Arthur R. Lehman, L.L.C.

Court: New York execs likely breached their fiduciary duties

New York corporate officers are supposed to act in the best interests of the corporation they lead. They have a fiduciary duty to their corporation and the corporation's shareholders. If a court finds that a corporate officer is not acting their corporation's best interest, the court can take steps including stopping a merger from taking place. A recent case here in Manhattan illustrates the duties officers have and what can happen if the duties are ignored.

On April 27, a judge blocked a shareholder vote on a proposed merger between Xerox Corp. and Fujifilm after finding that a conflict of interest existed that made it likely that Xerox's CEO and directors had committed a breach of fiduciary duty to Xerox's shareholders. The corporation was ordered to permit an alternative slate of directors to be nominated at a meeting next month.

The court found that Xerox's chief executive officer was under pressure from activist shareholders and was in danger of losing his job. The CEO then reportedly got in touch with Fuji about an outstanding merger discussion with Fuji. According to the court, Fuji proposed a merger that would permit the CEO and five Xerox directors to keep their jobs. In exchange, Fuji would be allowed to minimize its cash outlay in the transaction to the detriment of Xerox and its shareholders. In other words, the court said that the executives saved their own jobs by agreeing to a deal that hurt the corporation, and this conflict between the executive's own interests and the interests of the corporation and its shareholders compelled to court to take this action.

Concerned shareholders have an interest in preventing conflicted executives from harming the company's best interest. Similarly, corporations and their officers want to prevent a spurious shareholder dispute from stopping an advantageous business deal. Our legal system is designed to get to the bottom of this kind of situation and prevent harm to innocent parties.

Source: Reuters, "New York judge halts Xerox deal. Would Delaware have done the same?," Alison Frankel, April 30, 2018

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