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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK
Index No. 650766/2018IN RE XEROX CORPORATION CONSOLIDATED SHAREHOLDER LITIGATION Part 61
Justice Ostrager
CLASS PLAINTIFFS’ (1) SUPPLEMENTAL MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR A PRELIMINARY INJUNCTION; AND
(2) MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’MOTIONS TO DISMISS
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLPMark Lebovitch Abe Alexander Edward Timlin John Vielandi1251 Avenue of the Americas New York, NY 10020 212-554-1400
GRANT & EISENHOFER P.A.Jay W. Eisenhofer James J. Sabella Michael Bell 485 Lexington Avenue New York, NY 10017 646-722-8500
andMichael Barry 123 Justison Street Wilmington, DE 19801 302-622-7000
KESSLER TOPAZ MELTZER & CHECK, LLPEric ZagerJustin O. RelifordJ Daniel AlbertMichael Rullo280 King of Prussia RoadRadnor, PA 19087610-667-7706
Co-Lead Counsel for Class Plaintiffs
STULL, STULL & BRODYMark Levine Aaron L. Brody 6 East 45* Street New York, NY 10017 212-687-7230
Co-Lead Counsel for Class Plaintiffs
Additional Counsel for Class Plaintiffs
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES 111
PRELIMINARY STATEMENT 1
FACTUAL BACKGROUND 3
A. The Joint Venture and Fuji’s “All-Cash” Offer for Xerox 3
The Aecounting Seandal Pauses DiseussionsB. ,4
leahn Threatens to Oust Jaeobson, Who in Response Accelerates Discussions With Fuji...................................................................
C.5
Jacobson Pivots to Finding a Way to Silence Icahn at Stockholders’ ExpenseD. 6
The Board Unanimously Decides to Replace JacobsonE. 9
Jacobson Seeks Fuji’s Assistance in Saving His JobF. 10
Icahn Launches His Proxy Contest and the Board Rushes to Approve the Transaction.................................................................................................
G.12
ARGUMENT 15
I. THE REQUIREMENTS FOR A PRELIMINARY INJUNCTION 15
IT PLAINTIFFS HAVE A LIKELIHOOD OF SUCCESS ON THE MERITS 15
The Standards for Assessing the Directors’ ActionsA. 15
B. The Director Defendants Violated Their Duty of Loyalty, 16
The Director Defendants Violated Their Duty of CareC. 21
The Directors Allowed a Clearly Conflicted CEO to Negotiate the Sale of Control of Xerox.....................................................
1.21
2. The Director Defendants Failed Adequately to Explore Alternatives ,22
The Director Defendants Violated Their Duty of CandorD. ,24
Defendants Cannot Demonstrate the Entire Fairness of the TransactionE. ,27
1
1. The Sales Process Was Fatally Flawed 28
The Transaction Price Is Unfair to Xerox Shareholders2. 31
FUJI AIDED AND ABETTED THE DIRECTOR DEFENDANTS’ BREACHES 36III.
IV. FUJI WAS PROPERLY SERVED WITH THE SUMMONS AND COMPLAINT.................................................................................. 39
SHAREHOLDERS WILL BE IRREPARABLY HARMED ABSENT INJUNCTIVE RELIEF..........................................................................
V..41
VI. THE BALANCE OF THE EQUITIES FAVORS A PRELIMINARY INJUNCTION...................................................................................... .44
CONCLUSION .45
11
TABLE OF AUTHORITIES
Page(s)
Cases
Alpert V. 28 Williams St. Corp., 63 N.Y.2d 557 (1984)........ 16, 27, 28
Avacus Partners, L.P. v. Brian,1990 WL 161909 (Del. Ch. Oct. 24, 1990) ,20
Bomarko, Inc. v. Int’l Telecharge, Inc., 794 A.2d 1161 (Del. Ch. 1999)...... ,28
Caprer v Nussbaum,36 A.D. 3d 176 (2d Dep’t 2006) ,38
Crouse-Hinds Co. v. InterNorth, Inc., 634 F.2d 690 (2d Cir. 1980)......... ,20
Danaher Corp. v. Chicago Pneumatic Tool Co., 1986 WL 7001 (S.D.N.Y. June 18, 1986).... ,42
In re Del Monte Foods Co. S’holders Litig., 25 A.3d813 (Del. Ch. 2011).................. ,42
Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051 (Del. Ch. 1987)........ 24, 43
Ferring B. V. v. Allergan, Inc.,4 F. Supp. 3d 612 (S.D.N.Y. 2014) 39
Freeford Ltd. v. Pendleton,53 A.D.3d32 (1st Dep’t 2008) 41
Greenwald v. Patterson,1999 WL 596276 (Del. Ch. July 26, 1999) 20
Halas V. Dick’s Sporting Goods,105 A.D.3d 1411 (4th Dep’t 2013) .40
Higgins V. New York Stock Exchange, Inc.,10 Misc. 3d 257 (Sup. Ct. N.Y. Co. 2005) 16,38,39
Int’l Banknote Co. v. Muller,713 F. Supp. 612 (S.D.N.Y. 1989) ,20
111
Joseph V. Shell Oil Co.,482 A.2d 335 (Del. Ch. 1984) ,43
Kolbeck V. LIT Am. Inc.,939 F. Supp. 240 (S.D.N.Y. 1996) 39
Lemme v. Wine of Japan Import, Inc., 631 F. Supp. 456 (E.D.N.Y. 1986) ,40
Lewis V. Made],2015 WL 6442255 (S.D.N.Y. Oct. 23, 2015) ,40
Mills Acquisition Co. v. Macmillan, Inc., 559A.2d 1261 (Del. 1989)............... 21,22, 28,30
Minstar Acquiring Corp. v. AMF, Inc., 621 F. Supp. 1252 (S.D.N.Y. 1985) 19, 20
Morgan v. Cash,2010 WL 2803746 (Del. Ch. July 16, 2010) ,38
Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255 (2d Cir. 1984)..... 19
Phillips V. Instuform ofN. Am., Inc.,1987 WL16285 (Del. Ch. Aug. 27, 1987) 41
QVC Network, Inc. v. Paramount Commc’ns Inc.,635 A.2d 1245 (Del. Ch. 1993), affd, 637 A.2d 828 (Del. 1993) ,43
Rational SCategies Fund v. Hill,40 Misc. 3d 1214(A) (Sup. Ct. N.Y. Co. 2013) 15
Ret. Sys. v. Crawford,2007 WL 625006 (Del. Ch. Feb. 13, 2007) 45
Rissew V. Yamaha Motor Co.,129 A.D.2d 94 (4th Dep’t 1987) ,40
Schnellv. Chris-Cr aft Indus., Inc., 285 A.2d 430 (Del. Ch. 1971)., ,42
Sealy Mattixss Co. ofN.J. v, Sealy, Inc., 532 A.2d 1324 (Del. Ch. 1987)........ ,27
Second on Second Cafe, Inc. v. Hing Sing Trading, Inc., 66 A.D.3d 255 (1st Dep’t 2009)............................... 15, 18, 32
IV
Sherwood v. Ngon,2011 WL 6355209 (Del. Ch. Dec. 20, 2011) ,24
Small berg v. Raich Ende Malter & Co., LLP, 140 A.D.3d 942 (2d Dep’t 2016)............. 39
State of Wisconsin Inv. Bd. v. Bartlett,2000 WL 193115 (Del. Ch. Feb. 9, 2000) 44
In re Transkaryotic Therapies, Inc., 954 A.2d 346 (Del. Ch. 2008).... ,37
Treadway Cos. v. Care Corp., 638F.2d357(2dCir. 1980) 19
Weinberger v. UOP, Inc., 457A.2d 701 (Del. 1983) ,27, 28
Wells Fargo & Co. v. First Interstate Bancorp, 1996 WL 32169 (Del. Ch. Jan. 18,1996).... 18, 20, 32
Wright V. 299 Union Ave. Corp.,288 A.D.2d 382 (2d Dep’t 2001) ,40
Statutes and Rules
CPLR312-a ,40
CPLR 6311 15
Other Authorities
P. Hanouna, et ah, “Value of Corporate Control,” Working Paper No. 01-4, Marshall School of Business, U.S.C. (2001)...............................................
L. Zingales, “What Determines the Value of Corporate Votes,” The Quarterly Journal of Economics (Nov. 1995)....................................................................
32
32
V
Pursuant to the March 27, 2018 amended scheduling order (Doc. No. 68), Class
Plaintiffs^ submit this brief to supplement their February 15, 2018 brief in support of their
motion for a preliminary injunction (Doc. No. 19) and in opposition to Defendants’ motions to
dismiss (“MTD”) (Motion Seq. Nos. 003, 004). As shown below, the evidence developed during
discovery demonstrates that Defendants’ motions to dismiss should be denied and that injunctive
relief is necessary and appropriate.
PRELIMINARY STATEMENT
This case challenges a change of control transaction, where a CEO negotiated and a
conflicted board approved an unfair deal in order to save themselves from an ugly proxy contest.
As Plaintiffs only recently learned in discovery, for some time, the Xerox Corporation
(“Xerox” or the “Company”) board of directors (the “Board”) has recognized that an all cash
purchase of Xerox by a strategic or financial acquirer was likely the most value-maximizing
alternative for its shareholders. Xerox, however, has long been entwined in a joint venture (the
dV” or “Fuji Xerox”) with Fujifilm Holdings Corporation (“Fuji”), which owns 75% of Fuji
Xerox. This joint venture has, since at least 2001, made Fuji the most “natural” potential
acquirer, but has not precluded Xerox from selling itself to a third party.
In March 2017, Xerox and Fuji began discussing Fuji’s acquisition of 100% of Xerox in
an all-cash transaction. Fuji, however, could not complete such a transaction until it resolved the
significant accounting issues at Fuji Xerox discovered during the course of the parties’
negotiations of a cash acquisition.
Since May 2017, however. Xerox CEO Jeffrey Jacobson has known that Xerox’s largest
shareholder—Carl Icahn—^wanted to replace him with a new and more effective CEO. Faced
Asbestos Workers Philadelphia Pension Fund, Iron Workers District Council of Philadelphia & Vicinity Benefit and Pension Plan, Carpenters Pension Fund of Illinois, and Robert Lowinger.
1
with Icahn’s threat to his continued employment, in July 2017, Jacobson steered negotiations
with Fuji away from a 100% acquisition towards the “structured acquisition” of majority control
by Fuji at issue in this litigation (the “Transaction”).
The Board knew that Jacobson’s interests conflicted with other shareholders when
negotiating the Transaction at issue in this litigation. It nonetheless decided to support the
Transaction after: (i) Icahn finally commenced a very public and highly critical proxy contest.
and (ii) Fuji agreed to give five of the Board’s members self-perpetuating directorships for the
next five years. Each of the Board’s members (Jacobson included) are now affirmatively
misleading stockholders to believe that the Transaction is the best, if not only, deal available for
shareholders. They have concealed key details regarding Xerox’s alternatives, the process
leading to the Transaction, Fuji’s willingness and desire to buy Xerox for cash in the future, and
the economic predicament Xerox shareholders will accept if they approve the Transaction.
Fuji knowingly participated in the Directors’ breaches to secure this Transaction. Aware
of the threat Icahn posed to Jacobson and the other directors, Fuji agreed to treat him as a
And, upon learning of Jacobson’s anticipated firing and Icahn’s proxycommon enemy.
contest, it exploited Jacobson’s and the other directors’ conflicts of interest for its own benefit.
Accordingly, the Court should order injunctive relief (and deny Defendants’ motions to
dismiss) to help preserve the integrity of the shareholder franchise and prevent other irreparable
harm to Xerox shareholders. Specifically, the Court should order that the Company’s next
annual meeting occur sufficiently in advance of any “Special Meeting” to vote on the
Transaction, so that newly elected directors (if any) can evaluate the merits of the Transaction
and explore any other strategic alternatives that Jacobson and the other directors ignored. The
Court should likewise enjoin certain of the preclusive deal protections put in place to avoid and
2
discourage competing deals, to ensure that a true market check can occur.
