David Einhorn was just dealt a blow in his battle to shake up GM

Greenlight Capital's David Einhorn has been waging a battle ahead of General Motors (NYSE:GM)' annual shareholder meeting to split the company's stock into two classes.

The hedge funder, who controls over 3% of GM in total, wants dividend-paying shares and "capital appreciation" shares that could capture GM's growth and deliver a return to shareholders superior to what the markets have since the carmaker's 2010 post-bankruptcy IPO.

GM has underperformed the markets over this period and is currently trading at $33 per share, the IPO price. Einhorn believes that his scheme would untap billions in unrealized value. He has also nominated a slate of three directors for shareholders to vote on for the GM board.

GM, however, considers Einhorn's plan to be little more than financial engineering, with major drawbacks including damage to GM's investment-grade credit rating and corporate governance issues related to serving two groups of shareholders with different objectives.

The major credit rating agencies have agreed with GM, prompting Einhorn to accuse GM of misrepresenting Greenlight's proposal. GM denies this and has said that it presented Einhorn's plan fully and fairly.

On Saturday, Greenlight's plan was dealt a fresh blow when Institutional Shareholder Services recommended against Einhorn's slate, joining Glass Lewis (ISS and Glass Lewis are independent proxy advisors).

GM put out a press release summarizing ISS's assessment of the Greenlight proposal. “The negative outcomes associated with the proposed dual class share structure combined with the lack of visibility regarding value creation for shareholders drive our recommendation against the dual class proposal," ISS said.

ISS added that CEO Mary Barra and her team "have delivered objective operational improvements" with the carmaker narrowing the "performance gap relative to peers since Barra took over as CEO, while outperforming Ford, and...the market has not reacted positively to the [Greenlight] proposal.”

The ISS report also supported GM's concern that the two new types of shares would put GM's management at odds with shareholders.

“The dual class structure would create conflicts of interest as dividend and capital appreciation shareholders would have different objectives, adding complexity to decisions regarding the company's capital structure and investments," ISS said. "For example, an investment to grow profits would primarily benefit capital appreciation shareholders.”

Andy Kiersz/Buisness Insider

h2 A raid on GM's capital?/h2

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Regardless of whether you think Greenlight's proposal has merit and consider GM's opposition to be an endorsement of the status quo, backed up by the ratings agencies and now both ISS and Glass Lewis, Einhorn's plan wouldn't necessarily capture true business growth, especially as the US auto industry is seeing sales plateau ahead of a probable cyclical downturn.

Instead, Einhorn's plan would create a dividend share cut off from GM's current multibillion-dollar share buyback plan, which is ongoing. The carmakers will repurchase $9 billion in 2017, with an authorization to purchase $14 in total in the future, according to the company.

On its face, Einhorn's proposal looks to be targeted at creating a class of shares specifically designed to harvest share buybacks and the only means to deliver capital appreciation, while simultaneously undermining GM's ability to manage its capital toward organic business growth and strategic moves in a downturn, not to mention investment in new technologies and business opportunities.

Consequently, the proposal has set off a round of concern at GM that Greenlight's efforts are similar to past Wall-Street-pleasing undertakings that didn't pan out, from introducing tracking shares in the 1980s to spinning off partmakers Delphi and then having to contend with Delphi's bankruptcy.