By Bloomberg
June 19, 2018

Fujifilm Holdings accused Xerox (xrx) of caving to the whims of Carl Icahn and Darwin Deason in backing out of a $6.1 billion takeover deal.

Fujifilm (fujiy) sued Xerox Monday in Manhattan federal court over the failed takeover, seeking more than $1 billion in damages. Xerox walked away from the deal on May 13.

“This change of heart is undoubtedly due to external pressures,” Fujifilm said in the complaint. “Xerox has recently been subject to the whims of activist investors Carl Icahn and Darwin Deason, who, notwithstanding their minority ownership of Xerox shares, have yanked the Xerox Board in more directions than can be counted.”

Representatives for Icahn and Deason weren’t immediately available for comment.

Xerox said in an emailed statement that it’s “extremely confident” the former board acted correctly in terminating the transaction, “due to, among other things, the continuously expanding unresolved accounting issues at Fuji Xerox,” the companies’ joint venture.

Icahn and fellow billionaire Deason had argued the Fujifilm offer undervalued Xerox. The pair, who collectively held about 13% of Xerox, reached a settlement with the company after months of public fighting over the merits of the Fujifilm transaction.

Under the terms of the settlement, Norwalk, Conn.-based Xerox pulled out of the Fujifilm deal and Keith Cozza, chief executive officer of Icahn Enterprises, became the company’s chairman. John Visentin replaced Jeff Jacobson as Xerox’s CEO.

The newly filed lawsuit and other litigation might drive Xerox bonds into junk territory, Robert Schiffman, Bloomberg Intelligence senior credit analyst, and Mike Campellone, BI credit associate analyst, said in a note Monday.

“If a white-knight strategic buyer doesn’t emerge, non-investment grade rating action risk looms large,” the analysts said. Moody’s rates Xerox’s debt Baa3, the lowest investment-grade rating.

Deason sued Xerox in February in Manhattan state court to block the acquisition, accusing Jacobson of acting without authorization to strike a deal that preserved his job at shareholders’ expense. The lawsuit also claimed that the company’s board breached its fiduciary duties.

A judge issued an injunction in April barring Xerox from holding a shareholder vote on the proposed merger at its annual meeting, now scheduled for July. Yet, Fujifilm hasn’t given up on the deal. In May, the company appealed. Fujifilm, based in Minato-Ku, Japan, has also asked the state court to dissolve the injunction.

The proposed merger, announced in January, would have cemented a longtime relationship between the two firms, which have operated the joint venture Fuji Xerox Co. for the past 50 years.

The deal would have generated “billions of dollars in synergies,” lawyers for Fujifilm said in Monday’s complaint. The transaction is “value-enhancing for Fujifilm’s shareholders and thus Fujifilm is compelled to take steps to protect its rights.”

The company accused the Xerox board of breaching terms of its January agreement “thanks in no small part to Icahn and Deason’s machinations.”

Icahn initially favored the merger, urging Xerox to sell to Fujifilm after it expressed interest in 2017, Fujifilm said in its complaint. As details of the possible merger took shape, Fujifilm indicated that it would seek an “outright buyout” of Xerox, in part to push out activist investors.

Following the proposal put forward in January, Icahn and Deason came out against the deal. In May, they said they would consider any cash bid for the company of at least $40 per share, or more than $10 billion.

The May 13 agreement under which the deal was ended was basically “a corporate takeover” by the two investors. It “sought to ensure that the Xerox Board is comprised of many individuals with longstanding connections to Icahn and Deason for at least the next year, effectively granting Icahn and Deason control of the Xerox board for no consideration whatsoever,” Fujifilm said.

Fujifilm seeks damages for breach of contract, breach of implied covenant of good faith and fair dealing, and a finding that Fujifilm is entitled to a $183 million termination fee.

The case is Fujifilm Holdings v. Xerox, 18-cv-5458, U.S. District Court, Southern District of New York (Manhattan).

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