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Fujifilm takes its battle for Xerox to US court

New lawsuit seeks $1bn but is really meant to get Carl Icahn to back off

Fujifilm Chairman Shigetaka Komori's pursuit of Xerox has taken a legal detour that experts say is meant to dodge activist investor Carl Icahn, a Xerox shareholder. (Getty Images provided Icahn photo.)

TOKYO -- Fujifilm Holdings has raised the stakes in its bid to get Xerox to merge with Fuji Xerox.

The Japanese company on Monday filed a lawsuit with the federal court for the Southern District of New York, seeking over $1 billion in damages from Xerox for unilaterally cancelling a merger agreement that had been reached in January.

By applying legal pressure on Xerox, Fujifilm is trying to get the deal back on track and extract better conditions for a merger.

In mid-May, Xerox informed Fujifilm that it was canceling the agreement. Fujifilm claims in a complaint filed with the U.S. court that there is no doubt Xerox board members changed their minds because of outside pressure.

The 36-page, A4-size complaint details the circumstances of the negotiations between Fujifilm and Xerox.

In it, Fujifilm lashes out at Carl Icahn, a vocal Xerox shareholder, and at the U.S. company's current management team for scrapping the deal.

After the cancellation last month, Icahn began clamoring for an acquisition price of $40 per Xerox share. Fujifilm Chairman Shigetaka Komori has dismissed the price as "too high."

Fujifilm is now waiting for Xerox's new management team to resubmit formal conditions for a merger.

The company's executives say they feel hemmed in. "It is impossible for Fujifilm to present a concession plan for the sake of negotiations," one executive said.

There is a possibility that the U.S. printer and copier maker will not resubmit formal conditions for an acquisition. The suit Fujifilm filed this week is an attempt to persuade it to do so.

Fujifilm makes a number of damages demands in the complaint.

According to the suit, the headline amount reflects the value Fujifilm shareholders would be able to obtain from a completed transaction. Fujifilm said although the actual amount of damages will be determined at trial, it estimates the figure to be in excess of $1 billion. Fujifilm had estimated the integration effect of a merger at an annual $1.25 billion.

Fujifilm is also demanding an unspecified amount of punitive damages from Xerox for scrapping the plan in a way Fujifilm says violates the agreement between the two companies.

In addition, Fujifilm is demanding Xerox pay $183 million for failing to fulfill its obligation to urge its shareholders to accept the deal.

Xerox's former management team, which agreed to the acquisition in January, explained the merits of the deal to institutional investors and other parties in accordance with obligations spelled out in the merger contract. But Xerox's current management team moved to scrap the deal rather than urge shareholders to accept it, according to the complaint.

Further, the complaint demands Xerox compensate Fujifilm for legal costs.

The complaint also says Xerox does not appear to have received any superior bids since the agreement was announced.

Fujifilm's not-so-ulterior motive is to put back on track the planned merger. This will require compromising with Xerox's new management, or winning a reversal in an earlier legal dispute. In April, Fujifilm filed an appeal when the New York State Supreme Court temporarily blocked the planned merger.

Xerox, which heavily relies on product supplies from the joint venture, is unlikely to survive on its own in a shrinking global office equipment market.

To survive, suppliers like Xerox and Fuji Xerox will have to streamline their operations, find new efficiencies and build economies of scale. From Fujifilm's vantage point, a merger between Xerox and the partners' joint venture will offer exactly these solutions. In fact, the holding company cannot picture growth in the office equipment market without the anticipated merger.

Xerox on Monday said it is "extremely confident that the former Board correctly exercised its clear contractual right to validly terminate the transaction agreements." Previously, it also said Fujifilm failed to deliver the joint venture's audited financial statements in a timely manner.

Fujifilm disputes this. Either way, the long-time partners do not seem to be narrowing their differences.

Deliberations in Fujifilm's appeal are expected to begin in September.

Lawyers with experience in international mergers and acquisitions agree that Fujifilm's lawsuit is intended to get negotiations rolling again.

Lawyer Shintaro Takai said the litigation is "not aimed at earning hefty compensation but at advancing the deadlocked negotiations in Fujifilm's favor."

Another lawyer in Japan said "it is rare that punitive damages and other compensation is awarded to a plaintiff in breach of M&A contract cases."

The lawyer assumes that Fujifilm's true intention is "to win some kind of concessions from activist investors, not monetary compensation."

In cross-border M&As, taking legal action to push negotiations in one's favor is relatively common.

Lawyer Ken Kiyohara said Fujifilm had "no choice but to go to court due to Xerox's formidable activist investors."

The suit, he added, "could serve as a chance to break a deadlock and resume talks between the companies."

Fujifilm is scheduled to hold its annual shareholders meeting on June 28. Because the company has said the merger would boost shareholder value, Takai noted, "inaction would not make any sense to its shareholders since the M&A contract contains penalty payment provisions."

There is also the possibility of Fujifilm and Xerox going behind the scenes to work out matters.

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