, in value. A 4 per cent yield, in line with 30-year debt issued by Microsoft, would cost Apple around $2bn in dividend payouts, but implies a much higher earnings multiple than Apple's current valuation. "Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share," he said. Apple's shares had risen 1 per cent to $459.80 by around lunchtime in New York on Thursday, but remained more than a third off September's highs.