Deason’s call for Xerox to waive advance notice bylaw has precedent – sources

• HealthCor/Allscripts and Land & Building/Macerich worth reviewing
• Lawsuits targeting breach of fiduciary duties have led to settlements

Under certain circumstances, directors can be in breach of their fiduciary duties if they refuse to waive an advance notification bylaw, according to Michael Swartz, head of the shareholder activism litigation practice at Schulte Roth & Zabel.

When a material change in circumstances, which foreseably generates controversy and shareholder opposition, occurs following the close of a nomination window, courts have concluded that boards have a duty to waive advance notification bylaws to provide shareholders a fair opportunity to nominate an opposition slate, he noted.

On 26 February, Darwin Deason, the third-largest shareholder in Xerox [NYSE:XRX], filed an action to immediately enjoin the Connecticut-based company from enforcing its advance notice bylaw deadline for the nomination of directors to be elected at the upcoming 2018 annual shareholder meeting.

Per the bylaw, the window for board nominations closed on 11 December. Deason wants to reopen that window and nominate a slate of competing directors for election at the meeting.

In his complaint, Deason said Xerox made significant decisions six weeks after the end of the nomination window that were highly material to shareholders. In that time, Xerox approved a deal with Asian joint venture partner FujiFilm [TSE:4901] that will see the Japanese firm own 50.1% of the company; disclosed that the Asian joint venture with FujiFilm carried a “crown-jewel” lock-up right that limited Xerox’s ability to pursue strategic alternative besides the FujiFilm deal; and agreed to make this lock-up right permanent going forward.

Precedent cases

Investor HealthCor Management’s shareholder lawsuit against Allscripts Healthcare Solutions [NASDAQ: MDRX] in 2012 is a precedent case of an advance notification bylaw waiver.

According to the lawsuit, Allscripts disclosed in its 1Q12 earnings release that a leadership dispute led to the resignation of four of the company’s nine board members, including its chairman. Allscripts’ shares decreased more than 40% when the market opened the following day.

HealthCor said this material change could not have been known before the January deadline to nominated board members. Furthermore, the proxy statement showed that the remaining board members rushed to fill two of the four board seats without a thorough search while, because of the nomination deadline, shareholders were barred from nominating their own candidates.

HealthCor asked for “relief of these breaches of duty, including enjoining the board from enforcing” the advance notice bylaw requirement, forcing the company to reopen the director nomination window.

While reaching a settlement, the Delaware Chancery court said in chambers that it supported the HealthCor position that there was a breach of fiduciary responsibility by Allscripts. The company reached a settlement with HealthCor that expanded the board and nominated three new candidates to be elected as directors.

In another case, Land & Buildings Investment Management filed suit against Macerich [NYSE: MAC] in April 2015 in order to nominate and elect four of its own director nominees at an upcoming annual general meeting.

Land & Buildings said that this particular annual meeting was especially important because Simon Property Group [NYSE: SPG] had looked to acquire Macerich at a substantial premium to where its shares were then trading. Macerich chose not to engage in discussions and adopted defensive measures to fend off Simon.

While Land & Buildings nominated its directors before the deadline, Macerich rejected the nomination because it said that the activist was not a stockholder of record before the record date for the annual meeting. Land & Buildings argued that the bylaws contained no such record date requirement.

While questioning whether the record date requirement actually existed and whether it was enforceable, Land & Buildings highlighted that it believed that directors have a “fiduciary duty to waive application of advanced notice bylaws where changed circumstances render their application inequitable.”

Land & Buildings, along with Orange Capital, shortly entered a standstill agreement with Macerich, followed by a settlement that saw the company agree to de-stagger and make new appointments to its board. Macerich later in the year announced a large share buyback.

Annual meeting precedes FujiFilm vote

The Deason lawsuit against Xerox is important because the annual meeting comes before the shareholder vote on the FujiFilm transaction, said a source familiar with the activist. The source said that if the advance notice bylaw is not waived, the company will succeed in completing the FujiFilm deal.

A board refresh would allow shareholders to know that, if they vote against the deal, there will be a rigorous market check, that Xerox can look at how it can take back its Asian business, and that the option is open to be more aggressive in dealing with FujiFilm in the wake of its accounting scandal, the consequences of which are “still raining down on Xerox,” the source said. The next shareholder meeting is “about all these issues, it’s not just the deal,” the source added.

The key question for a court is whether there has been a sufficiently significant material change since the nomination window closed, and whether the board delayed the disclosure of these material facts until after the deadline, the source said.

The source pointed out that the issue of the FujiFilm relationship had been raised on 22 May 2017, Deason sent a letter raising his concerns about a lack of disclosures around the contractual arrangement between FujiFilm and Xerox.

Xerox has yet to announce the date of its 2018 AGM. It held last year’s meeting on 23 May. Xerox announced that it is seeking to close the FujiFilm deal by the end of this year.

A spokesperson for Xerox referred to a 7 March press release where it restated significant benefits of the Fuji-Xerox combination.

by Ed Mullane in New York and Shia Kapos in Chicago