Preliminary Injunction Blocks Proposed Xerox-Fujifilm Deal

In a major win for activist investors Darwin Deason and Carl Ichan, on April 27, 2018, the Supreme Court of the State of New York issued an order that temporarily blocks a complicated proposal for the sale and merger of Xerox with Fuji Xerox. The ruling was issued in a response to a lawsuit filed by Xerox investor Deason, who, along with  Icahn, have been seeking to block the deal.  Deason’s lawsuit also seeks to enable him to nominate members to the Xerox board of directors, and Icahn has been seeking to have Xerox sold in all-cash transaction.

Under the proposed deal, Fujifilm would purchase Xerox for $6.1 billion, and Xerox would be merged with Fuji Xerox, Xerox’s decades-old joint venture between Xerox and Fujifilm, with Fujifilm having a 50.1 percent controlling interest in the new company, with current Xerox CEO Jeff Jacobson serving as CEO of the new combined company. Xerox would borrow $2.5 billion to pay its shareholders a special $2.5 billion dividend.

“I am grateful the court acted to protect the shareholders of Xerox,” Deason said following the court ruling.

“Xerox will immediately appeal the court’s decision,” a Xerox statement said.

Judge Barry Ostrager of the Supreme Court of the State of New York, County of New York, granted the injunctions, saying:

“The plaintiffs have demonstrated a likelihood of success on the merits of their claim that defendants breached their fiduciary duties as directors in approving the proposed transactions and that Fuji aided and abetted such breach.”

A statement issued by the Xerox board however stated: “The Xerox Board undertook a rigorous process to reach its decision to approve the proposed transaction, including a comprehensive review of the company’s strategic and financial alternatives, as well as potential transaction structures in its negotiations with Fujifilm over a ten-month period.”

Among the findings by the court was a provision of Xerox’s agreement with Fuji Xerox that should Xerox sell more than 30-percent of its shares to a competitor, it would loss access to the technology it has contributed to the venture for more than 30 years. The court noted that this provision was first disclosed to Xerox shareholders and the public on January 31, 2018.

Court papers also noted: “The lynchpin of the Court’s decision turns on the conduct of Xerox CEO Jeff Jacobson in the time frame preceding the Board’s approval of a transaction that granted control of an American icon company to Fuji without any cash payment by Fuji to Xerox shareholders, and the Board’s acquiescence in Jacobson’s conduct.”

Court papers also noted that in the summer of 2017, a unanimous Xerox board had decided that Jacobson “was not the right person to lead Xerox,” according to testimony provided by Xerox Board Director Cheryl Krongard, and that in October and November 2017, the board interviewed various replacements, including John Visentin, a former IBM and HP executive.

On November 10, 2017, court papers indicated that Xerox Board Director Richard Keegan told Jacobson that he might be replaced and to stop discussions with Fujifilm. However, Keegan later told Jacobson to proceed with talks. Papers also indicate that the CEO of Fujiflm sought to have Jacobson named CEO of the new combined company.

Court papers also noted: “…it was a breach of fiduciary duty for Keegan to authorize Jacobson to continue to be the primary interface with Fuji after Keegan both told Jacobson he could be imminently terminated and, for that reason, he should cease communications with Fuji about any transaction.”

Court papers also included an email from Krongard to Keegan stating that Jacobson was a “rogue executive” that has put the Xerox board in “a horrible situation” and “He is asking us to lie!” Keegan didn’t respond to the email, but authorized Jacobson to purse talks with Fujifilm in November 2017 with Fujifilm.

A Fujiflm CEO email also suggested that Fujiflm wanted Jacobson to be the CEO of the new combined company in order for Fujifilm to have control of the Xerox board members for the new combined company.

Court papers also stated: “This transaction was largely negotiated by a massively conflicted CEO in breach of his fiduciary duties to further his self interest and approved by a Board, more than half of whom were perpetuating themselves in office for five years without properly supervising Xerox’s conflicted CEO.”

The court concluded that: “The plaintiffs have demonstrated a likelihood of success on the merits of their claim that defendants breached their fiduciary duties as directors in approving the proposed transaction and that Fuji aided and abetted such breach,” and granted a preliminary injunction blocking the deal pending a final determination of the merits of  Deason’s claims, noting that the plaintiffs demonstrated the Xerox shareholders will lose the ability to receive superior value if the deal is approved.

The court also found that Deason should be able to propose to the Xerox board a slate of directors, provided he does so in the next 30 days.

Our Take

Xerox shareholders were originally scheduled to vote on the proposed merger deal sometime in May 2018, but under this court ruling, it appears the court must make a  final determination of Deason’s claims before any vote can occur.

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