Finally, the Court should force the disclosure of the facts that Plaintiffs learned in
discovery. While shareholders have been led to believe that certain recently-disclosed joint
venture agreements prevented a sale of Xerox to any party other than Fuji, discovery has shown
that Defendants are merely using the agreements to help justify and gamer shareholder support
for the deal with Fuji. To be clear. Xerox is selling control to Fuji because Fuji was the only
party in a position to agree to a change of control transaction quickly enough to defeat Icahn’s
proxy contest - while also being willing to save Jacobson and the continuing directors as part of
the quid pro quo. Stockholders voting on either the election of directors or the Transaction
should know the trae marmer in which the Board members were willing to sacrifice shareholder
value for their own selfish aims, the fact that the Board was on the verge of terminating Jacobson
(whom they deemed incapable of running Xerox), and the self-serving decisions the Board made
when faced with Icahn’s proxy contest. Stockholders similarly deserve to know about flaws in
the valuation analysis that overstate the purported “value” shareholders will receive in the deal.
Only if armed with the truth can stockholders decide whether to leave the incumbent directors in
office, or to elect new fiduciaries who will independently evaluate the merits of the Transaction
and the Company’s other strategic alternatives.
FACTUAL BACKGROUND
The Joint Venture and Fuji’s All-Cash Offer for XeroxA.
Xerox and Fuji created a joint venture (the “JV” or “Fuji Xerox”) over 50 years ago that
they owned equally until 2001. In 2001, Xerox sold 25% of its equity in the JV to Fuji, resulting
in a 75/25% split, with Xerox retaining certain governance rights in the JV.^
^ Ex. 93, Reese Dep. at 41-43. (The exhibits (“Ex.”) are identified in the Affirmation of James J. Sabella, submitted herewith.)
3
On March 7, 2017, at a meeting in Japan to discuss, among other things, the operation of
the JV, Fuji’s Chairman and CEO Shigetaka Komori told Jacobson that Fuji was interested in
diseussing a 100% cash acquisition of Xerox.^
acquisition would likely “require” a premium of “30%” or more.'^ Komori confirmed in writing
that they “agreed to study and consider various strategic collaborations to maximize shareholder
Komori indicated he understood that an
»5value ... [which] would include [Fuji’s] acquisition of Xerox.
On March 16, 2017, the Board diseussed Fuji’s overture and agreed to retain Centerview
as a financial advisor.^ After receiving preliminary analyses of a potential all-cash acquisition,^
the Board agreed to enter discussions in contemplation of an all-cash, whole-company
acquisition.^ In subsequent correspondence sent on March 23, 2017, Komori explained that Fuji
was committed to work on an expedited basis, stating: uIf we agree to offer your shareholders
100% cash consideration, we would fund the potential transaction through a combination of our
10„9cash on hand and credit facilities.... Fuji retained Morgan Stanley as its financial advisor.
B. The Accounting Scandal Pauses Discussions
The acquisition discussions paused on April 20, 2017, when Fuji publiely armounced that
11it was investigating accounting improprieties at Fuji Xerox. As Jaeobson immediately
reeognized, the accounting scandal was “likely to keep them distracted from Projeet Juice -the95
12code name that Xerox used for strategic discussions with Fuji. Fuji “communicated (via
Morgan Stanley) an inability to advance strategie diseussions with Xerox until [the accounting]
^ Ex, 9 at XEROX_FX-00000403; Ex. 5 '‘Ex. 5 ^Ex. 6® Ex. 8 at XEROX_FX00000034 ’ Ex. 9 at XEROX_FX-00000404 * Ex. 98, Jacobson Dep. at 45-46.®Ex. 10 atXEROX_FX-00100938]10 Id.11 Ex. 1312 Id.
4
13issue is folly resolved. 95
At the Board’s May 22, 2017 meeting, Centerview advised the Board that a eash sale of
Xerox to any aequirer “would be the value-maximizing alternative and would provide certain
14 While identifying Fuji as a “natural aequirer,” Centerview expresslyvalue for shareholders. 99
advised the Board that fostering “eompetitive tension” was valuable, and thus Xerox should
15 Centerview advised that, while the change-in-controlexplore other strategic options.
provisions in the Fuji Xerox joint venture eontracts posed issues, these agreements would not
preclude” a sale transaction with another party, noting that Xerox management’s “early analysis
16suggests it appears manageable. Centerview committed to the Board that it - in conjunction99
with management - was analyzing the “economic implications” of these provisions, but this
17 Thus, while Centerview advised the Board that any sales “processwork was never conducted.
must be designed to maximize pressure on Fuji[] while determining level of potential interest
18from third parties,” it failed to develop analysis essential for doing so.
Icahn Threatens to Oust Jacobson, Who in Response Accelerates Discussions With Fuji
Things changed on May 15, 2017, when, at Carl Icahn’s request, Jacobson, Xerox CFO
C.
Bill Osborne, and Xerox exeeutive Bob Brody attended a dinner at leahn’s residence. Icahn
19complained about Jaeobson’s performance, undermining him in front of his direct reports.
According to Jacobson’s notes from the meeting, Icahn was unhappy with Jacobson’s “base
20 Rather, Icahn “wanted the business sold,” and if Jacobson could not sell theplan” for Xerox.
13 Ex. 17 at XEROX_FX-00000447 Ex. 17 atXEROX_FX-00000481 Ex. 17 at XEROX FX-00000483.
141516 Id.17 Ex. 99, Hess Dep. at 236.18 Id.19 Ex. 97, Keegan Dep. at 123-24
Ex. 15 at XEROX FX-0008135420
5
„2lbusiness, “he would push to have [Jacobson] removed. Jacobson felt disrespected by Icahn,
„22and he was “not at all” inclined to “accede to Mr. Icahn’s demands to sell the [CJompany.
From that moment forward, Jacobson knew he would face a potentially embarrassing
ouster by the Company’s largest shareholder after only months on the job. He turned back to
Fuji, the “natural acquirer” who could either complete an acquisition on a short timetable or help
find a way to exit Icahn from his position. In mid-June, he attempted to reinstitute negotiations
23with Fuji about a cash acquisition during a trip to Japan for a Fuji Xerox board meeting.
During his June meetings, Fuji reiterated that “Project [Juice] was put on the shelf as they work
through closing their year end, due to the [accounting] situation.... [Fuji] indicated that they
„24would come to NY to pick up discussions on what the joint business would look like.
Jacobson expected those meetings to occur sometime in August.
25Icahn, however, was running out of patience. Feeling the heat, Jacobson pushed for
26Fuji to meet sooner. Fuji agreed to engage in an “exchange of information” on July 10, 2017 in
27New York. In the interim, Centerview advised Jacobson to “reach out to HP before getting
„28together with [Fuji] so we begin to generate the semblance of some competition.
D. Jacobson Attempts to Find a Way to Silence Icahn
At the July 10 meeting, Fuji again emphasized its interest in an acquisition of all of
Xerox; hut, citing Xerox’s stock price and Fuji Xerox’s ongoing accounting issues, Fuji noted
29that it was still not in a place to complete the acquisition. Jacobson raised two alternatives for
21 Id.22 Ex. 98, Jacobson Dep. at 328.
Ex. 21 at XEROX FX-0000799223
24 Id.25 Ex. 21 at XEROX_FX-00007993
Ex. 21 at XEROX_FX-00007994; Ex. 98, Jacobson Dep. 332-338 Ex. 24 at XEROX_FX-00000051 Ex. 23Ex. 28 at XEROX FX-00007644
2627
2829
6
consideration. First, at the suggestion of directors Ann Reese and Bob Keegan, Jacobson raised
30the idea of Fuji buying Icahn’s stake. As Reese explained, having Fuji buyout Icahn would
„31buy us time to think without [his] presence. Second, without Board approval, Jacobson
threw the “Hail Mary” that ultimately became the Transaction at issue in this litigation. As he
later recounted to Keegan and Reese: “The door is open. I threw a Hail Mary and we may have
a chance.... I should temper the excitement, that it is not likely to be a 100%, but we have
„32options[.]
Fuji, however, was not interested in aequiring less than 100% of Xerox. It needed
convincing, which Jacobson eagerly provided. First, Jacobson painted Carl Icahn as a common
enemy to Fuji and Xerox: I have been telling [Fuji] how crazy our largest shareholder is. It is
5,33inspiring Komori, as he is a warrior. I believe this will push them over the top. He warned
Fuji of a possible proxy contest by Icahn and repeatedly used the December 11, 2017 director
nomination deadline to help create a sense of “urgency” for Fuji to agree to a deal.^"^ Through
Centerview, Jacobson also conveyed that the proposed transaction stracture would provide a
35meehanism to exit Icahn from his position, something Fuji demanded as part of any deal.
When Fuji expressed concerns about Xerox stockholder approval for a sale of majority control.
Jacobson and Centerview explained: “In the US it is extremely unusual for shareholders to fail to
support a transaetion that has been recommended by the target’s Board. In fact, it almost never
happens.... In all likelihood, we would be able to close our transaction even if Icahn were to mn
30 Ex. 97, Keegan Dep. at 356Ex. 26 at XEROX_^FX-00008023-24Ex. 27 atXEROX_FX-00008010, 00145565Ex. 35 at XEROX_FX-00008125Ex. 98, Jacobson Dep. 338-39; 369-70.Ex. 37 at XEROX FX-0001010167
3132
33
34
35
7
an active campaign against it.”^^ Jacobson and Centerview backed up their words with hard
data, forwarding Kawamura a slide demonstrating that “in 433 transactions announced in the past
„37three years, in only 1 case did shareholders reject the merger. Jacobson’s message was clear -
Xerox would deliver shareholder support for any transaction they could negotiate with Fuji, even
if it was not a transaction that best served stockholders’ interest.
To gain additional traction, Jacobson sent a trusted emissary, Tetsuya Shiokawa - a
Xerox employee who worked in Japan and was familiar with the key Fuji negotiators - to set up
38a meeting to discuss the transaction with Fuji’s lead negotiator, Kawamura. In a July 26, 2017
conversation with Kawamura about which only Jacobson was aware, Shiokawa advocated
Jacobson’s novel transaction structure. Kawamura remained skeptical. He explained that Fuji
was still interested in acquiring all of Xerox, whether through a stock-for-stock merger, cash
39buyout, or by partnering with a private equity firm for a cash acquisition. As Shiokawa
explained, the “most desirable structure for [Fuji] is outright buy-out ..., however, current stock
price of [Xerox] is little too high. So partnering acquisition with PE [Private Equity] would be
»40the second option.... Bringing in a private equity firm, however, would not work for
Jacobson. Any private equity firm would likely require additional time for due diligence, which
41would be further delayed by the umesolved accounting issues at Fuji Xerox. Thus, Jacobson
never disclosed to the Board that Fuji would be willing, in the future, to team with a private
42equity buyer to effect a cash acquisition; and the Board never investigated that option.
Fuji remained unconvinced that Xerox shareholders would ever approve this transaction
36 Id.37 Ex. 37 atXEROX_FX-000101072
Ex. 98, Jacobson Dep. at 385-399. Ex. 36 at XEROX FX-000101053
383940 Id.41 Ex. 98, Jacobson Dep. at 399-400.
Ex. 97, Keegan Dep. at 352-54; Ex. 98, Jacobson Dep. at 396-9942
8
structure instead of a full acquisition of Xerox. In any event, given the depth of Fuji Xerox’s
43accounting issues, Fuji could not finance an all-cash deal at that time.
When diseussions resumed in September, Fuji’s position had not changed. According to
Jacobson’s notes from a September 12, 2017 meeting with Fuji, Fuji was “continuing to study
„44how to acquire 100% of [Xerox] which [Fuji] believes is the best option. Xerox stock.
45however, was continuing to perform well, presenting a “concern” for Fuji and Jaeobson alike.
Jacobson nevertheless pressed forward, trying to resolve Fuji’s concerns with the odd transaetion
,A6 By September 15, 2017, he had sufficientlystructure that Fuji “did not really understand.
47piqued Fuji’s interest. Fuji agreed to retain a financial advisor to continue discussions.
