There has been a new development in the Xerox and Fujifilm (“Fuji”) litigation:  Justice Ostrager of the New York Commercial Division declined to (i) certify the putative class, (ii) approve the proposed class settlement, and (iii) award the class attorney’s fees pursuant to a memorandum of understanding that was reached by defendant Xerox and putative class plaintiffs.  The material terms of this agreement—changes to the Xerox Board of Directors—already took effect prior to the Justice Ostrager ruling.

We covered Justice Ostrager’s decision granting shareholder plaintiffs a preliminary injunction to enjoin the proposed Xerox-Fuji merger and the subsequent appeal to the First Department overturning that decision.[1]

While the appeal was pending, on July 13, 2018, a newly constituted Xerox Board approved a settlement agreement between Xerox shareholders and Xerox.  At a hearing in July 2018, Justice Ostrager informed the parties that the Xerox Board’s approval of the class settlement could not take effect until the Court certifies the class, appoints class counsel, and reviews the proposed agreements. [2]

Justice Ostrager’s Decision Denying Putative Class Plaintiffs’ Standing and the Terms of the Proposed Memorandum of Understanding

On September 12, 2019, Justice Ostrager issued a ruling that declined to certify the proposed class, approve the proposed settlement, and award of attorney’s fees proposed class plaintiffs’ counsel.[3]  However, the material terms of the settlement, including the resignation of several Xerox board members, had already taken effect on May 13, 2018, months before the settlement was before the Court for approval.[4]

First, the Court determined that the named plaintiff-shareholders could not adequately represent the class.  Justice Ostrager found that “the purported class representatives bound a class that had not been certified to major corporate actions,” and that the memorandum of understanding entered into by the proposed class plaintiffs failed to adequately protect the interest of the class since that agreement shielded the Xerox directors from liability in the subsequently filed Fuji action.[5]

Second, the Court declined to approve the terms of the non-monetary class settlement.  The Court applied the First Department’s reasoning in Gordon v. Verizon Communications, Inc., 148 A.D.3d 146 (2017),[6] to evaluate whether the proposed nonmonetary settlement “is in the best interests of the putative class as a whole, and whether the settlement is in the best interest of the corporation.[7]  The Court determined that the putative class members receive no financial benefit, and “are being asked to ‘give’ broad releases of any derivative claims they may have.”[8]  The Court also found it problematic that the putative class plaintiffs entered into the memorandum of understanding that provided a release for the prior slate of Xerox directors despite the Court’s holding that the directors breached fiduciary duties to its shareholders.[9] 

Third, the Court declined to award attorney’s fees.  The Court explained that the putative class plaintiffs’ counsel had no authority to settle on behalf of the class.[10] The Court explained that, instead of advocating on behalf of the class, “the net result of the actions of the purported class representatives and purported class counsel was to transfer control of a public corporation to [shareholders] Mr. Deason and Icahn via a private agreement that offered no tangible benefit to the interests of the class.”[11] 

It remains to be seen what effect Justice Ostrager’s decision declining to approve the class plaintiffs’ settlement agreements will have on the new composition of the Xerox Board of Directors and the litigation.