First Department Reverses Against Ending Fuji-Xerox Merger

On October 16, 2018, the Appellate Division, First Department lifted several injunctions granted by the Commercial Division that had restrained a proposed merger deal between Xerox and Fujifilm (“Fuji”), and dismissed the Xerox shareholders’ actions against Fuji.[1]

Background

On April 27, 2018, Justice Barry Ostrager of the New York Commercial Division enjoined a proposed Xerox and Fuji transaction that would have given Fuji a 50.1% controlling interest in Xerox (the “Xerox-Fuji Transaction”).[2] The Court held that the shareholder plaintiffs had demonstrated a likelihood of success on the merits on their breach of fiduciary duty claim because Xerox’s then-CEO Jeff Jacobson was conflicted.[3] Justice Ostrager’s holding that the Xerox Board breached its fiduciary duty was also based in part on a clause in the parties’ agreement that secured future board positions for five of the Xerox Board members.[4]  Because the Court concluded that Jacobson and Xerox Board members were conflicted, it concluded that the business judgment rule did not apply to the Xerox Board’s decision to enter into the Xerox-Fuji Transaction.[5] The proposed transaction was instead reviewed under a less-exacting “entire fairness” standard, which reviews the transaction for “fair dealing” and “fair price.”[6]  Justice Ostrager also held that plaintiffs were likely to succeed on their claims against Fuji that it had aided and abetted the Xerox Defendants’ fiduciary duty breaches.[7] The Commercial Division further determined that Fuji’s representatives were aware of Jacobson’s conflict, and used this to further the proposed Xerox-Fuji Transaction.[8]

On May 13, 2018, Xerox and its Board entered into a settlement with shareholder Deason, and a memorandum of understanding with the remaining shareholder class plaintiffs.  Thereafter, Xerox and class plaintiffs asked Justice Ostrager to stay the litigation and vacate the injunction only against the Xerox Defendants.[9]  Fuji moved to dissolve the preliminary injunctions against it.[10] The Court denied all parties’ requests to lift the preliminary injunctions on the grounds that the preliminary injunction enjoined only the specific transaction at issue.[11] Fuji appealed to the Appellate Division.

The First Department’s Opinion

On appeal, the First Department held that the business judgment rule applied to the Xerox Board’s decision to approve the Xerox-Fuji Transaction.[12] Under this standard, Plaintiffs were unable to show a likelihood of success on the merits on their fiduciary duty claims.  The First Department found that an agreement that five members of the current Xerox Board would serve on the board of the new Fuji-Xerox company was not “a material benefit such that it was a disabling interest.”[13] The Court further concluded that then-CEO Jacobson’s conflict had been acknowledged by the Xerox Board, that he did not mislead or misinform the Xerox Board, and that the Xerox Board took steps to ensure the viability of the Xerox-Fuji Transaction by engaging outside advisors prior to putting the transaction to a vote.[14] For these reasons, the Court determined that the business judgment rule applied and vacated the preliminary injunction.[15] The Court also dismissed the plaintiffs’ aiding and abetting a fiduciary duty breach claim against Fuji, holding that plaintiffs had failed to plead the claim with particularity.[16]

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Since the time of Justice Ostrager’s injunctions, a minority shareholder faction took control of the Xerox Board.  Thus, regardless of the First Department’s reversal, it remains to be seen whether and if so, how the Fuji transaction will proceed or if Xerox will pursue alternative deals.