Fuji and Xerox, along with their respective advisors, held in person meetings in New
York on October 18 and 19, 2017. By that point, Fuji had re-engaged Morgan Stanley, which
presented Xerox with an “illustrative” example of a structured transaction that would provide
48Xerox stockholders with a $2.5 billion dividend. Jacobson’s notes from the October discussion
about the $2.5 billion dividend admit that this structure would involve “No Premium” for Xerox
49 The parties agreed to meet again in November, including in person meetingsshareholders.
between management teams and advisors on or around November 13, and an in-person meeting
50in Japan between Jacobson and Fuji CEO Komori on November 21.
The Board Unanimously Decides to Replace JacobsonE.
While Jacobson spent his summer frantically trying to get Fuji to engage on the
Transaction, his fellow directors were growing dissatisfied with his performance. According to
43 Ex. 34 atXEROX__FX-000124157-66; XEROX_FX-00125542 Ex. 3 at XEROX FX-0014613444
45 Id.46 Id. atXEROX_FX-146135
Ex. 40 at XEROX_FX-00124280, 00124283Ex. 43 atXEROX_FX-00008493Ex. 3 atXEROX_FX-00146163; Ex. 98, Jacobson Dep. 415-421 Ex. 44 at XEROX FX-00125563
47
48
4950
9
Keegan, Jacobson’s presentation at the Board’s July 20, 2017 meeting represented a “watershed99
moment, where it became clear that Jacobson was not exhibiting the leadership expected of a
My recollection from that meeting is the board said and concluded that we don’t thinkCEO:
Jeff is stepping up to this.... We saw Jeff as overconfident, doesn’t know what he doesn’t know.
51 Notably, it was at this Board meeting thatand somewhat self-absorbed ... not strategic. 99
Jacobson first proposed the Transaction at issue in this litigation.
The Board formed a committee to search for a new CEO and retained a search firm to
52 By October 13, 2017, the committee was “narrowing in” on one particularhelp in the process.
candidate,^^ a candidate that Keegan described as “head and shoulders better than Jeff 5499
On November 10, 2017, at the direction of the Board, Keegan told Jacobson that the
Board was in the process of finding his replacement and asked Jacobson to “postpone the high
55 Jacobson described his reaction tolevel meetings with [Fuji] planned for the next two weeks. 99
Reese as follows: “Obviously disappointed, and candidly, 1 believe it is a mistake for the
56Company, the shareholders, customers and employees, but what’s done is done. 99
Jacobson Seeks Fuji’s Assistance in Saving His JobF.
He contacted Kawamura on November 10,Jacobson asked Fuji for assistance.
purportedly to cancel the upcoming meetings. Kawamura replied that it “would be very
important for you to meet [Fuji CEO] Komori face to face and let Komori know the very
„57difficult situation you are facing with the largest shareholder. The following morning.
Jacobson told Keegan that Fuji’s executives “are extremely unhappy” and wanted to follow-
51 Ex. 97, Keegan Dep. at 184; Ex. 25 at XEROX_FX-00145127Ex. 97, Keegan Dep. at 185Ex. 93, Reese Dep. at 184-185; Ex. 42Ex. 97, Keegan Dep. at 285-86Ex. 97, Keegan Dep. at 258Ex. 46 at X:EROX__FX-00008130Ex. 47 atXEROX__FX 124485, 124488
525354555657
10
58through with the meetings.
Jacobson’s self-interest overrode any concern for finding a transaction serving Xerox
stockholders’ best interests. On November 20, 2017, one day before he was set to meet with
Komori to discuss the Transaction, Kawamura told Jacobson that Komori would make sure the
Board understood Jacobson was Fuji’s choice for CEO of New Xerox. Kawamura told Jacobson
that Komori “would focus on hearing current situation surrounding you and [Xerox] and what he
„59can do.” Jacobson replied that he was grateful Komori “wants to discuss the ‘environment.’...
The meeting gave Jacobson everything he wanted. As Jacobson explained to Centerview
immediately after the meeting, “Kawamura told me that there is no deal without me, so we’ll
„6Qhave to figure out where this goes. Fuji agreed to submit a term sheet outlining a proposal
61under Jacobson’s transaction structure. This timing was important because, as Jacobson
impressed on Fuji, “we are getting close to ‘our friend’s’ deadline”—i.e., Icahn’s deadline to
62nominate directors for election at the next annual meeting.
Jacobson’s and Fuji’s interests were fully aligned.
Neither Fuji, nor Jacobson, wanted to see Xerox name a new CEO.
58 Ex. 48Ex. 52 atXEROX„FX-00125589 Ex. 51 at XEROX__FX-00125424 Ex. 51 at XEROX_FX-00125423Ex. 98, Jacobson Pep. 201-03;Ex. 53 at XEROX FX-Q0124655-61, 00125602-04.
59
60
61
62
63
11
Icahn Launches His Proxy Contest and the Board Rushes to Approve the Transaction
G.
On November 30, 2017, Fuji sent its first term sheet offering to exehange its 75% interest
64 Fuji’s initial term sheet proposedin Fuji Xerox in exehange for a controlling stake in Xerox.
only a $2 billion dividend for Xerox shareholders. Demonstrating where his true loyalties lay.
I just don’t want the Board to get greedy and blow this up. . .Jacobson wrote to Centerview:
„65[Kawamura] is counting on us to be able to sell this.
The paltry offer shocked most directors. After all, only Keegan and Reese were aware
that Jacobson was continuing strategic discussions with Fuji. On December 4, 2017, the Board
66met with Centerview (without Jacobson) to discuss the term sheet. Following the meeting.
director BCrongard expressed significant concern over the transaction, noting: “I can argue
strongly that we are not acting in our shareholders’ best interest in this transaction. No premium,
minority position, no governance and a base case from the LRP which comprises fictional
„67 Importantly, the Transaction the Board ultimately approved hews closely to the dealnumbers.
outlined in the November 30, 2017 term sheet. In a December 7, 2017 handwritten letter to
Keegan, Krongard expressed outrage and alarm at the situation she felt Jacobson created:
This Board exhausted every ounce of patience and coaching to make our current CEO a success. We then decided, unanimously, for a variety of reasons, he was not the leader we need.... Jeff was told by you, as directed and supported by the Board, that the Board was disappointed by his performance and would likely look at outside talent. Additionally, you told him in no uncertain terms, that he was to discontinue any and all conversations with [Fuji Xerox] and F[uji] regarding Juice. He blatantly violated a clear directive. Which brings us to where we find ourselves today.We have a rogue executive together with an advisor(s) who only gets a big pay day if there is a deal ... who have placed us in a precarious position with our valued partner....
64 Ex. 55Ex. 54 at XEROX_FX-00125427 Ex. 98, Jacobson Dep. 213-214; Ex. 102 Ex. 56 (emphasis added).
656667
12
68Jeff has put us, and mostly you, in a horrible situation. He is asking us to lie!
Even after learning that Jacobson had continued directing the negotiations after being put
on notice of his likely termination, the Board failed to exercise additional oversight of
Jacobson’s negotiations with Fuji, the Company’s exploration of competing offers, or outreach to
potential acquirers. In fact, Centerview could not recall a single director suggesting a solution to
69Jacobson’s conflict of interest. Meanwhile, the Board continued to narrow-in on Jacobson’s
70replacement, and, on December 5, 2017, prepared a term sheet for an external candidate.
On December 8, 2017, Jonathan Christodoro, Icahn’s Board designee, noisily resigned
from the Board. In his resignation letter, Christodoro explained: Until the last few weeks, it
appeared that the Board’s decisions would be consistent with my views on the best interests of
Xerox and our shareholders. It now appears, however, that the Board will make decisions and
71take Xerox in a direction with which I strongly disagree. Christodoro explained further that99
he would be joining a slate of four directors nominated by Icahn to run against the incumbent
72Board members at the next annual meeting of Xerox shareholders.
Following Christodoro’s resignation, and Icahn’s public announcement of his proxy
contest, the Board charged ahead with approving the transaction. During a December 13, 2017
meeting, the Board specifically discussed approving the Transaction and presenting it for
shareholder approval in advance of the aimual meeting as a means of thwarting Icahn’s proxy
challenge.^^ Indeed, Centerview’s presentation materials specifically state that “Icahn’s situation
will not be resolved until the earliest of (i) shareholder vote on Project Juice; (ii) May 2018
68 Ex. 59 atXEROX_FX-00144182-84 (emphasis added).Krongard was correct about Centerview’s incentive, as its fee increases from $13.5 million to $53.5 million, only
if Xerox consummates a transaction with Fuji. Ex. 99, Hess Dep at 54-56. It thus has a “financial incentive ... to see this deal close.” Ex. 99, Hess Dep at 57.
Ex. 58 Ex. 60
69
70
7172 Id73 Ex. 97, Keegan Dep. at 327-28
13
„74 Centerview further noted:shareholder meeting; and (iii) negotiated settlement with leahn.
’Depending on SEC review process, it may be possible to accelerate the shareholder meeting for
„75 Indeed, as recently asthe transaction so that it takes place prior to the shareholder meeting.
February 9, 2018 - i.e., nine days after approving the Transaction - Jacobson was pressuring ftiji
to rush its audit and financial reports in the hope of holding the shareholder vote on the
76Transaction in advance of the annual meeting.
Thus, in the face of a proxy contest by Icahn, the directors rushed to approve the
Transaction to prevent their ouster. The Board’s willingness to sacrifice shareholder value for
their ovm entrenchment motives is evident from the final days of negotiations with Fuji. By
December 11, 2017, Fuji made its best and final offer, agreeing to a $2.5 billion dividend for
77shareholders, but refusing to bend on certain “governance” terms requested by the Board.
Starting around that time, the parties began their diligence efforts in earnest, in an effort to agree
upon the post-transaction synergies that they could present as “upside” for Xerox stockholders
78who receive no near term economic premium in the Transaction.
On January 24, 2018, Centerview emailed Fuji representatives to inform them that Xerox
would not be in position to approve the Transaction by the January 31, 2018 announcement date
Fuji desired. Centerview explained:
1) Our financial due diligence on [Fuji Xerox] is incomplete and requires more work and disclosure[.]
2) The current financial projections we have created together do not create enough value for [Xerox] shareholders. We are not prepared to support a deal on this basis, as it is unlikely to achieve shareholder support. It requires a more aggressive financial plan and, potentially, new ideas on
74 Ex. 65 atXEROX_FX-00000345 Id. atXEROX_FX-00000387 Ex. 98, Jacobson Dep. 409-412; Ex. 101. Ex. 63See, e.g., Ex. 66 at XEROX^FX-00062079
757677
78
14
79transaction structure[.]
Centerview concedes that, after sending this (appropriately) firm email, Xerox failed to
80secure a dollar of incremental value in the deal. Instead, Defendants decided to secure
concessions for themselves. The following day, Keegan sent Komori a letter conveying the
Board’s final demands. Without requesting an3dhing with respect to the “value” Xerox
shareholders would receive, Keegan demanded: (1) that five Xerox directors receive self-
perpetuating seats on the post-transaction Board; and (2) that Jacohson be named sole CEO of
81the post-transaction company, in lieu of a dual CEO structure preferred by Fuji. Fuji agreed to
82 The Board subsequently approved the Transaction on January 30, 2018,all of these demands.
83and Fuji and Xerox announced it the following day.
ARGUMENT
THE REQUIREMENTS FOR A PRELIMINARY INJUNCTIONI.
A party seeking an injunction under CPLR 6311 must demonstrate (i) a probability of
success on the merits, (ii) danger of irreparable injury, and (iii) that the balance of the equities is
in its favor. Second on Second Cafe, Inc. v. Hing Sing Trading, Inc., 66 A.D.3d 255, 264 (1st
Dep’t 2009); Rational Sti^ategies Fundv. Hill, 40 Misc. 3d 1214(A) (Sup. Ct. N.Y. Co. 2013).
PLAINTIFFS HAVE A LIKELIHOOD OF SUCCESS ON THE MERITSII.
