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In re Xerox Corp. Consolidated Shareholder Litigation

Supreme Court, New York County

April 27, 2018

In Re Xerox Corporation Consolidated Shareholder Litigation

          Class Plaintiffs were represented by Richard T. Marooney, Jr., Robert Meadows and Israel Dahan, King & Spalding, Abraham Alexander of Bernstein Litowitz Berger & Grossman LLP, and James J. Sabella, Grant & Eisenhofer P.A.

          Defendant Fujifilm was represented by James E. Hough and Erik J. Olson of Morrison & Foerster

          Defendant Xerox was represented by Jay Cohen, Jaren Elizabeth Janghorbani and Daniel J. Toal of Paul, Weiss, Rifkind, Wharton & Garrison LLP

          Barry R Ostrager, J.S.C.

         This case involves a transaction approved by the Xerox Corp. ("Xerox") Board of Directors (the "Board") on January 31, 2018 pursuant to which Fujifilm Holdings Corp. ("Fuji") will acquire a 50.1% controlling interest in Xerox. Fuji and Xerox have long been involved in a complex, interlocking joint venture called Fuji Xerox Ltd ("Fuji Xerox") that distributes Xerox products in Asia and the Pacific Rim, including Australia and New Zealand. At present, Fuji has a 75% interest in the joint venture and Xerox has a 25% interest in the joint venture. The specific terms of the transaction, which requires shareholder approval, would be accomplished in the following manner:

1. Fuji Xerox will take a loan to finance the repurchase of Fuji's 75% share of Fuji Xerox for 671 billion yen. Once Fuji's 75% share is bought out, Fuji Xerox would become a wholly-owned subsidiary of Xerox.
2. Thereafter, pursuant to the transaction documents, Xerox will issue new shares of common stock to Fuji that will represent 50.1% of the fully diluted capital stock of Xerox after such issuance. The transaction documents set the aggregate purchase price of the shares at $6.1 billion, which is equivalent to the 671 billion yen Fuji will receive for its 75% of the joint venture. The $6.1 billion would be used to repay to Xerox the loan that finances the acquisition of the purchase of Fuji's 75% interest in the joint venture.
3. Finally, before the transaction closes, Xerox will borrow $2.5 billion to pay its shareholders a special dividend of $2.5 billion.

         Other provisions of the transaction documents include a non-solicitation clause that prevents Xerox from soliciting other purchasers of Xerox as well as a fiduciary-out provision that would enable the Xerox Board to consider a potential unsolicited superior proposal. In addition, Fuji receives a six-day match right against any unsolicited superior proposal and, in the event the transaction does not close, Fuji would receive a $183 million break-up fee. Significantly, the transaction documents provide that after the closing the CEO of Xerox, Jeff Jacobson ("Jacobson"), will be the CEO of the combined company and that five of the existing Xerox directors (and Mr. Jacobson) will be members of the twelve-person Board of Directors of the combined entity. The five current Xerox directors who are chosen to be on the Board of the combined entity are assured of remaining directorships of the combined entity for five years.

         There are pending motions for a preliminary injunction enjoining the transaction filed by Darwin Deason ("Deason"), the third largest shareholder of Xerox who claims to have a $600 million investment in Xerox, and by certain pension funds that hold Xerox shares that have filed a consolidated class action against the defendants. [1] Deason also seeks a mandatory injunction requiring the Xerox Board to waive the advance notice bylaw that would have required Deason to propose on or before December 11, 2017 a slate of directors for election at the Xerox annual shareholders' meeting to run against the incumbent director slate. The "class" plaintiffs also seek an injunction adjourning the shareholder vote on the transaction to a date after the Xerox annual shareholder meeting.

         Xerox's largest shareholder, Carl Icahn ("Icahn"), made a timely filing of a slate of four directors challenging the four longest serving members of the Xerox Board of Directors. Xerox's current Board is presently composed of nine highly credentialed and experienced directors and Mr. Jacobson. Prior to filing his slate of directors, Icahn requested that Xerox extend the advance notice bylaw, which request the Board denied. On December 12, 2017, Icahn released an open letter to Xerox shareholders championing his slate of directors and criticizing the long-tenured directors of Xerox, one of whom is Xerox Chairman Robert Keegan ("Keegan"). In January 2018, after the existence of the Fuji Xerox combination was publicly reported, Mr. Deason wrote a January 22, 2018 letter to the Xerox Board demanding public disclosure of the joint venture arrangements. Mr. Deason is now supporting Mr. Icahn's slate of four directors, and Mr. Icahn is sharing with Mr. Deason the costs of prosecuting this litigation.

