In April, a New York court temporarily blocked the proposed $6.1 billion merger between Xerox Corporation (Xerox) and Fujifilm Holdings Corp. (Fuji), finding that Xerox’s then-CEO, Jeff Jacobson, and its board of directors (the Xerox Board), likely breached their fiduciary duties, and that Fuji likely aided and abetted such breach. Since then, Xerox has announced plans to terminate the deal, while Fuji has filed a $1 billion suit seeking to enforce the merger. As the matter continues to develop, we examine the implications of the decision to grant the preliminary injunction for both US public M&A target boards and buyers of US public companies.

In March 2017, Fuji and Xerox began discussions around a potential all-cash acquisition of Xerox by Fuji. Several impediments to the negotiations arose throughout the year, including an accounting issue at the joint venture Fuji and Xerox established in Asia-Pacific and the Xerox Board’s growing dissatisfaction with Jacobson’s performance. Yet the transaction structure the Xerox Board unanimously approved less than a year later consisted of, among other things, Fuji acquiring a majority stake in Xerox without paying cash consideration, a guarantee that Jacobson remain CEO of Xerox, and continuing terms for several Xerox directors.

The record the court examined alleged that, throughout the course of negotiating this transaction, Jacobson and other Xerox directors acted in accordance with their own self-interest over shareholders’ interests. Jacobson, whom the court described as “hopelessly conflicted,” was aware that the Xerox Board and Carl Icahn, activist investor and Xerox’s largest shareholder, wanted to replace him. Jacobson therefore had an incentive to negotiate a deal that would preserve his job. The incentives for the Xerox Board to approve a transaction are less clear on the record, but may have been due to the fact that Icahn was threatening a proxy contest and the Fuji deal would safeguard board seats for several Xerox directors. Rather than replace Jacobson as they originally intended, the Xerox Board unanimously approved a deal their “rogue executive” negotiated and decided to present it for shareholder vote before the annual meeting, when director elections would take place.

As for Fuji, the aiding-and-abetting finding is highly unusual, and even more rare when it comes to a counterparty with a duty to its own shareholders to negotiate the best possible deal. The decision seemed to turn on indications in the record before the court that Fuji representatives knew about and took advantage of the contentious relationship among Icahn, Jacobson, and the Xerox board.

What can buyers and target boards of US public companies learn from this? First, sophisticated judges in New York and elsewhere expect CEOs and boards to proactively promote shareholder interests, and not their own self-interests. Second, counterparties should be careful of possible aiding-and-abetting claims, particularly when the record reflects knowledge of possible bad faith. Third, the presence of activist investors, especially those with a view into the boardroom, materially enhances substantive litigation risk. While it would defeat the principles of freedom of contract for a court to enjoin every deal it deems unfair, when a court has before it behavior so inexplicable it cannot help but be suspicious of bad faith, it may well conclude that a breach of fiduciary duty likely took place and that the counterparty likely assisted.