The Standards for Assessing the Directors’ ActionsA.
Defendants’ assertion in their motion to dismiss that the business judgment rules bars
judicial scrutiny of the Transaction is incorrect. Corporate fiduciaries must “exercise their
responsibilities in good faith when undertaking any corporate action, including a merger. 59
79 Ex. 73 atXEROX_FX-00076966 (emphasis added). Ex. 99, Hess Dep. at 38-88.Ex. 78 atXEROX_FX-00056781Ex. 97, Keegan Dep. at 247Ex. 84, Xerox Corp. Form 8-K (Jan. 31, 2018)
80818283
15
Alpert V. 28 Williams St. Corp., 63 N.Y.2d 557, 568 (1984) (citations omitted). Accordingly,
courts only defer to the business judgment of directors who have acted in good faith on a fully
[W]hen there is an inherent conflict of interest, the burden shifts to theinformed basis.
interested direetors ... to prove good faith and the entire fairness of the merger.” Alpert, 63
N.Y.2d at 570. As stated in Higgins v. New York Stoek Exchange, Inc., 10 Misc. 3d 257, 278
(Sup. Ct. N.Y. Co. 2005) (internal citations omitted):
The presumptive applicability of the business judgment rule is rebutted, and judicial inquiry thereby triggered, however, by a showing that a breach of fiduciary duty occurred, which includes evidence of bad faith, self-dealing, or by decisions made by directors demonstrably affected by inherent conflicts of interest. Thereafter, the burden to prove the fairness of the challenged acts shifts to defendants.
As shown below, the facts adduced in discovery and to be presented at the April 26
hearing establish that the business judgment rule does not apply and that Defendants must prove
the entire fairness of the Transaction. This they cannot do.
The Director Defendants Violated Their Duty of LoyaltyB.
The fiduciary duty of loyalty demands that directors must not “allow their private
Higgins, 10 Misc. 3d at 278 (citation omitted).interests to confliet with corporate interests.
[Ajpplicability of the business judgment rule is rebutted ... [where] decisions made by directors
[were] demonstrably affected by inherent conflicts of interest. Id. That is precisely what
oceurred here. Following Jacobson’s disloyal lead, the full Board acted in their own self-interest
after Christodoro’s noisy resignation and Icahn’s publie announcement of his proxy battle.
Personal job preservation permeated Jacobson’s negotiations with Fuji. In May 2017,
84 A June 2017Jacobson understood that Icahn would push for Jacobson’s replacement as CEO.
Planning Doeument edited by Jacobson states that discussions regarding a deal with Fuji “have
84 Ex. 15 at XEROX_FX-00081354; see Ex. 93, Reese Dep. at 194 (“He knew Mr. Icahn was going to seek to oust him.”); Ex. 94, Osbourn Dep. at 143-47
16
„85accelerated” due to the “[ijnfluence of Icahn.
Jacobson was also at risk from his own Board, and he knew it. As one direetor put it in
August 2017, “[t]he board unanimously agreed Jeff wasn’t the right person and to look for
»86 This Board exhausted every ounce of patience andcandidates. Another director stated:
coaching to make our current CEO a success. We then decided, unanimously, for a variety of
„87 The Board retained an executive search firm toreasons he was not the right leader we need,
find a replacement, identified candidates for the job,** and ultimately prepared a term sheet for
9089the winning candidate. The Board targeted December 11, 2017 as the new CEO’s start date.
91Jacobson knew by November 10, 2017 that his job as CEO was at risk.
Jacobson that day that the Board had retained a search firm to find a replacement.^^ Krongard
Keegan told
wrote that Jacobson was informed “that the Board was disappointed by his performance and
„93would likely look at outside talent. As Reese confirmed, by “November 11th, 2017, Mr.
„9AJacobson knew his job was in jeopardy.
Knowing they would replaee Jacobson, the Board wanted him to cease negotiating with
Fuji. As director Christodoro testified, “it would make no sense for a two-week outgoing CEO
96„95to have negotiations with a partner for a long-term deal. Krongard agreed. The Board
97 But Jacobson persuadeddecided that Jacobson should discontinue his negotiations with Fuji.
85 Ex. 19 atXEROX_FX-00002595.Ex. 38 at XEROX_FX-00062189; see Ex. 96, Christodoro Dep. at 196-97 Ex. 59 at XEROX_^FX-00144182 Ex. 41 Ex. 58Ex. 95, Krongard Dep. at 182Ex. 45 at XEROX_FX-00062178-79; Ex. 95, Krongard Dep. at 189Ex. 96, Christodoro dep. at 197-98; Ex. 97, Keegan Dep. at 221-22Ex. 59 atXEROX_FX-00144183Ex. 93, Reese Dep. at 193Ex. 96, Christodoro Dep. at 199-200Ex. 95, Krongard Dep. at 235-36Ex. 97, Keegan Dep. at 260-61
8687
899091929394959697
17
98Keegan to allow him to continue negotiating with Fuji -something that Keegan neglected to
99tell the Board or obtain its consent.
Jacobson then accelerated efforts to strike a deal with Fuji. In exchange for selling out
Xerox shareholders, Jacobson elicited Fuji’s employment commitment. Kawamura stressed to
Jacobson that Jacobson and the Fuji CEO, Komori, should be a “team to fight against our mutual
100 Kawamura told Jacobson that Komori will “try to help you if you ask hisenemy,” i.e., Icahn.
102101understanding and support. and that “there is no deal withouf ’ Jacobson. When Jacobson59
103 Kawamura reassuredlamented that “Icahn has publicly called for Xerox to hire a new CEO,59
104him “We are supporting you Jeff! In January, Jacobson again asked for reassurance: “Are95
105 Again, Kawamura responded;things on track as we discussed for you [sic] role and my role?99
106I clearly told Komori to tell Keegan that he wants Jeff to be the CEO. 99
Jacobson’s negotiations with Fuji to lock in his future employment role were plainly
107 But the Board capitulated to Jacobson for severalimproper, as Reese acknowledged.
improper reasons. First, Jacobson’s unauthorized negotiations with Fuji painted the Board into a
108 Second, they faced thecomer, putting it “in a precarious position with our valued partner. 99
109omnipresent specter of Icahn’s proxy fight, of which the Board was “always In55 aware.
110 andSeptember 2017, Xerox was aware that Icahn was threatening to mn a slate of directors.
98 Ex. 97, Keegan Dep. at 259-60Ex. 95, Krongard Dep. at 234-35; Ex. 97, Keegan Dep. at 267-68 Ex. 47 at XEROX_FX-00124502-03; Ed. 98, Jacobson Dep. 175-177 Ex. 47 at XEROX_FX-000124491 Ex. 51 atXEROX_FX-00125424 Ex. 62 at XEROX_FX-000124853 Ex. 62 at XEROX_FX-00124860 Ex. 71 at XEROX_FX-00125672 Ex. 71 atXEROX_FX-00125169 Ex. 93, Reese Dep. at 306-08 Ex. 59 atXEROX__FX-00144183]Ex. 97, Keegan Dep. at 224-25] (testifying that the Board was “always” aware of the threat of a proxy contest by
Icahn).Ex. 39
99100101102103104105106107108109
no
18
Illby November the Board considered that likely. In early December 2017, Icahn announced that
112he would mount a proxy contest to replace four directors on the Xerox Board. Centerview’s
December 13, 2017 slides warn that “Icahn has publicly called for management changes” and
that “Icahn will nominate a slate of four directors” at the annual meeting then expected in May
1132018. Centerview’s January 28, 2018 presentation reiterated that Icahn was “criticizing
114management and the Board” and “calling for a change in management. ?5
At this point, the Board caved and approved the Transaction, by which they sought not
only to sidestep Icahn and avoid a fight with Fuji but also to preserve directorships for five other
members of the Xerox Board, whose seats were now being threatened by Icahn. Thus, while
»115Keegan had previously stated that Jacobson “would never be CEO of a combined company.
the directors abandoned their intention to replace Jacobson and, instead, approved the
Transaction whereby Jacobson would become CEO of the merged entity.
This is classic entrenchment. When directors use corporate powers to preserve their66
control, they become interested directors and have the burden of proving the fairness and
propriety of the challenged transaction. ?5 Minstar Acquiring Corp. v. AMF, Inc., 621 F. Supp.
1252, 1260 (S.D.N.Y. 1985). “[SJelf-perpetuation is but an aspect of the fundamental threshold
question, ‘Is the director or officer interested in the transaction. 99? Treadw’ay Cos. v. Care Corp.,
638 F.2d 357, 387 (2d Cir. 1980). Therefore,the motivation to preserve board seats and control
of a company overcomes the application of the business judgment rule. See, e.g., Norlin Corp. v.
Rooney, Pace, Inc., 744 F.2d 255, 265 (2d Cir. 1984) (affirming preliminary injunction where
there was “a strong inference that the purpose of the transaction was not to benefit the employees
111 Ex. 97, Keegan Dep. at 224-25 Ex. 64Ex. 65 atXEROX_FX-000345 Ex. 82 at XEROX_FX-000165 Ex. 86; Ex. 96, Christodoro Dep. at 204
112113114115
19
but rather to solidify management’s control of the company”); Int’l Banknote Co. v. Muller, 713
F. Supp. 612, 625 (S.D.N.Y. 1989) (granting preliminary injunction because “there is a
substantial likelihood that the Committee will succeed at trial in showing that the Board’s
116primary motivation for adopting the By-law was entrenchmenf’).
Xerox argues there is no reasonable inference as to the directors’ self-interest. XRX
MTD at 12. But in the cases relied on by Defendants in their motion to dismiss, there were “no
particularized allegations of fact that any actual threat to the directors’ positions existed at the
117 and evidence that the motivation for the transactiontime” they entered into the transaction.
118was the retention of control was “unusually sparse, if not nonexistent. Here, the record55
reveals that the ongoing campaign by Icahn to replace Jacobson and other members of the Board
was in foil gear, the Board had decided unanimously to replace Jacobson, and a replacement for
Jacobson had already been selected.
Xerox argues that an entrenchment motivation is “nonsensical” because four directors
will lose their board seats. XRX MTD at 13. But Xerox ignores the difference between a
directorship ending in a successful transaction, versus a public ouster in an unsuccessful proxy
fight. Xerox likewise ignore that nine of the ten directors who approved this Transaction did so
119 To be clear, inwhile seeking valuable “self-perpetuating” positions on the new Xerox board.
116 See also Minstar, 621 F. Supp. at 1260-61 (granting preliminary injunction because there was “a strong inference that AMF’s board acted only to entrench itself’); Avacus Partners, L.P. v. Brian, 1990 WL 161909, at *6 (Del. Ch. Oct. 24, 1990) (denying motion to dismiss where plaintiff alleged the directors “approved the WNW Merger for grossly inadequate consideration, and for the purpose of entrenching themselves in office”); Wells Fargo & Co. v. First Interstate Bancorp, 1996 WL 32169, at *5 (Del. Ch. Jan. 18, 1996) (denying motion to dismiss because board members had “a personal interest in the transaction in the indirect sense of an interest in maintaining their seats on the board”).
Greenwaldv. Batterson, 1999 WL 596276, at *5 (Del. Ch. July 26, 1999).Crouse-Hinds Co. v. InterNorth, Inc., 634 F.2d 690, 703-04 (2d Cir. 1980).(Eight of the nine outside directors on the Board disclosed to Keegan that they would be willing to serve on the
post-transaction board. [Ex. 97, Keegan Dep. at 298, 300-04.] Sarah Martinez Tucker told Keegan that she would not likely serve on the Board following the transaction because of her other commitments. [Ex. 97, Keegan Dep. at 298.]
117118119
20
the days before approving the Transaetion, the Xerox notified Fuji that the Transaction, as
conceived, did not create enough value for shareholders, requiring them to potentially reconsider
120the structure of the transaction or delay a final deal. The Board literally abandoned its value
concerns when Fuji agreed to appoint Jacobson as sole CEO and allow five directors to serve in
self-perpetuating roles. Moreover, all directors stood to financially benefit from the immediate
121cash out of their unvested stock awards because of the change of control they approved.
