Xerox/Fuji: Don’t Copy This, Part 2

In April, Justice Barry Ostrager of the New York Commercial Division granted a preliminary injunction motion, blocking the proposed merger between Xerox Corporation (Xerox) and Fuji Holdings Corp. (Fuji). The merger would have converted Fuji’s 75% share of the 50+ year joint venture between Fuji and Xerox into a 50.1% controlling interest in Xerox. To learn more about the preliminary injunction, please click here to read Freshfields’ prior post and here to listen to our podcast.

The weeks after the preliminary injunction were a rollercoaster for Xerox. Four days after the preliminary injunction, the Xerox Board announced a settlement with the activist investors. Xerox shares fell 12% that day. Two days after that, the Xerox Board reversed course, announcing it would appeal the preliminary injunction and abandon the settlement. Finally, about two weeks after the preliminary injunction, on May 13, 2018, the Xerox Board changed their mind again:

• Xerox entered into a settlement with the activist investors and shareholder class plaintiffs.
• Xerox’s CEO and five directors, including the chairman, resigned.
• Xerox would terminate the merger on the grounds that certain audited financial statements were not received in time and that they deviated materially from unaudited financial statements.

Fuji and Xerox’s relationship soured further in June when Fuji sued Xerox for more than $1 billion in damages claiming willful breach of the merger agreement, in addition to the $183 million break fee. Fuji’s complaint contended that the merger agreement is still in force and the termination is ineffective, however, Fuji is not seeking specific performance because of the injunction.

Further, any conflict that Xerox’s CEO had, created by the possibility he would serve as the future CEO of the combined company, was acknowledged – he did not mislead or misinform the Xerox Board. The court also noted that the Xerox Board engaged outside advisers and discussed the transaction extensively prior to voting – not a post-hoc backstop analysis – and the transaction was not unreasonable on its face.

The Appellate Division concluded that “[i]n light of the foregoing, the business judgment rule does apply.” Therefore, plaintiffs were not likely to succeed on the merits for the alleged breaches of fiduciary duty and fraud.

Finally, the Appellate Division ordered the claims against Fuji dismissed for being unsupported by specific factual allegations.

What can buyers and target boards of US companies take away from this?

• First, beware of activist investors, particularly when they have a presence in the board room. The lower court lawsuit was fueled by information gained in the Xerox boardroom by activist investors. The post-preliminary injunction settlement allowed the activist investors – a minority shareholder faction – to gain control of the Xerox Board.
• Second, after this ruling by the Appellate Division, it may be likely that the lower New York courts will return to giving deference toward management and boards. Justice Ostrager’s opinion does give us insight, however, into the reasoning of the lower courts. Before applying the business judgement rule, sophisticated trial courts judges, like Justice Ostrager in New York, may expect to see more evidence that CEOs and boards are proactively promoting shareholder interests. Where there is significant evidence of suspicious behavior, the courts may not always give immediate deference.