         For the reasons that follow, all three motions for a preliminary injunction are granted on the basis of the testimony adduced at the two-day evidentiary hearing that took place on April 26 and 27, 2018; the applicable law; and the voluminous submissions made by the parties in connection with the motions. During the evidentiary hearing, testimony was adduced from eight live witnesses who testified in person and four witnesses who testified by videotaped deposition.

         Findings of Fact

         It is undisputed that the joint venture agreement between Fuji and Xerox, which has been renewed multiple times for five-year terms over decades and which next expires in April 2021, contains various provisions that make it difficult, but not impossible, for Xerox to engage in any value-maximizing transaction with any party other than Fuji. Among the terms of the joint venture agreement are provisions that prohibits Xerox from selling more than 30 percent of its outstanding shares to a Fuji competitor without triggering a variety of adverse economic consequences to Xerox, including the cancellation of the joint venture and loss of the technology that Xerox has contributed to the joint venture over many decades. The provision in the joint venture agreement relating to the sale by Xerox of more than 30 percent of its stock to a Fuji competitor was first disclosed to Xerox shareholders and the public when the transaction was announced on January 31, 2018.

         The Fuji Xerox joint venture accounts for approximately 25 percent of Xerox's revenues. In April 2017, there was an accounting scandal involving Fuji Xerox that caused Xerox to have to revise its earnings for 2017 and several years prior to 2017. All issues relating to the accounting scandal were not resolved at the time the Xerox Board approved the transaction, and a final audit of Fuji Xerox for 2017 that was received by Xerox on April 24, 2018 will cause Xerox to revise its earnings for the first quarter of 2018. The transaction documents required Fuji to deliver the audited financial statement by April 15, 2018, so it appears that there may be further negotiations between Fuji and Xerox. There are conflicting Japanese law expert reports on the issue of whether, under Japanese law (which governs the joint venture agreements and the joint venture transactional documents), Xerox could have withdrawn from the joint venture agreements because of the accounting scandal. Finally, the weight of the evidence adduced at the hearing, including Xerox's financial performance in 2017, established that on and before January 31, 2018 there was no exigent necessity for Xerox to engage in any change of control transaction. The evidence also established that Mr. Icahn had a strong desire to have Xerox sold in an all-cash transaction at a premium over Xerox's market value.

         The lynchpin of this 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 iconic American company to Fuji without any cash payment by Fuji to Xerox shareholders, and the Board's acquiescence in Jacobson's conduct.

         The testimony adduced at the hearing established that Fuji and Xerox had explored various potential transactions over a period of decades, including an outright purchase by Fuji of all Xerox shares. And, in early 2017, discussions relating to a purchase of all Xerox shares by Fuji were in process.

         On March 7, 2017, Jacobson went to Japan to meet with Shigetaka Komori ("Komori"), Fuji's Chairman and CEO, and Kenji Sukeno ("Sukeno"), Fuji's President and COO. (PX 18). [2] According to Jacobson, during the meeting, Komori asked Jacobson whether Xerox would be interested in being acquired by Fuji. Komori and Sukeno explained that they believed a combination of Fuji, Xerox, and Fuji Xerox would provide the best value for both Fuji and Xerox shareholders and that Fuji understood that Xerox would likely require a 30 percent premium on its stock price. Id. The next day, Takashi Kawamura ("Kawamura"), Fuji's Head of Strategy, handed Jacobson a letter summarizing the parties' discussions and confirming Fuji's interest in acquiring Xerox. (PX 20).

         On March 16, 2017, the Xerox Board met to discuss Fuji's proposal and agreed to engage Centerview Partners ("Centerview") as a financial advisor. Centerview gave a presentation to the Xerox Board analyzing the economics of a possible all-cash acquisition by Fuji. (PX 24).

         Following the Xerox Board meeting, Jacobson sent a formal written response to Fuji's March 8 letter. (PX 347). Jacobson advised Fuji that "[w]e would be prepared to enter into discussions only" if Fuji's offer reflects an "appropriate premium to our current trading price" and provides "our shareholders 100% cash consideration." Id. Thus, as reflected in Jacobson's March 16, 2017 communication to Fuji, as of at least March 16, 2017, the Board made clear to Fuji that Xerox was not in immediate or urgent need of a strategic combination and that it was only interested in pursuing an all-cash acquisition by Fuji. In short, the parameters of the change of control transaction under discussion in early 2017 were nothing like the terms to which the Xerox Board ultimately agreed to in January 2018.