C. The Director Defendants Violated Their Duty of Care
1. The Directors Allowed a Clearly Conflicted CEO to Negotiate the Sale of Control of Xerox
As discussed above, the Board was aware the Jacobson knew his job was in jeopardy
after Icahn threatened to oust him. And they communicated directly to him that they were
dissatisfied with his performance. Yet, the Board allowed Jacobson to continue to handle the
negotiations. Worse, the Board left Jacobson in charge of supposed outreach efforts to and
discussions with potential competing bidders, despite his patent conflicts. Even after learning
that he had managed to negotiate for himself the position as sole CEO of the merged eompany,
the directors continued to endorse the deal Jacobson struck with Fuji.
Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989), is
instructive. In Mills, the Board delegated to a conflicted CEO “the ultimate responsibility for
ensuring the integrity” of the company sales process. Id. Here, as in Mills, a self-interested
120 See Ex. 97, Keegan Dep. at 240 (“Q: And the current financial projections that you and Fuji created together did not create enough value for the Xerox shareholders as of January 24th, 2018, correct? A: We felt we could do better.”); Ex. 73 (XEROX FX-00076966) (“The current financial projections we have created together do not create enough value for [Xerox] shareholders. We are not prepared to support a deal on this basis . . . .”); Ex. 75 at XEROX FX-00144904 (notes for Keegan’s call with Komori indicating that in “[wjorking with oxu advisors, I [Keegan] have just discovered that our financial projections do not create the shareholder value that we absolutely need”)
See, e.g. Ex. 93, Reese Dep. at 18-19 (confirming Reese will receive $1.8 million due to the cash out of her restricted stock awards); Ex. 97, Keegan Dep. at 292 (noting that Keegan holds around $1.0 million in deferred stock awards).
121
21
CEO, met with and proposed the structure of the challenged transaction without approval of the
target board. Id. at 1281. And, as here, the target board allowed the CEO to field competing
offers and manage negotiations with potential suitors. Id. Mills held that the board breached its
duty of care by leaving the sale process in the hands of a conflicted officer and those beholden to
him. Id. The court concluded, “By placing the entire process in the hands of Evans, through his
own chosen financial advisors, with little or no board oversight, the board materially contributed
to the unprincipled conduct of those upon whom it looked with a blind eye.” Id. at 1280.
The Director Defendants Failed Adequately to Explore Alternatives
2.
There were numerous possible value-maximizing alternatives to the Transaction, but
Xerox either completely ignored them or gave them cursory consideration.
Krongard explained that “if Fuji was going to make an all cash offer,” then the Board was
122advised that a broad auction might not be desirable. But once it became clear in the summer
of 2017 that Fuji would not offer an all-cash deal in the near-term, there was no reason not to
engage in the normal market canvassing process. Nonetheless, as Reese admitted, the Board
'explicitly decided not to—^not to canvas the market that way or to run an auction like you might
123normally—might normally see in some other situations.
While some directors believed that the Joint Venture agreements made it difficult to
124 others felt those agreements did notinterest other companies to make a bid for Xerox,
125 In any event, there were ways to limit the impact of those agreements.preclude such a sale.
In light of the Fuji accounting scandal. Xerox had the right to terminate the Technology
122 Ex. 95, Krongard Dep. at 64 Ex. 93, Reese Dep. at 119Defendant Prince stated that those agreements “made it practically impossible for Xerox to sell to anyone else.'
Ex. 85 at XEROX_FX-00007806.Ex. 93, Reese Dep. at 153, 260
123124
125
22
126Agreement, but the Board never considered that, and Xerox never warned Fuji that because of
127 Even if Xerox did not wish tothe accounting scandal. Xerox might terminate the agreements.
terminate the agreements, the accounting fraud gave Xerox enormous leverage to renegotiate the
most egregious provisions thereof, as Darwin Deason, the Company’s third largest shareholder
128 129Jacohson never raised this with the Board, and no such efforthas urged the Board to do.
130 Xerox made no effort to revise the exclusive licenses that inhibited other bids.was made.
Despite repeatedly modeling and discussing a Reverse Morris Trust transaction with
Hewlett Packard (“HP”), the Board took no meaningful effort to explore that option. Defendant
Reese testified that HP was a potential buyer for whom the joint venture agreements would not
131pose difficulty hut rather the agreements “would work in a positive way” for HP. Jacohson
personally raised the issue of a possible transaction between Xerox and HP in discussions with a
Fuji executive, who noted that such a transaction would be more preferable from Fuji’s
132perspective than a sale to a Chinese competitor - clearly indicating a willingness of Fuji to
work with HP following a transaction. Throughout all of 2017, however, Jacohson, held only
one ditmer with an HP executive solely to “generate the semblance of some competition” for
133 He never even raised the Reverse Morris Trust structure that the Board analyzed andFuji.
134 Much worse, HP ultimately expressed interest in acquiringnever solicited a bid from HP.
135 Yet Xerox brushed HP off, telling HP that it had to move fast to beXerox in January 2018.
126 Ex. 96, Christodoro Dep. at 194-95 Ex. 97, Keegan Dep. at 115 Ex. 16Ex. 96, Christodoro Dep. at 190-91, 195Ex. 97, Keegan Dep. at 117Ex. 93, Reese Dep. at 115Ex. 98, Jacobson Dep. at 344-346.Ex. 23 at XEROX_FX -00008218Ex. 98, Jacobson Dep. at 268-271, 273-276.Ex. 93, Reese Dep. at 118
127128129130131132133134135
23
136 The Board did not seriously explore doing a deal with HP, instead it left Jacobsonconsidered.
- whom the Board knew had already locked up employment with Fuji - to deal with HP on his
138137 Indeed, Keegan did not even know why HP talks did not proceed. Besides HP, Xeroxown.
139did not contact any other potential strategic buyer.
Another alternative was a cash sale. Initially, the Board insisted that it wanted a deal
140 As discussions progressed, Fujiwhereby Fuji would purchase Xerox in an all-cash deal.
141 leaving open the possibility ofindicated that it could not do an all-cash deal ‘in the near term. 5?
5,142 The only urgencyan all-cash deal later. There was no urgency to do a deal “in the near term.
was Jacobson’s desire to get a deal in place before the Board or the Icahn/Deason proxy contest
could throw him out of office. Similarly, Fuji raised the possibility of teaming with a private
143 But Jacobson hid that possibility - which did notequity firm to help fund a cash purchase.
work for Jacobson’s timeline -from the Board and his advisors, who never investigated that
144possible structure.
The Director Defendants Violated Their Duty of Candor
With respect to a merger/acquisition transaction, stockholders are “entitled to an accurate.
D.
candid presentation of why the self-[interested] tender offer is being made. Eisenberg v.95
Chicago Milwaukee Corp., 537 A.2d 1051, 1059 (Del. Ch. 1987). Disclosures relating to such a
transaction will be materially misleading if they fail to “disclose the board’s ‘motivations
candidly.’” SherM>oodv. Ngon, 2011 WL 6355209, at *8 (Del. Ch. Dec. 20, 2011) (quoting ODS
136 Ex. 94, Osbourn Dep. at 220 Ex. 96, Christodoro Dep. at 201 Ex. 97, Keegan Dep. at 57 Ex. 97, Keegan Dep. at 63Ex. 7 at XEROX_FX-00100922; Ex. 96, Christodoro Dep. at 167]Ex. 32 atXEROX_FX-00000243Ex. 96, Christodoro Dep. at 186-87; Ex. 93, Reese Dep. at 121-22; Ex. 95, Krongard Dep. at 18, 1126-27]Ex. 36 at XEROX_FX-00101053 (“Non-cash merger is clearly one of the options among others like 100%
buyout or partnering acquisition with PE.”)Ex. 97, Keegan Dep. at 351-54
137138
139140141142143
144
24
Techs. L.P. V. Marshall, 832 A.2d 1254, 1261 (Del. Ch. 2003)).
Xerox and the Director Defendants have violated their disclosure duties by making
numerous materially false and misleading public statements concerning the Transaction. First
and foremost, when announcing the transaction. Defendants misled Xerox shareholders with
public presentations that state that the Company’s joint venture agreements with Fuji “limit
145Xerox’s strategic flexibility. 9? As Ann Reese, one of Xerox’s longest-tenured directors and
„146former Lead Independent Director explained, “I do not agree with the characterization.
Indeed, Reese explained that certain of the agreements actually “enhance our strategic
»147flexibility. testifying further: There are some buyers who potentially, in a properly
structured transaction might even want these ... agreements...... I can think of more than one of
„148them. Thus, when testifying about the Company’s public slide presentations on this topic.
Reese explained: “Yes, it is a PR person has constructed this to be less nuanced than what I’m
149trying to explain to you. Similarly, Jacobson testified that the language that appears in the99
Company’s public presentations reflect “incomplete statements” regarding the impact of the JV
150agreements on the Company’s strategic flexibility. Xerox should correct this misleading
disclosure, and should further disclose that Centerview and management expressly told the
Board that the JV agreements did not preclude a sale to third parties, which was “feasible. 99
Second, Xerox has failed to disclose that the Xerox was initially interested only in an all
151cash deal with Fuji. Indeed, Jacobson has expressly claimed in investor conferences (the
transcripts of which have been filed as proxy materials in connection with the transaction) that
145 Ex. 102 at 10Ex. 93, Reese Tr. at 283-284.146
147 Id.148 Ex. 93, Reese Tr. at 114.
Ex. 93, Reese Tr. at 287.Ex. 98, Jacobson Dep. 349-350.
Ex. 7; Ex. 98, Jacobson Dep. at 45-46.
149150151
25
the Company began discussions with Fuji in the first quarter of 2017 to “streamline” the
152 This is false. The companies began discussing an allorganization of Fuji and Fuji Xerox.
cash, 100% acquisition—a transaction that Xerox’s advisors thought was likely maximize value
on behalf of Xerox shareholders. Moreover, Xerox failed to disclose that while Fuji stated it
153 it has never indicated that it would notcould not do an all cash deal in the “near term,'
consider one in the future, after it fully resolves the accounting issues at Fuji Xerox.
Third, Xerox must disclose that Jacobson negotiated the Transaction (and his post-Transaction
employment) while fully aware he would likely lose his job if he could not successfully strike a
deal with Fuji. Such an important conflict of interest must be disclosed.
Fourth, as explained further below. Xerox’s public descriptions of the value offered by
the deal is misleading, as Xerox fails to disclose that Centerview’s fairness analysis and
analysis performed to support the purportedly 15% “day 1” premium - did not take into account
that the legacy Xerox stockholders would own only a “stub” in the Fuji-controlled pro forma
company. And as Xerox’s own advisors concede, the stub may trade at a permanent “minority
discount,” contradicting the Company’s statements regarding value creation. Moreover, Xerox
misleadingly states that the Transaction is accretive in 2020, when its internal analysis shows the
Transaction is dilutive in 2020 unless the Company spends millions in stock buybacks.
Just as Xerox must disclose additional material information in connection with the
shareholder vote on the proposed Transaction, it must also disclose additional information in
connection with the upcoming election of directors. Indeed, on April 10, 2018 - i.e., the date of
Xerox filed a preliminary proxy statement (the “Annual Meeting Proxy”) inthis filing
152 Ex. 87 at 3-4Ex. 32 at XEROX FX-000243153
26
154 The Annual Meeting Proxy makes numerousconnection with the upcoming annual meeting.
false, incomplete, or otherwise misleading statements about the Board’s process and decision to
sell control to Fuji. More specifically, the Annual Meeting Proxy fails to candidly disclose that
Xerox and Fuji were specifically negotiating a potential 100% cash transaction in the Spring of
2017, falsely suggesting a broader array of options - e.g., like the Transaction at issue now was
on the table. The Annual Meeting Proxy fails to disclose that Fuji and Xerox only turned to a
sale of majority control after Icahn’s threat to oust Jacobson and pursue a proxy contest, and
even fails to mention Icahn’s threat at all. The Annual Meeting Proxy falsely claims the Board
seriously considered alternative transactions, when, in fact, it intentionally engaged in a single-
155 The Annual Meetingbidder sales process, making only superficial contacts with other suitors.
Proxy is further misleading with respect to the Board’s decisions with respect to Jacobson’s
employment or qualifications to continue serving as CEO of the Company. As noted above, the
Board unanimously agreed to terminate Jacobson, but reversed course only when Fuji
supposedly demanded that he be involved in the post-Transaction Company. The Annual
Meeting Proxy suggests that Jacobson somehow independently addressed and corrected the
performance flaws that led to the Board’s decision to start a CEO search.
