Xerox-Fuji Xerox Merger May be Good for Xerox Shareholders – But Is It Good for Fujifilm?

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In the past several weeks, activist investors Carl Icahn and Darwin, who together own about 15.2 percent stake in Xerox, have ferociously battled to stop the proposed Xerox-Fuji Xerox merger, under which Fujifilm of Japan would have a controlling 50.1 percent interest. But an article published by the Nikkei-Asian Review this week asks a different question: is the deal good for Fujifilm?

The author of the article, Stephen Givens, argues that the deal could “embroil the Japanese group in U.S.-style investor disputes.” Those disputes are already underway. Deason has filed two lawsuits, one to block the merger, and another to enable him to nominate members to the Xerox board of directors. Meanwhile, several law firms are soliciting members for a possible class-action lawsuit.

In the Nikkei-Asian Review, Givens argues that the deal is a trap awaiting Fujifilm if the deal goes through: “A trap so risky that Fujifilm would be well advised to walk away now.” The new ownership structure – 49.9 percent would be in the hands of Xerox shareholders, including Icahn and Deason, and 50.1 percent would be in the hands of Fujifilm – would be “fraught with risk in corporate and legal environments outside Japan, not least the U.S.”

According to the article in the Nikkei-Asian Review, the second part of Icahn’s strategy may also include lawsuits and arguments that “minority rights are being ignored,” forcing a higher share price for the remaining 49.9 percent of the new company.

While the structure of the new combined Xerox-Fuji Xerox – one listed company owning another – is common in Japan – it’s “almost unheard of in the U.S.” In the United State, U.S. corporate law and corporate governance principles are said to be highly sensitive to the conflicts of interest “that inevitably arise between a controlling majority shareholder and minority shareholders.”

Givens notes that these conflicts of interest “are viewed as particularly threatening to minority shareholders in cases where the majority shareholder conducts ongoing business transactions (for example, a supply relationship) with the entity it controls. The concern is that the majority shareholder will use its majority control to dictate unfair terms, to the detriment of the minority shareholders. Unlike in Japan, in a U.S. court, the majority shareholder will carry the burden of proving that each transaction with the controlled entity is scrupulously fair and at arm’s length. U.S. companies therefore almost never create ownership structures that expose them to this kind of conflict of interest claim from minority public shareholders.”

Givens also notes that Icahn’s public letters are already painting a “lurid post-acquisition picture of ‘big brother’ Fujifilm abusing its position as 50.1% controlling shareholder of Xerox to ‘live in a mansion and drive a Rolls-Royce while the younger brother lives in shack and drives an old beat-up hatchback.'”

Givens notes that Icahn “may already be mentally drafting the lawsuits to come in “Act II, accusing Fujifilm of ‘abusing’ its majority control to siphon off Xerox’s assets and technology for the benefit of the Japanese ‘big brother’ to the detriment of the American ‘little brother.'”

Ultimately – unless Icahn and Deason “go away” (unlikely in our opinion) – Givens argues that the new combined Xerox-Fuji Xerox may be “under the constant threat of an Icahn lawsuit accusing Fujifilm of stealing or undervaluing Xerox assets, technology, customers and people.”

The investors’ ultimate goal may be just to get to Fujifilm to buy Xerox at a higher price. But will that be good for Xerox – or Fujiilm? Stay tuned. Xerox’s shareholders will vote on the deal in May. If they approve the deal, Icahn and Deason may – or may not – begin their Act II.

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