On Monday, plaintiff Steven Hill filed a derivative shareholder complaint on behalf of “nominal defendant,” Apple, Inc., alleging that the company’s board of directors and several of its executives violated California common law by breaching their fiduciary duties, committing abuse of control, waste of corporate assets, and unjust enrichment.
The case, filed in Santa Clara County, Calif., contends that Apple’s decision-makers failed to put the interests of shareholders first, evinced through a 10% stock price decline after a series of decisions involving product releases amidst souring U.S.-China trade relations.
The named plaintiff is an Apple shareholder who brought the claims to “redress injuries suffered and to be suffered by Apple.” Apple is a “multinational technology company,” which produces the iPhone and the Apple iOS it uses, according to the complaint. Apple has a strong presence in “the Greater China region, which encompasses China, Hong Kong, and Taiwan, [and] is Apple’s third-largest market… accounting for $52 billion in sales in Apple’s fiscal year 2018 or nearly 20% of Apple’s total FY18 annual sales,” the plaintiff asserted.
The plaintiff’s contentions stemmed from September 2018, when Apple announced the debut of three new iPhones. Contemporaneously, Chinese manufacturers like Huawei, Oppo, and Xiaomi released competing phones that undercut Apple iPhone prices by hundreds of dollars, the complaint said. At the time, “the strength of the U.S. dollar and the high price of iPhones, combined with a declining Chinese economy, placed the iPhone out of reach of many Chinese consumers.”
According to the complaint, Apple then “mask[ed] the declining [Chinese] sales,” by issuing materially misleading statements with regard to iPhone demand. This included an assertion by CEO and board member, Tim Cook, that the company was concerned about markets where the local currency had weakened, but not the Chinese market, pointing to Apple’s double-digit growth there the previous quarter. The company also allegedly decided to stop “disclos[ing] unit sales for iPhones and other hardware, claiming that these metrics were not relevant to assess the Company’s performance.”
“In reality,” the complaint averred, “the decision not to report unit sales was merely an attempt to conceal that [the] demand for iPhones was declining.” The plaintiff cited Apple’s false assurances that the U.S.-China trade war had not “negatively impacted demand for iPhones and Apple’s pricing power in greater China.” The complaint also charged Apple with falsely stating that the increasing demand for replacement batteries in older iPhones was not harming new iPhone sales growth.
In turn, the plaintiff argued, “Apple had slashed production orders from suppliers for the new 2018 iPhone models and cut prices to reduce inventory,” without disclosing unit sales to investors. Finally, and as a result of the foregoing, the plaintiff contended, “the [d]efendants lacked a reasonable basis in fact when issuing the Company’s revenue outlook for 1Q19 and/or making the related statements concerning demand for its products, as Apple’s business metrics and financial prospects were not as strong as Defendants had led the market to believe.”
The plaintiff argued that in January 2019 Apple disclosed that “iPhone sales had declined, especially in China, and that the Company missed revenue projections for first quarter 2019 by a whopping $9 billion.” Also, “iPhone sales had been impacted by the price cuts to battery replacements,” the complaint argued. According to the plaintiff, the company’s stock price fell $15.73 or by about 10% on this news, and closed at $142.19 during unusually heavy trading volume.
As a result of the executives’ and board members’ conduct, the complaint claimed, Apple has been harmed by the incursion of legal fees and settlement costs associated with “legal and regulatory proceedings stemming from the misleading disclosures,” and compensation paid to defendants who have allegedly breached their fiduciary duties. “The credibility and motives of management are now in serious doubt,” the plaintiff argued in support of his request for relief, including monetary damages.
The plaintiff is represented by Glancy Prongay & Murray LLP.