(Reuters) - Fujifilm filed a $1 billion complaint in Manhattan federal court Monday, accusing Xerox of breaching a $6.1 billion agreement that would have given the Japanese company control of its longtime joint venture partner. Fujifilm claims that when the Xerox board voted to terminate the transaction on May 13, it surrendered “to the whims of activist investors Carl Icahn and Darwin Deason,” who own a combined 15 percent of Xerox’s shares and now control the Xerox board. The Japanese company wants Xerox to pay at least $1 billion in damages in addition to its $183 million breakup fee for the failed deal.
Icahn and Deason are not named as defendants – but that didn’t stop Fujifilm from accusing them of violating securities regulations. The suit contends Icahn and Deason have been acting in concert “for some unknown period of time” to block Fujifilm’s takeover. Icahn provided financing for Deason’s shockingly successful litigation in April to enjoin the deal, Fujifilm alleged, and the two activist investors have since engaged in a tag-team campaign to win control of the Xerox board and kill the Fujifilm acquisition definitively. During at least some of that time, Fujifilm claimed, Icahn and Deason failed to comply with the Securities and Exchange Commission’s Regulation 13D, which mandates public disclosure of groups that control more than 5 percent of a company’s shares.
It’s a curious bit of strategy to trot out Regulation 13D against Icahn and Deason. The regulation requiring group disclosure is cited from time to time in M&A litigation, including a 2008 case in which Manhattan federal judge Lewis Kaplan concluded that hedge funds were manipulating swap agreements to hide their stake in CSX Corporation in the midst of a proxy fight. Group disclosure requirements got a lot of attention a few years ago when Valeant and Pershing Square teamed up on a bid for the pharma company Allergan. Just last month, U.S. District Judge Michael Anello of San Diego found that the deposed CEO of the biotech company Arcatus failed to disclose his cooperation with other investors as he waged a proxy war to regain control of the board.
But in most cases, the remedy for violations of Regulation 13D is just an updated disclosure to reflect cooperation among a group of investors. That’s it. In the 2008 CSX case, for example, the company wanted to enjoin the hedge funds from voting their shares based on their failure to disclose the extent of their holdings. Judge Kaplan denied the injunction, in a decision the 2nd U.S. Circuit Court of Appeals later upheld.
In other words, if Fujifilm were right about Icahn and Deason violating SEC rules, it might be able to obtain an injunction compelling disclosure. But Fujifilm isn’t even seeking such a ruling, nor anything else from Deason and Icahn. As I mentioned, they’re not defendants in the suit.
So why raise the disclosure accusations against the two investors whose allies now control Xerox? I emailed Fujifilm counsel Andrew Stern of Sidley, who said he couldn’t comment without his client’s authorization. (Sidley is a new law firm for Fujifilm, which was represented during the Deason injunction litigation in New York State Supreme Court by Morrison & Foerster.) Deason’s counsel at King & Spalding didn’t provide a statement on Fujifilm’s SEC disclosure allegations.
But Icahn Enterprises deputy general counsel Louie Pastor told me Fujifilm’s motive seems to be publicity: “This is a straightforward breach of contract case they’re trying to dress up to attract headlines,” he said. (If so, the plan doesn’t seem to be working very well, since as best I can tell, the headline at the top of this story is the only one about the Fujifilm suit to mention the disclosure accusations.)
More importantly, Pastor said Fujifilm’s allegations about Icahn and Deason are “sloppy” and “filled with basic factual errors that are easily disproven with even a cursory review of the public record.” Icahn Enterprises, for instance, disclosed in a Jan. 22, 2018, filing with the SEC that he and Deason had agreed to act in concert to oppose a prospective deal between Xerox and Fujifilm in the wake of an accounting scandal at the joint venture company Fuji Xerox. On May 15, after the Xerox board agreed in a so-called global settlement with Icahn and Deason to kill the Fuji deal and cede control of the company to directors allied with the activists, Icahn Enterprises filed another disclosure with the SEC, announcing that Icahn and Deason were no longer acting in concert and should not be considered a group for SEC reporting purposes. In light of those filings, I don’t see how Fujifilm can credibly allege disclosure violations during the time period in which Xerox reached a definitive agreement with Fujifilm and then withdrew from that agreement.
The disclosure allegations are, obviously, a tiny piece of the fight between Fujifilm and Xerox, which is being waged not just in Fujifilm’s suit in federal court but in Deason’s case in New York state court, where he obtained the injunction that threw Xerox’s deal into chaos. Deason dismissed his claims against Xerox board members as part of the global settlement in May but kept alive his claims against Fujifilm. As my colleague Jon Stempel reported Monday, Fuji filed counterclaims last week in that case, presaging its own suit against Xerox. I’m sure Xerox will soon enough have plenty to say about why it dumped Fujifilm as a merger partner, whether its explanation comes in state or federal court.
Maybe Fujifilm regards the SEC allegations against Deason and Icahn as leverage, a hint of what it may do if Xerox won’t negotiate over the busted deal. Based on what Icahn’s lawyer told me today, I doubt the ploy will be effective.