Defendants Cannot Demonstrate the Entire Fairness of the TransactionE.
As discussed above, where, as here, the directors committed breaches of fiduciary duty
and their conduct was marred by conflicts of interest, they have the burden of demonstrating the
entire fairness of the transaction. This entire fairness standard has two components: fair process
Fair dealing is concerned with the procedural fairness of the transaction.and fair price.
including how the transaction was timed, initiated, structured, negotiated, disclosed to directors.
154 Ex. 104Ex. 93, Reese Dep. at 119 (“Q. Did you ever instruct Centerview to go out and canvass the market for a potential
acquirer... ? A. We at the board discussed that potential process and explicitly decided not to....”)155
27
and how the approvals of the direetors and the stockholders were obtained. Weinberger v. UOP,
Inc., 457 A.2d 701, 711 (Del. 1983); Alpert, 63 N.Y.2d at 570-71; Scaly Mattress Co. ofN.J. v.
Sealy, Inc., 532 A.2d 1324, 1333 (Del. Ch. 1987). Fair price relates to all relevant economic and
financial considerations of the proposed merger, including assets, market value, earnings, future
prospects and any other factor relating to the intrinsic value of the company. Weinberger, 457
A.2d at 711; Alpert, 63 N.Y.2d at 571. Although the fair dealing and fair price prongs are
structurally bifurcated,” the concept “is conceptually singular” such that an “unfairness of the
process also infects the fairness of the price.’ Bomarko, Inc. v. Int’l Telecharge, Inc., 794 A.2d
1161, 1182-83 (Del. Ch. 1999) {cWmgKahnv. Tremont, 694 A.2d 422, 432 (Del. 1997)).
The Sales Process Was Fatally Flawed1.
As noted, Jacobson’s and the other Director Defendants’ self-interest infected the sales
[IJllicit manipulation of a board’s deliberative processes by self-interested corporateprocess.
fiduciaries,” and a board’s “lack of oversight in structuring and directing” the search for a merger
partner vitiate reliance on the business judgment rule. Mills 559 A.2d at 1279.
Notwithstanding Defendants’s contention that the various joint venture agreements do not
156 and Centerview’s advice that a full sale would likelypreclude a sale of the Company,
maximize shareholder value, the Board chose, however, to pursue a single-bidder sales process
with Fuji, and then pivoted to the current Transaction when it became clear that they could not
sell the Company in advance of the nomination deadline for the next annual meeting.
Icahn’s threat clearly accelerated the Board’s consideration of alternative transaction
: 157 Fuji, however, maintained its interest in acquiring all of Xerox, not thestructures with Fuji.
majority control structure Jacobson started to pitch when he began to run out of time. Even
156 See, e.g., Ex. 93, Reese Dep. at 153-54; Ex. 97, Keegan Dep. at 45-46, 66-67 Ex. 20 at XEROX FX-00054021157
28
when it seemed that Fuji could not move forward on any deal, Jacobson never attempted to find
an alternative strategic purchaser, making only one superficial outreach to HP. But Jacobson
concedes that he did not even raise the reverse Morris trust structure that was developed by
Centerview as a way to strike a deal with HP that would not raise implications under the JV
158agreement change-of-control provisions. In other words, “outreach” to HP did not even
include a description of the concept developed at Xerox to make a transaction more attractive.
As noted above, Jacobson’s conflict of interest further marred an already deficient sales
process. By November 10, 2017, the Board had identified a replacement for Jacobson and
informed Jacobson that he should cease discussions with Fuji about a potential transaction.
When he privately met with Komori and other Fuji executives on November 21, 2017, to discuss
what would ultimately become Fuji’s first official offer for the Transaction, Jacobson went into
159that meeting aware that Komori wanted to discuss Jacobson’s specific employment situation.
He left the meeting knowing there would be no deal without him. On the same trip, he was
literally negotiating with Fuji about the size of the dividend for Xerox shareholders, while also
160confirming Komori’s support for his continued role in the post-transaction Company. Within
days, Jacobson expressly noted to Centerview that he hoped the Board would not “get greedy’
161by seeking more on behalf of Xerox’s public shareholders.
Approaching the January 31, 2018 deadline Fuji imposed on Xerox, Xerox and
Centerview notified Fuji that this transaction structure and the $2.5 billion dividend would not
162create enough value for its shareholders. The Board nonetheless agreed to move forward with
158 Ex. 98, Jacobson Dep. at 274Ex. 52 atXEROX_FX-00124535, 124538, 124541, 12544, 125589, 124547, 124550 Ex. 49 at XEROX_FX-00008015 Ex. 54, XEROX_FX-00125427See Ex. 73 at XEROX_FX-00076966 (“The current financial projections we have created together do not create
enough value for [Xerox] shareholders. We are not prepared to support a deal on this basis... .”)
159160161162
29
the transaction once Fuji agreed to appoint Jacobson as CEO, while allowing five other directors
to keep self-perpetuating board seats for a five-year period - i.e., the Board traded value in
exchange for governance terms that served a majority of the directors’ own self-interest.
Jacobson also did not inform the Board that Fuji was willing to consider partnering with a
private equity purchaser. As Keegan acknowledged, the Board would have investigated such a
163structure, if it were aware of Fuji’s willingness to do so. since that structure would have
addressed Fuji’s concern with Xerox’s high stock price and the private equity firms’ concerns
with the overall size of the transaction. Where a board is deceived by management in an M&A
transaction, the protections of the business judgment rule vanish. Mills, 559 A.2d at 1284.
Moreover, the Board ensured that no alternative purchaser would come forward
following the deal announcement. It agreed to a substantial termination fee and a no-shop
provision that precluded the Board from soliciting alternative transactions. The Board further
agreed that it would not seek to alter or change the terms of the joint venture agreements that
164complicated potential transactions with third parties. Then, after 21 years of keeping the joint
venture agreements—^which the directors claim do not preclude the Company from selling itself
to third parties—secret, the Board finally publicly disclosed those agreements, while claiming
that their terms “limit” the company’s “strategic flexibility. The timing of these disclosures is
not coincidental: the Board is actively discouraging competing bids during the no-shop period.
At bottom, the sales process here: (i) was led by a clearly conflicted fiduciary, who was
aware that he would lose his job if he did not negotiate a transaction with Fuji; (ii) was overseen
most closely by the two “old-guard” directors who stood the largest chance of being removed in
a proxy contest with Icahn; (hi) failed to genuinely engage with any alternative suitor; (iv) did
163 Ex. 97, Keegan Dep. at 351-54See Ex. 83, § 4.01(b)(xiv) of the Share Subscription Agreement164
30
not explore a potential acquisition structures that would have maximized stockholder value; and
(v) resulted in a transaction that will sell control of Xerox without securing a true premium for
shareholders, but will likely ensure victory against Icahn’s proxy contest.
2. The Transaction Price Is Unfair to Xerox Shareholders
As Defendants recognized just a week before approving it, the Transaction fails to deliver
adequate value to Xerox shareholders. On January 24, 2018—only five days before voting to
approve the transaction—Centerview, at the direction of the Board, wrote a letter to Kawamura,
acknowledging that “[t]he current financial projections [of New Xerox] we have created together
165do not create enoush value for Juice [Xerox shareholdersL Nevertheless, Centerview
admits that all it obtained after making this (correct) ultimatum was an agreement from Fuji to
announce more aggressive synergies, and asserts - now in litigation - that it convinced itself
that the deal was not that bad after all. Centerview concedes that not a single dollar in additional
166value was secured. In fact, the only real change in response to this correspondence was that
the Board secured self-perpetuation rights for themselves and an entrenched position for
167 -the man the Board had contemplated firing for incompetence just a monthJacobson
earlier—as sole CEO of the combined company.
The record confirms Defendants’ candid assessment in the days before the deal was
hastily agreed to that the Transaction fails to deliver adequate value.
[168 Likewise, contrary
to Defendants’ public statements to investors touting the considerable upfront and long-term
165 Ex. 73 (emphasis added).Ex. 99, Hess Dep. at 38-88.Ex. 78 at XEROX FX-Q0Q55667; Ex. 81 atXEROX_FX00071757
166167168
31
premiums flowing to Xerox shareholder from the Transaetion, Centerview privately told the
Board as early as December 4, 2017 that “[hjecause this is a mostly stock transaction and the
counterparty is private, there is no observable premium,” but instead depends for value creation
169on inflated, highly speculative synergies, as discussed below.
First, as described above, the Board failed to adequately vet the Transaction’s value
proposition because it failed to engage in a full and fair market check process, notwithstanding
the admonitions of Xerox’s financial adviser to create “competitive tension” by seeking out
170multiple potential acquirers in order to maximize value. Accordingly, the value delivered by
this Transaction is inherently inadequate in that it has not been market checked, vetted, and
tested against competing bids. Xerox shareholders are losing their only chance to sell their
Company and are being denied a Board process geared toward securing adequate value.
Second, the Board’s analysis of the value of the Transaction, including analyses
published in presentations disseminated to shareholders after the deal was announced, failed to
account for the “minority discount” that the market will apply to shares of New Xerox stock. A
'minority discount” is a downward adjustment applied to the market price of a company’s
publicly traded stock if the company is majority-owned by a single shareholder. The market
applies a discount to the publicly traded stock representing the minority ownership interest
because, among other things, they face the risk that the majority shareholder will use its
influence over the company in ways that are not consistent with the minority’s interest. P.
Hanouna, et ah, “Value of Corporate Control,” Working Paper No. 01-4, Marshall School of
Business, U.S.C. (2001); see also L. Zingales, “What Determines the Value of Corporate Votes)
The Quarterly Journal of Economics (Nov. 1995). Typical minority discounts range from 20%
169 Ex. 57 Ex. 17170
32
to 30%. Hanouna, supra.
Here, The Board’s sanguine estimates of the value delivered to shareholders wholly fails
to account for the minority discount that will apply to New Xerox stock. The largest component
of the supposed value proposition is the value of the pro forma company stock. Thus,
Centerview analyzed the expected pro forma trading price when opining on fairness and
supporting the Company’s statements that the deal provides a 15% premium. When doing so,
Centerview blithely applied a trading multiple band based on the historical stock prices of
171entirely non-controlled peer companies (and to-date won-controlled Xerox). Centerview
simply failed to discount for this basic economic phenomenon - widely recognized by
academics, investors, and Xerox’s own board member - despite being warned just four days
before the Board approved the transaction. On January 26, 2018, Centerview, Jacobson, Keegan,
and Reese received an email forwarding analysis from Innisfree, Xerox’s proxy advisor.
Innisfree warned that “the governance issue \i.e.. Xerox shareholders’ minority stake] should
result in the stock trading at a permanent ‘minority discount, ’ implying its trading multiples
111 Nevertheless, Centerview “did notwill also be lower than that of comparable companies^
173take any action” to alter its analysis “on the basis of Innsifree’s sentence.
Centerview was forced to acknowledge the error internally shortly after the deal was
announced. In a February 17, 2018 draft presentation to the Transaction Committee attempting
to assess shareholder sentiment about the Transaction, Centerview admitted that “[mjinority
position seen as a concern .... Could result in a potential multiple discount (one investor
55174estimated a 15% trading discount). Centerview reports on investor sentiment similarly make
171 Ex. 29, XEROX_FX-00080721; Ex. 99, Hess Dep. at 409,410 Ex. 80 atXEROX_FX-00054481 (emphasis added)Ex. 99, Hess Dep. at 416 Ex. 88
172173174
33
clear that significant Xerox institutional investors have voiced concern that New Xerox stock
175will trade at a minority discount. 103169. For instance, J.P. Morgan Investment Management,
Inc. told Centerview that it had “long term concerns on minority positions, and Becker Capital
»176Management, Inc. stated it believes there will be a “[djiscount for minority position.
