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General Motors Rejects Activist Investor's Proposal For Dual-class Stock Structure

30 March 2017

The Plan would split GM's common stock into two classes: one that would receive the current dividends and one that would participate in the remaining earnings and cash flows and future growth of the Company. But the company says that its board and management have analyzed the plan and decided against it.

Einhorn has a history of pushing unique capital plans at big US companies and in 2013 urged Apple Inc to issue preferred stock with a perpetual 4-percent dividend. By creating securities that appeal to income-oriented investors and value- and growth-focused buyers, respectively, the scheme could generate a value of between $43 and $60 for the two shares combined.

Einhorn said Tuesday on CNBC that GM is only paying out a quarter of its earnings, which is unusual for a high-yielding stock.

To add more pressure on the company, Einhorn has said he wants to nominate directors but would not identify them. GM is not recommending any of the Greenlight candidates for its board; the candidates have not been named by Greenlight or GM, but should be included in GM's proxy which typically comes out in late April.

"Moody's believes that the Greenlight proposal would reduce financial flexibility and increase credit risk", Moody's Investors Service wrote in a note.

Another issue Einhorn raised is the market's lack of respect for GM's healthy dividend.

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The company is expected to hold its annual meeting mid-year. "In contrast, the proposed structure creates an unacceptable level of risk for our company and its shareholders", concluded Barra. "The creation of a perpetual, cumulative dividend in excess of $2.2 billion would saddle GM with a sizable and largely inflexible cash outflow burden". The proposal relates to eliminating the dividend on the existing GM common stock and distributing an unprecedented new dividend-focused security, thereby creating a dual-class common stock structure.

Einhorn, however, said GM's contention that a change would endanger GM's credit rating a red herring, contending that ratings agencies don't normally care about whether there are two classes of stock.

By separating and appropriately valuing GM's dividend yield and its capital appreciation potential, Einhorn believes the two stock classes could be priced in the market at a combined $52.11 per share, roughly 50 percent higher than GM shares now trade.

The Detroit automaker has had a history of activist investors seeking more from the stock. The stock has now gained 3% year to date, while the S&P 500 has tacked on 5.2%.

Greenlight Capital owned about 0.88 percent of General Motors' shares as of December 31, according to Reuters data. The company promised to return about $7 billion in cash to shareholders this year, bringing total cash returns in dividends and buybacks to about $25 billion since 2012.

General Motors Rejects Activist Investor's Proposal For Dual-class Stock Structure