(Reuters) - New York State Supreme Court Justice Barry Ostrager of Manhattan is not afraid to stir things up. In April 2018, you may recall, the judge – previously a longtime litigation partner at Simpson Thacher & Bartlett – issued a preliminary injunction to block Xerox from allowing a shareholder vote on a proposed merger with Fuji, holding that the deal was hopelessly tainted by Xerox board members’ conflicts. Justice Ostrager’s decision was effectively a death knell for the Xerox management team that approved the Fuji deal. In a subsequent settlement with activist investor Darwin Deason and a proposed settlement with a class of shareholders, the company replaced four of its directors with new board members proposed by Deason and fellow activist Xerox investor Carl Icahn. Xerox also ditched the Fuji deal.
Much has transpired in the Xerox case since Justice Ostrager’s injunction, as I’ll explain. But last week, the plaintiffs' lawyers who negotiated last year’s shareholder class action settlement with Xerox received their own shock treatment from the judge. Ostrager refused to approve the deal, holding in a scathing opinion that plaintiffs' lawyers from Kessler Topaz Meltzer & Check, Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer had obtained nothing of value for shareholders.
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In the judge’s view, plaintiffs’ lawyers had essentially allowed Deason and Icahn, who owned just 15 percent of Xerox shares, to seize control of the company with no consideration for shareholders – but with a $7.5 million fee deal for themselves. Justice Ostrager said that if he had approved the settlement, Xerox directors would be released from liability for their role in approving the tainted Fuji deal and then walking away from it. That would have been a valuable benefit for board members, considering that Fuji is pursuing a billion-dollar breach of contract claim against the company and a different plaintiffs’ firm has sued Xerox directors in a shareholder derivative action. But shareholders, according to Justice Ostrager, would have gotten nothing in exchange for releasing claims against Xerox directors.
“The net result of the actions of the purported class representatives and purported class counsel was to transfer control of a public corporation to Deason and Icahn via a private agreement that offered no tangible benefit to the interests of the class,” Ostrager wrote. “Since purported class counsel conferred no benefit on the Xerox shareholders, there is no basis for any award of counsel fees.”
Lead plaintiffs’ lawyers on the Xerox deal - Justin Reliford of Kessler Topaz, Mark Lebovitch of Bernstein Litowitz and Daniel Berger of Grant & Eisenhofer – did not provide a statement in response to my emails requesting comment on Justice Ostrager’s opinion. Xerox counsel Jaren Janghorbani of Paul Weiss Rifkind Wharton & Garrison did not respond to my email. Xerox backed the class action settlement.
Reliford and Lebovitch argued at a Sept. 6 hearing before Ostrager that plaintiffs' lawyers in the Xerox case had actually accomplished all that shareholders could have hoped for. They won, along with Deason’s counsel from King & Spalding, an injunction halting a tainted deal. They obtained the quick ouster of four allegedly compromised board members, including the CEO whom Ostrager castigated in his injunction ruling - but also assured a voice for shareholders other than Icahn and Deason by insisting in their proposed settlement that Xerox hold a shareholder vote on directors within 120 days. (The vote actually took place within 90 days and ratified board members backed by Deason and Icahn.) In addition, plaintiffs' lawyers said, their proposed settlement included a concrete benefit: Xerox’s ousted CEO agreed to surrender $21 million of the money he was due in a severance package.
At the Sept. 6 hearing, Reliford and Lebovitch also contested Justice Ostrager’s assertion that they had allowed Deason and Icahn to seize control of the company and had forced the board to bail on the Fuji deal. Their proposed settlement agreement, they said, did not require Xerox to renounce the Fuji merger. And their deal did not give Deason and Icahn majority control of the board. Directors backed by the activists only attained majority control, they said, after a shareholder vote and the resignation of two holdover board members.
Justice Ostrager was obviously unconvinced by those arguments, instead siding with shareholders who asked him to reject the proposed class settlement. Chief among the deal’s opponents was the plaintiffs' firm Levi & Korsinsky, which represents a Xerox shareholder who has sued board members in a derivative case also being litigated before Justice Ostrager.
The interplay between the shareholder class action and the derivative case is complicated but I’ll try to streamline things. Levi & Korsinsky originally filed the derivative suit in May 2018, after Justice Ostrager enjoined Xerox’s deal with Fuji. The suit alleged that Xerox board members breached their duty by entering that deal. Fuji, meanwhile, sued Xerox in federal court in Manhattan in June 2018, alleging that Xerox breached their merger agreement and owed Fuji billion-dollar damages. U.S. District Judge John Koeltl denied Xerox’s motion to dismiss Fuji’s suit at a hearing last February.
Fuji’s lawyers at Sidley Austin also appealed Justice Ostrager’s injunction, which tagged Fuji with aiding and abetting Xerox's likely breach of duty, to the New York State Appellate Division, First Department. In October 2018, the appeals court reversed Justice Ostrager. In a very brief opinion, the First Department held that Xerox board members were shielded by the business judgment rule and that shareholders hadn’t adequately pleaded aiding and abetting by Fuji.
The appellate ruling led to a revised theory in the derivative case, which now alleges that Xerox board members breached their duty by acquiescing to Deason and Icahn, allowing the activists to take control of the company and terminate the Fuji deal. Levi & Korsinsky asserts, among other things, that if Xerox ends up settling or being found liable in Fuji’s breach of contract case, Xerox board members should bear a share of the responsibility.
The proposed class action settlement would have allowed those directors to walk away, Levi & Korskinsy argued in its objection to approval of the deal. And in return, argued Levi's Christopher Kupka at the hearing before Justice Ostrager, class members got nothing more than the company agreed to in its separate settlement with Deason.
In an interview, Kupka and Levi & Korsinsky name partner Eduard Korsinsky said Justice Ostrager clearly understood their point: The now-rejected settlement didn’t benefit shareholders so it didn’t deserve to be approved. “The proof is in the pudding,” Korsinsky said. “The settlement was not approved and nothing is changing.” (Xerox counsel Janghorbani addressed that point at oral argument before Justice Ostrager, contending that it wasn’t fair to punish shareholder lawyers for obtaining relief even before their settlement was approved.)
Assuming that neither Xerox nor plaintiffs’ lawyers in the rejected class action do not appeal Justice Ostrager’s ruling, the decision means Xerox board members are not released from liability so the derivative suit remains alive. Korsinsky and Kupka said the goal is to win compensation for shareholders who received no consideration when Deason and Icahn effectively took control of the company. I asked how they proposed to deliver that premium to Xerox investors. Korsinsky said the case is unique, but shareholders’ direct claims could be resolved with damages or a special dividend. (The suit does not name Deason or Icahn as a defendant; Deason counsel James Woolery of King & Spalding declined to comment.)
“The case is moving on,” he said. “Let’s see where it goes.”
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