Likewise, Defendant Krongard specifically referenced Xerox shareholder’s “minority position
in concluding that she could “argue strongly that we are not acting in our shareholders [sic] best
55177interest in this transaction. Krongard incorrectly “assume[d]” that Xerox’s public
presentations to shareholders touting the value delivered by the Transaction applied a minority
discount to the published estimates, and that applying that discount “wouldn’t be overlooked” in
178Xerox’s presentation of those figures.
The negative impact of the minority discount affecting the New Xerox shares the Class
will receive is likely to be significant. Indeed, the 15% discount cited in Defendants’ internal
presentations largely off-sets the 15% first-day premium Defendants promised shareholders the
Transaction would deliver.
Third, the Transaction fails to deliver adequate value to Xerox shareholders because that
value is largely driven by illusory “synergy” projections. Defendants claim that the deal will
deliver at least $1.7 billion in total annual cost savings by 2022. Xerox’s estimate of the
synergies flowing from the Transaction includes at least $450 million of Fuji Xerox-centric cost
savings that Xerox could have implemented and enjoyed without its stockholders giving up their
shares. These savings would be passed on to Xerox, which buys 60% of its equipment from
Fuji-Xerox, in the form of lower cost of goods sold, its 25% equity interest in the joint venture.
175 Ex. 4176 Id.177 Ex. 56
Ex. 95, Krongard Dep. at 314178
34
and its dividend. In particular, a May 23, 2017 presentation to the Board discussed the “multiple
179levers” the JV could use to reduce costs at the JV, absent “Ml integration. At least $720?5
million Fuji-Xerox cost savings “require[] no major effort hy Xerox” to implement. Later
presentations hy Centerview estimate that approximately $340 million of these savings would
180flow through to Xerox shareholders, again, without giving up a thing. Ultimately, these cost
savings are included in Xerox’s synergies estimates, although they would have been available to
Xerox shareholders absent the Transaction. Displaying their disloyal motivations, the Director
Defendants, including Jacobson, urged Fuji to refrain from announcing elements of these cost
cutting initiatives before the deal, so the Company could falsely present them as part of the
181overall package of consideration transferred to shareholders as part of the Transaction.
Moreover, the Board asked PwC to audit the combinational synergies identified by Xerox
management. PwC was “able to support base synergies” of only $800 million—an estimate 36%
182lower than the estimate of $1.25 billion adopted by management and touted to shareholders.
PwC further concluded that “[t]he timing/phasing of the synergy realization appears aggressive
55183given our experience in the Japanese market. PwC’s conclusion is hardly surprising since
Defendants, recognizing that the Transaction failed to deliver adequate shareholder value,
artificially accelerated the timing of projected synergies in order to boost the present value of
184those savings.
Thus, while Defendants have presented the Transaction as delivering $1.7 billion in
synergies, facts known to Defendants show that at least $875 million of those cost savings do not
179 Ex. 18 atXEROX_FX-00001563-64 Ex. 31 XEROX_FX-00001760, 1765 Ex. 69Ex. 94, Osbourn Dep. at 22
180
181182183 Id.184 See Ex. 76 at XEROX FX-00125479 (text message in which Hess tells Jacobson, “Key for you and me this AM is to come up with the accelerated plan. Will need to be Internal + some acceleration of synergies. No way aroundit”)]
35
derive from the Transaction, either because they are likely not achievable or because, “with no
major effort” on the Company’s part, they would flow to Xerox shareholders without a sale of
their Company.
Fourth, contrary to Defendants’ public presentations that the Transaction will be
'accretive to [earnings per share] in 2020,” internal Centerview presentations in the days before
the Xerox Board voted to approve the Transaction, conclude that “[bjased on both Internal and
External plans, transaction is significantly dilutive for several years; particularly in External
185 Likewise, Centerview admitted in a January 28, 2018 presentation to the Board, andplan.
conceded during its deposition, that the Transaction is dilutive under the Company’s long-range
186plan unless one presumes expensive incremental share purchases. In the days before the
Board’s vote. Board members and Xerox management panicked about the extent of dilution
Xerox shareholders would experience, with Defendant Echevarria noting that Defendant Keegan
187had noted “we have run into an issue. This is unsurprising, given the importance of
188accretion/dilution estimates to stockholders assessing a deal. And the reality here is in stark
contrast to what was modeled internally.
III. FUJI AIDED AND ABETTED THE DIRECTOR DEFENDANTS’ BREACHES
Without citation, and ignoring the Complaint, Fuji argues that “Plaintiffs allege that
Fujifilm negotiated the Proposed Transaction with Xerox at arm’s-length as a part of a lengthy
process in which the Xerox Board considered potential strategic options and concluded that this
Proposed Transaction was the best available option for Xerox stockholders.” Fuji MTD at 8.
Plaintiffs allege the opposite. Fuji was not a neutral third party emerging through an open
185 Ex. 79 atXEROX_FX-00055297 (emphasis added)Ex. 82 at XEROX_FX-00000202; Ex. 99, Hess Dep. at 408,417 Ex. 77 atXEROX_FX-00037253 Ex. 99, Hess Dep. at 402
186187188
36
bidding process. Fuji exploited the secret and asymmetrical joint venture agreements and
manipulated Jacob’s disloyal focus on achieving a deal that would preserve his job. Fuji then
offered continued directorships to the Xerox directors in return for their delivering control of
Xerox into Fuji’s hands without Fuji having to pay a penny.
The Complaint and the evidence make clear that Fuji exploited conflicted Xerox directors
and its CEO, who were desperate to avoid answering to their shareholders in the looming proxy
fight, resulting in a transaction that violated the Director Defendants’ fiduciary duties.
1189
Similarly, during the negotiations Fuji told Jacobson: “[W]e should be the one team to
190fight against our mutual enemy,” i.e. leahn -the antithesis of an arms’-length relationship.
Where, as here, a bidder offers a fiduciary a side deal to induce him to breach his duty, the bidder
may have aiding and abetting liability to the shareholders of the target. See In re Transkaryotic
Therapies, Inc., 954 A.2d 346, 372 (Del. Ch. 2008). Adding to the quid pro quo, Jacobson even
committed to helping the primary negotiator on the Fuji side - Takashi Kawamura in a palace
191coup against Fuji’s effective-CFO, Masaru Yoshizawa.
Because there was no arms’-length transaction, Fuji’s citations to Delaware cases (in a
case where New York law applies) suggesting aiding and abetting liability cannot accrue under
Delaware law in the face of arms’-length bargaining (Fuji MTD at 8-9) are irrelevant. But even
if Delaware law applied, the complaint should be sustained. Under Delaware law, “a bidder may
189190 Ex. 47 at XEROX_FX-00124502
Ex. 105 at XEROX FX-00125628191
37
be liable to the target’s stockholders if the bidder attempts to exploit conflicts of interest in the
board or conspires with the board to breach a fiduciary duty. Morgan v. Cash, 2010 WL
2803746, at *4 (Del. Ch. July 16, 2010). Here, the Complaint and the evidence adduced in
discovery establish exactly that.
In arguing that “[n]one of the Proposed Transaction’s terms is ‘so egregious’ as to
suggest that Fujifilm had any reason to believe it would be a breach of fiduciary duty for Xerox
to agree to h” (Fuji MTD at 9), Fuji implies that this Court should focus on the terms
individually, as opposed to its entire course of conduct alleged. Fuji yet again ignores relevant
192allegations. Because Fuji was instrumental in the implementation of these unusual
provisions—^the vehicle through which the Director Defendants entrenched themselves in a new
company rather than face revolt at Xerox—it plausibly aided and abetted the Director
Defendants’ fiduciary breaches.
Indeed, a defendant “who aids and abets a breach of a fiduciary duty is liable for that
breach as well, even if he or she had no independent fiduciary obligation to the allegedly injured
party, if the alleged aider and abettor rendered ‘substantial assistance’ to the fiduciary in the
course of effecting the alleged breaches of duty.” Caprer v Nussbaum, 36 A.D. 3d 176, 193 (2d
Dep’t 2006).
Higgins in highly analogous. There, this Court “sustain[ed] plaintiffs’ direct shareholder
class action complaints challenging the fairness of the merger that was allegedly tainted by
numerous conflicts of interest and for an unfair price.' 10 Misc. 3d at 258. As here, Higgins
192 E.g.'. “it is highly unusual for the board of the target company ... to enter into a change of control transaction where the buyer corporation will only own 50.1% of the combined entity as opposed to buying out all of the shareholders in exchange for a customary control premium” (Complaint IfflO, 70); that it “will end up receiving over $120 million more in aimual cash dividends than it currently receives from the joint venture, while Xerox shareholders will receive $0 in additional regular annual cash dividends” (T[71); that “change of control premiums for comparable transactions generally average approximately 25%-30% over the pre-announcement stock trading price” and here there appears to be a negative premium priced by the market” (f69); and that it is not spending a penny in the Proposed Transaction. 1f68.
38
included allegations of a conflicted Board and CEO, id. at 261-64, and the complaint alleged
aiding and abetting elaims against Goldman Sachs. In particular, the plaintiffs alleged that
Goldman was providing substantial assistance to the NYSE defendants by exerting influence on
NYSE’s CEO and other directors “in order to structure a deal that benefitted” the other party to
the merger. Id. at 290. Noting that the record “establishes that Goldman was aware of
conflicts,” id. at 289, the Court denied Goldman’s motion to dismiss the aiding and abetting
claims.
Similarly, Smallberg v. Raich Ende Malter & Co., LLP, 140 A.D.3d 942 (2d Dep’t 2016),
sustained allegations of aiding and abetting a breach of fiduciary duty against the defendant
accounting firm. There, an accountant who left one firm and joined the defendant firm breached
his fiduciary duty to the first firm by taking a client with him. The Court held that because the
defendant knew of this duty and “nevertheless participated with [the accountant] in conduct
designed to breach that fiduciary duty,” the complaint adequately alleged aiding and abetting.
Id. at 944. The same is true here, where Fuji exploited the Director Defendants’ conflicts by
allowing Jacobson and the other Xerox directors to entrench themselves in a one-sided, value-
193destructive, and disastrous deal for Xerox’s shareholders.
IV. FUJI WAS PROPERLY SERVED WITH THE SUMMONS AND COMPLAINT
Fuji does not and cannot dispute that Plaintiffs have complied with the requirements of
BCL § 307, including by serving copies of the operative summons and complaint on the New
193 Fuji’s authorities are inapposite. Fuji cites Kolbeckv. LIT Am. Inc., 939 F. Supp. 240 (S.D.N.Y. 1996), where the court found there were insufficient allegations of knowledge of actual fraud to implicate aiding and abetting breach of fiduciary duties. Id. at 245-48. In Kolbeck, as opposed to the instant case, the underlying primary violation was for fraud, a more difficult standard to meet, and the aiding and abetting allegations did not plausibly allege knowledge of the fraud. Id. Here the knowledge requirement is satisfied as it is clear that Fuji was well aware of the Director Defendants’ concerns about the Icahn proxy contest. Ferring B. V. v. Allergan, Inc., 4 F. Supp. 3d 612 (S.D.N.Y. 2014), which characterized the pleadings as “threadbare, speculative allegations” that were not unusual in the defendants’ business and there were no affirmative acts of substantial assistance (id. at 624), is also irrelevant. Plaintiffs here detail affirmative acts by Fuji to exploit Jacobson’s exposure to being replaced by the Board and the other directors’ vulnerability to the proxy contest to reach an unreasonable deal for the Xerox shareholders.
39
York Secretary of State, sending the summons and complaint to Fuji by registered mail, and
194timely filing appropriate proof of service and compliance with § 307 with this Court.