         Jacobson's role in negotiating the ultimate transaction must be viewed against the background of events that commenced on and after May 15, 2017 when Jacobson participated in a dinner with Carl Icahn at which Icahn told Jacobson, in the presence of two of Jacobson's direct reports, that Icahn did not believe Jacobson was the right person to be Xerox CEO and that Icahn wanted Xerox sold. Icahn further stated that Jacobson would be fired if Jacobson was unable to produce a sale transaction. Jacobson memorialized his recollection of his meeting with Icahn and shared it with the Xerox Board. (PX 50). In November 2016, Icahn had threatened a proxy contest which did not occur after Xerox and Icahn entered into a standstill agreement that had an outside expiration date of December 11, 2017. The agreement also made provision for the addition of Jonathan Christodoro ("Christodoro") to the Xerox Board as Icahn's representative with the ability to report to Icahn on issues before the Xerox Board. Christodoro ultimately resigned from the Xerox Board to be a member of Icahn's slate immediately prior to December 11, 2017.

         Shortly after the dinner meeting with Icahn, on or about May 22, 2017, Jacobson and the Xerox Board were advised that Fuji could not advance strategic discussions with Xerox until the Fuji Xerox accounting scandal was resolved. Fuji, embroiled in the Fuji Xerox accounting scandal, which involved allegations of fraud, proposed to suspend discussions and indicated that a purchase of all Xerox shares was too expensive for Fuji. Thereafter, the testimony established that Jacobson, working with Xerox's investment banker, Centerview, developed a transaction concept that would allow Fuji to make a cashless acquisition of Xerox.

         Jacobson testified that he was authorized by Xerox Chairman Keegan to explore with Fuji alternatives to an all-cash deal, but the full Xerox Board was unaware of Jacobson's overture to Fuji which was presented to Fuji in June 2017. For all intents and purposes, Jacobson's cash-free acquisition concept took off the table any type of all-cash sale transaction with Fuji even though one of Xerox's financial advisors, David Hess of Centerview, testified that Fuji has cash reserves of $8 billion. And, while Fuji sought to delay a substantive meeting with respect to Jacobson's proposal, Jacobson insisted on pressing for a July 2017 meeting. It was only in July 2017 that Jacobson advised the full Xerox Board of his strategic acquisition proposal that could potentially transfer to Fuji control of Xerox.

         During the late spring and early summer of 2017, Icahn and his Board nominee, Christodoro, were pressuring Jacobson and the Xerox Board to secure a transaction, and Jacobson believed Icahn would initiate a proxy contest to remove the Board. In July 2017, Icahn was informed of Jacobson's strategic acquisition concept, and Icahn advised Keegan that Icahn opposed a transaction that would leave Xerox shareholders with a 49.9% minority interest in a combined company controlled by Fuji. Icahn further requested that a search committee be formed to find a replacement for Jacobson. Keegan conceded at the hearing that he suggested to Jacobson that Jacobson propose to Fuji that Fuji purchase Icahn's shares in Xerox.

         During the summer of 2017, while Jacobson was dialoguing with Fuji's most senior executives, the Xerox Board became disenchanted with Jacobson's performance as CEO and the Board decided that Jacobson was not the right person to lead Xerox into the future. Director Cheryl Krongard ("Krongard") testified that this was the unanimous view of the Board. Notes prepared by Keegan from April 2017 reflect that there was concern with Jacobson's performance as CEO as early as April 2017. In July 2017, the Board decided to form a committee called the "Scan Committee" to explore finding a potential replacement for Jacobson. Keegan testified that by September 2017 the Board had hired a professional search firm, Heidrick & Struggles ("Heidrick"), to identify potential candidates to replace Jacobson as CEO. (Keegan EBT, PX 236 at 188:18-23). The members of the Scan Committee were Directors Keegan, Reese, Brown and Christodoro. (Id. at 186:8-12).

         The Xerox Board interviewed various candidates in October and November 2017. The Board specifically identified as Jacobson's potential replacement, Giovanni (John) Visentin ("Visentin"), a former IBM and HP executive that Xerox's Chairman Keegan described as "head and shoulders" better than Jacobson. The Board discussed compensation terms with Visentin and identified a start date for Visentin of December 11, 2017. Jacobson testified that he was unaware of any efforts to replace him prior to November 10, although this testimony is suspect given the large number of people aware of the work of the Scan Committee.

         On November 10, 2017 Keegan advised Jacobson that he might be replaced. Keegan further told Jacobson at the express and unanimous direction of the Xerox Board to desist from further discussions with Fuji about a possible combination of Xerox with Fuji and to cancel meetings in New York and Japan that were scheduled for November 14 and November 21, 2017. On November 12, 2017, Jacobson emailed to his personal email account copies of his employment agreement and pension plan. (PX 247). Jacobson and Keegan both testified that Keegan advised Jacobson that Xerox had reached no decision as of November 10 to replace Jacobson as CEO, but correspondence with the head of Fuji's corporate planning department, Takashi Kawamura, makes clear that Jacobson communicated his "situation" to Fuji. And Hess testified that both ...

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