New York Court Enjoins Shareholder Vote on Xerox-Fujifilm Merger, Leading to Activist Settlement, CEO Resignation, and Buyer Lawsuit

On April 27, 2018, in In re Xerox Corp. Consol. S’holder Litig., the Supreme Court of New York in New York County issued a preliminary injunction preventing Xerox from holding a shareholder vote on its proposed combination with Fujifilm, through which Xerox would merge with a joint venture owned 75% by Fujifilm and 25% by Xerox. As a result, Fujifilm would own 50.1% and Xerox shareholders would own 49.9% of the combined company, and Xerox shareholders would receive a $2.5 billion special dividend. Although the board unanimously approved the merger and no other bidder had emerged, the Court focused on the actions of Xerox CEO Jeff Jacobson. While Jacobson was under pressure from two activist investors who were Xerox’s first and third largest shareholders, he negotiated the complex merger deal with Fujifilm which included various Xerox governance rights, including a term retaining him as CEO of the combined entity. Notably, the Court ordered Xerox to waive the advance notice deadline to allow one of the activists to nominate an alternative slate of directors at the upcoming annual meeting, finding that the announcement of the business combination qualified as “a material change in circumstances” since the passing of the nomination deadline. Shortly after the ruling, the activists and Xerox entered into an agreement in principle providing for Jacobson’s resignation and a board overhaul, but that agreement was quickly terminated due to the failure to execute stipulations discontinuing the activist litigation within two days of signing the agreement in principle. On May 13, 2018, Xerox delivered a termination notice to Fujifilm, citing uncurable covenant breaches and material deviations of certain Fujifilm-Xerox financial statements as bases for termination. Later that day, the activists and Xerox entered into a new settlement agreement providing for the resignation of Jacobson and five other directors, and the appointment of five new agreed-upon directors to a nine-member board. On June 18, 2018, Fujifilm filed suit for breach of contract, alleging, among other things, that Xerox’s termination was pretextual and Xerox had willfully breached the transaction agreement. Fujifilm is seeking to prove damages it estimates are in excess of $1 billion, which it says reflect the value its shareholders would have received from the transaction, along with punitive damages, as well as to obtain a declaratory judgment giving Fujifilm the ability to terminate the transactions and collect a $183 million termination fee.