Contrary to Fuji’s argument, specific jurisdiction over a defendant under New York’s
long-arm statute is sufficient to support service under § 307. See, e.g., Lewis v. Madej, 2015 WL
6442255, at *9 (S.D.N.Y. Oct. 23, 2015); Halas v. Dick’s Sporting Goods, 105 A.D.3d 1411,
1413-14 (4th Dep’t 2013); Wright v. 299 Union Ave. Corp., 288 A.D.2d 382 (2d Dep’t 2001),
On March 22, 2018, Plaintiffs mailed the operative summons and complaint in this matter
directly to Fuji in Japan pursuant to Section 312-a of the CPLR and Article 10(a) of the
Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or
Commercial Matters (the “Hague Convention”), 20 U.S.T. 361, T.I.A.S. No. 6638, which
provides that if “the State of destination does not object, the present Convention shall not
interfere with ... the freedom to send judicial documents, by postal channels, directly to persons
abroad.” Here, as Fuji concedes, Japan “has not declared that it objects to service through postal
chaimels. Lemme v. Wine of Japan Import, Inc., 631 F. Supp. 456, 463-64 (E.D.N.Y. 1986)
(citation omitted). Consequently, it is “proper” and consistent with Article 10 to effectuate
service in Japan via registered mail. Id. at 464 & n.9. Courts recognize that service by mail to a
Japanese corporation is effective. See, e.g, Rissew v. Yamaha Motor Co., 129 A.D.2d 94, 98,
(4th Dep’t 1987). Fuji’s suggestion that service is somehow ineffective because it has
obstinately refused to return an acknowledgement of service under of the CPLR 312-a elevates
form over substance.
Fuji was also effectively served pursuant to the Share Subscription Agreement (“SSA”),
which provides that process in any action arising out of the agreement is effective if it is mailed
194 See Corrected Affidavit of Service of Summons and Complaint on Fujifilm Holdings Corp.
40
to Fuji and its counsel and may be enforced by Plaintiffs under the “elosely related” doctrine.
See SSA §§ 8.07 & 8.03. See FreefordLtd. v. Pendleton, 53 A.D.3d 32, 40 (1st Dep’t 2008) (a
forum selection clause may be enforced by a non-signatory to an agreement where, as here, the
non-signatory is “closely related” to a signatory of the agreement and its enforcement of the
clause is foreseeable by the party to be bound). Fuji offers no principled basis for its suggestion
that the “closely related” doctrine should not apply to a elause governing service of process.
V. SHAREHOLDERS WILL BE IRREPARABLY HARMED ABSENT INJUNCTIVE RELIEF
'Given the great difficulty, and perhaps practical impossibility of returning a merged
eorporation to its original constituent corporations, a preliminary injunction is the conventional
remedy when a shareholder establishes that a proposed merger is likely to be found to be in
violation of the law or of the board’s fiduciary obligations.” Phillips v. Instuform of N. Am., Inc.,
1987 WL16285, at *11 (Del. Ch. Aug. 27, 1987).
By reason of the Director Defendants’ breaehes of their fiduciary duty and the failures by
Xerox to fulfill its diselosure obligations, the Transaction should be enjoined so that shareholders
can be fully informed as to the relevant facts and so as to enable Xerox to solicit, receive and
evaluate alternative offers.
At a minimum, any shareholder vote on the Transaction should be postponed until after
the annual meeting and vote on new directors takes place. To be clear, each of the breaches of
fiduciary duty that occurred here happened because of the Defendants’ desire to front-run and
ultimately thwart a competing slate of directors at the upeoming annual meeting, which must
occur under New York law by June 22, 2018. The directors specifically discussed (among
themselves and with Fuji) how they stood the best chance of success by holding the vote on the
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195Transaction before, or at the same time, as the Annual Meeting.
All the while, Xerox direetors are aetively misleading shareholders about the manner in
which this Transaction came to he and the Company’s ability to pursue strategic alternatives that
the Board chose to ignore. As a result, shareholders will feel compelled to vote for the
Transaction because they believe there is no alternative. Onee that oeeurs and Fuji owns 50.1%
of Xerox, the entrenehment scheme will have suceeeded, and it will be virtually impossible for
eurrent Xerox shareholders to remove direetors from the Board. Indeed, even the five legaey
Xerox directors will have self-perpetuating seats on the Board for the next five years. In such
circumstances, the Court has the power to postpone the vote on the Transaction and direct the
armual meeting to go forward first. See In re Del Monte Foods Co. S’holders Litig., 25 A.3d
813, 818-19 (Del. Ch. 2011) (postponing vote on merger to restore “the stockholders’ unique
opportunity to reeeive a topping bid free of fiduciary misconduct”). “[WJhere directors, bent on
entrenehment, allegedly use their powers to restriet the ability of shareholders to replace them.
eourts have the power to intervene. Danaher Corp. v. Chicago Pneumatic Tool Co., 1986 WL
7001, at *13 (S.D.N.Y. June 18, 1986). Thus, “when a board of direetors has improperly
postponed or manipulated the timing of the shareholders annual meeting, eourts have the
authority to compel the board to promptly hold such a meeting.” Id.; see Schnell v. Chris-Craft
Indus., Inc., 285 A.2d 430, 432-34, 439 (Del. Ch. 1971) (enjoining management aetion where
management has attempted to utilize the eorporate machinery and the Delaware law for the
purpose of perpetuating itself in offiee and obstrueting the legitimate efforts of dissident
stockholders in the exercise of their rights to undertake a proxy contest against management).
If the Court orders that the aimual meeting oecur first and, resultantly, a slate of new
195 Ex. 98, Jacobson Dep. at 409-12; Ex. 97, Keegan Dep. at 338-41; Ex. 101, XEROX^FX-00066925
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directors is elected before the vote on the Transaction, that would enable new directors to re
evaluate the situation and the Company’s alternatives. Not motivated to do a deal with Fuji just
to save their jobs, like Jacobson and the old guard directors were, the new directors would be
free to act in the best interests of Xerox’s shareholders. They might consider termination of the
Technology Agreement and other agreements with Fuji or, at a minimum, threatening the same
to leverage better terms with Fuji. They might consider entertaining bids from other suitors.
They might consider renegotiation of the terms of the Transaction. The point is simple: before
the Transaction becomes final, shareholders should have the chance to elect directors free from
conflict who might take Xerox in a different, more advantageous direction.
Once the Transaction is consummated, however. Xerox and its shareholders will
irrevocably lose the opportunity “to receive a superior control premium,” QVC NetM>ork, Inc. v.
Paramount Comma’ns Inc., 635 A.2d 1245, 1273 n.50 (Del. Ch. 1993), affd, 637 A.2d 828 (Del.
1993), and will never know how much more they could have received for the shares through a
fair and even-handed sales process. Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051,
1151 (Del. Ch. 1987) (“to permit a deficient offer to go forward might forever deprive the
tendering shareholders of their right to be treated fairly” and “[i]n that event the harm could not
easily be undone”). Indeed, Fuji has been steadfast in its desire to ultimately acquire all of
196Xerox and clear in its position that it would not like to see Xerox sold to a competitor.
Moreover, the shareholders will be irreparably harmed if either the vote on the
Transaction or the Annual Meeting proceeds before the full truth of Defendants’ conduct over
the last thirteen months comes to light. See Joseph v. Shell Oil Co., 482 A.2d 335, 344 (Del. Ch.
1984) (“To permit ... stockholders ... to tender their shares without the omissions of the
196 Ex. 3 at XEROX_FX-00146134 (Jacobson notes from a September 12, 2017 meeting with Kawamura indicating Fuji was “not ready to move forward ... [, that the] stock price is a concern ... [and that Fuji was] continuing to study how to acquire 100% of XRX which FF believes is the best option”)
43
defendants being cured might forever deny to those tendering stockholders their right to be
treated fairly. This would constitute such harm as could not easily be unscrambled and is
therefore irreparable.”). Shareholders voting on either the election of directors or the
Transaction should receive full disclosure regarding Jacobson’s suitability to lead the Company
(regardless of whether they approve this Transaction), and the manner in which he and the other
directors were willing to sacrifice shareholder value in the face of a proxy contest.
Absent injunctive relief that will countermand Defendants’ efforts to coerce stockholders
into approving this Transaction, shareholders will suffer irreparable harm. The narrow injunctive
relief sought here—i.e., ensuring the annual meeting vote occurs before the vote on the
Transaction and eliminating some of the preclusive deal protections like the no-shop provision
and termination fee—is the most tailored and reasonable solution to ensure that the stockholder
franchise here is meaningful.
VI. THE BALANCE OF THE EQUITIES FAVORS A PRELIMINARY INJUNCTION
As discussed above, in the absence of injunctive relief. Xerox shareholders will be
deprived of the benefits of a transaction negotiated in compliance with the Board’s fiduciary
duties and the right to make a fully-informed vote. On the other hand. Defendants will suffer no
hardship from a delay in the vote on the Transaction. See State of Wisconsin Inv. Bd. v. Bartlett,
2000 WL 193115, at *3 (Del. Ch. Feb. 9, 2000) (hardship caused by delaying vote on a merger
transaction is ‘We minimis when compared to concern over the possibility that shareholders may
have voted on the extinction of their corporation with less than all the material information”).
197After all, the Annual Meeting must occur, under New York law by June 22, 2018,
while there is ample time to hold the Special Meeting on the Transaction before the outside date
197 See BCL § 603 (requiring shareholder meetings for the election of directors within 13 months of the prior meeting to elect directors)
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198 There is no guarantee that the Specialunder the governing contracts—October 31, 2018.
Meeting can occur before the deadline to hold the Annual Meeting. Indeed, as of the date of this
199filing. Xerox has still not received audited financial statements for Fuji Xerox. And it is likely
that these audited financial statements will not match the unaudited financial statements upon
which the parties negotiated the Transaction. As Keegan testified. Xerox is already aware that
200 Without audited financial statements, thethere will be discrepancies in the numbers.
Company cannot file a preliminary proxy. Even then, there is no guarantee that the SEC will
approve a final proxy by the deadline to hold the Annual Meeting. Meanwhile, citing attorney-
client privilege, Defendants have prevented discovery into the Board’s current discussions on the
timing of the Transaction vote or Special Meeting, including whether the Board is currently
201contemplating delaying the Annual Meeting past the deadline provided under New York law.
Defendants rushed the negotiation of this Transaction to thwart an inevitable proxy
[I]n considering the balance of equities betweencontest by Xerox’s largest shareholder.
plaintiffs and defendants, it is relevant to note that any wounds to defendants are entirely self-
inflicted.” La. Mun. Police Emps. ’ Ret. Sys. v. Crawford, 2007 WL 625006, at *1 (Del. Ch. Feb.
13, 2007). Here, it is time for the director Defendants to account to their stockholders before
these stockholders vote on this hastily negotiated Transaction.
CONCLUSION
It is respectfully requested that the Court issue a preliminary injunction.
198 Ex. 83, Share Subscription Agreement § 7.01(b)(i) Ex. 97, Keegan Dep. at 329 Ex. 97, Keegan Dep. at 332-34 Ex. 97, Keegan Dep. at 341-44
199200
201
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Dated: April 10, 2018 Respectfully submitted,
GRANT & EISENHOFER P.A.
By /s/ James J. Sabella Jay W. Eisenhofer James J. Sabella Michael Bell 485 Lexington Avenue New York, NY 10017 646-722-8500
andMichael Barry 123 Justison Street Wilmington, DE 19801 302-622-7000
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP
/s/ Mark LebovitchByMark Lebovitch Abe Alexander Edward Timlin John Vielandi1251 Avenue of the Americas New York, NY 10020 212-554-1400
KESSLER TOPAZ MELTZER & CHECK,LLP
By /s/ Justin O. RelifordEric ZagerJustin O. RelifordJ Daniel AlbertMichael Rullo280 King of Prussia RoadRadnor, PA 19087610-667-7706
Co-Lead Counsel for Class Plaintiffs
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STULL, STULL & BRODY
/s/ Mark LevineByMark Levine Aaron L. Brody 6 East 45“' Street New York, NY 10017 212-687-7230
Additional Counsel for Class Plaintijfs
47