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shareholders will receive a total of $18.60 per share in cash plus 4.935 Xerox stock for each ACS
share they own.
3. As described below, both the value to ACS shareholders contemplated in the
Merger and the process by which Defendants propose to consummate the Merger are
fundamentally unfair to Plaintiffs and the other public shareholders of the Company.
Defendants conduct constitutes a breach of the Individual Defendants fiduciary duties owed to
ACSs public shareholders, and a violation of applicable legal standards governing Defendants
conduct.
4. For these reasons and as set forth in detail herein, Plaintiff seeks to enjoin
Defendants from approving the Merger or, in the event the Merger is consummated, recover
damages resulting from Defendants violations of their fiduciary duties of loyalty, good faith,
due care, and full and fair disclosure.
PARTIES
5. Plaintiff currently holds shares of common stock of ACS and has held such shares
since prior to the wrongs complained of herein.
6. ACS, a Delaware corporation with its principal place of business at 2828 North
Haskell Avenue, Dallas, Texas 75204, is a provider of business process outsourcing and
information technology services to commercial and government clients. For the fiscal year
ending June 30, 2009, total revenues rose to $6.5 billion. The Companys stock is traded on the
New York Stock Exchange (NYSE) under the symbol ACS.
7. Defendant Darwin Deason (Deason), one of the Companys founders, has
served as Chairman of the Companys Board of Directors (the Board) since its formation in
1988. Deason also served as the Companys Chief Executive Officer (CEO) from 1988 until
February 1999. Deason controls 43.6% of the total voting power of the Company as a result of
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his ownership of 2.99% of the total shares of Class A Common stock and 100% of Class B
Common stock. In connection with the Merger, Deason entered into a Voting Agreement, dated
as of September 27, 2009 (the Voting Agreement), with Xerox, pursuant to which, among
other things, he agreed to vote his shares in favor of the adoption of the Merger and against any
takeover bid by a third party.
8. Defendant Lynn Blodgett (Blodgett) has served as a Director of ACS since
September 2005. Blodgett also serves as the Companys President and CEO. Prior to assuming
his current responsibilities, he served as the Companys Executive Vice President and Chief
Operating Officer. Blodgett joined ACS upon the 1996 acquisition of Unibase, a company he
co-founded with his brother.
9. Defendant Kurt R. Krauss (Krauss) has served as a Director of ACS since
November 2007. Krauss was a partner with Booz Allen Hamilton (BAH). He also served on
BAHs Board of Directors and Executive Committee and the Board of Loudeye Corporation
alongside defendant Frank Varasano
10. Defendant Paul E. Sullivan (Sullivan) has served as a Director of ACS since
February 2008.
11. Defendant Frank Varasano (Varasano) has served as a Director of ACS since
November 2007. Prior to that, Varasano held several senior management positions during his
26-year tenure at BAH, including Senior Vice President of BAHs Engineering and
Manufacturing practice. He also served on BAHs Board of Directors and Executive Committee
along with defendant Krauss. Varasano also served as a director of Loudeye Corporation with
defendant Krauss.
12. Defendant Robert Allan Druskin (Druskin) has served as a Director of ACS
since March 2008.
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13. Defendant Ted B. Miller, Jr., (Miller) has served as a Director of ACS since
November 2007.
14. Defendants Deason, Blodgett, Krauss, Sullivan, Varasano, Druskin, and Miller
are sometimes referred to herein as the Individual Defendants.
15. Defendant Xerox is a Delaware corporation with its principal place of business
located at 45 Clover Avenue, Norwalk, Connecticut 06856. Xerox is the worlds leading
document management technology and services enterprise, providing one of the document
industrys broadest portfolio of color and black-and-white document processing systems and
related supplies, as well as document management consulting and outsourcing services. Its stock
is traded on the NYSE exchange under the symbol XRX.
16. Defendant Boulder Acquisition Corp. is a wholly-owned subsidiary of Xerox.
17. Defendants Xerox and Boulder Acquisition Corp., are sometimes referred to
herein as Xerox.
THE FIDUCIARY DUTIES OF THE INDIVIDUAL DEFENDANTS
18. By reason of the Individual Defendants positions with the Company as officers
and/or directors, said individuals are in a fiduciary relationship with Plaintiff and the other public
shareholders of ACS and owe Plaintiff and the other members of the Class a duty of highest
good faith, fair dealing, loyalty and full and candid disclosure.
19. By virtue of their positions as directors and/or officers of ACS, the Individual
Defendants, at all relevant times, had the power to control and influence, and did control and
influence and cause ACS to engage in the practices complained of herein.
20. Each of the Individual Defendants is required to act in good faith, in the best
interests of the Companys shareholders and with such care, including reasonable inquiry, as
would be expected of an ordinarily prudent person. In a situation where the directors of a
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publicly traded company undertake a transaction that may result in a change in corporate control,
the directors must take all steps reasonably required to maximize the value shareholders will
receive rather than use a change of control to benefit themselves, and to disclose all material
information concerning the proposed change of control to enable the shareholders to make an
informed voting decision. To diligently comply with this duty, the directors of a corporation
may not take any action that:
(a) adversely affects the value provided to the corporations shareholders;
(b) contractually prohibits them from complying with or carrying out their
fiduciary duties;
(c) discourages or inhibits alternative offers to purchase control of the
corporation or its assets; or
(d) will otherwise adversely affect their duty to search for and secure the best
value reasonably available under the circumstances for the corporations shareholders.
21. Plaintiff alleges herein that the Individual Defendants, separately and together, in
connection with the Merger, violated duties owed to Plaintiff and the other public shareholders
of ACS, including their duties of loyalty, good faith and independence, insofar as they engaged
in self-dealing and obtained for themselves personal benefits, including personal financial
benefits, not shared equally by Plaintiff or the public shareholders of ACS common stock (the
Class).
CLASS ACTION ALLEGATIONS
22. Plaintiff brings this action pursuant to Court of Chancery Rule 23, individually
and on behalf of the Class. The Class specifically excludes Defendants herein, and any person,
firm, trust, corporation or other entity related to, or affiliated with, any of the Defendants.
23. This action is properly maintainable as a class action.
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24. The Class is so numerous that joinder of all members is impracticable. As of
August 20, 2009, ACS had in excess of 91 million shares of Class A common stock and 6.5
million shares of Class B common stock outstanding. Members of the Class are scattered
throughout the United States and are so numerous that it is impracticable to bring them all before
this Court.
25. Questions of law and fact exist that are common to the Class, including, among
others:
(a) whether the Individual Defendants have fulfilled and are capable of
fulfilling their fiduciary duties owed to Plaintiff and the Class;
(b) whether the Individual Defendants have engaged and continue to engage
in a scheme to benefit themselves at the expense of ACS shareholders in violation of their
fiduciary duties;
(c) whether the Individual Defendants are acting in furtherance of their own
self interest to the detriment of the Class;
(d) whether Defendants have disclosed and will disclose all material facts in
connection with the Merger; and
(e) whether Plaintiff and the other members of the Class will be irreparably
damaged if Defendants are not enjoined from continuing the conduct described herein.
26. Plaintiff is committed to prosecuting this action and has retained competent
counsel experienced in litigation of this nature. Plaintiffs claims are typical of the claims of the
other members of the Class and Plaintiff has the same interests as the other members of the
Class. Accordingly, Plaintiff is an adequate representative of the Class and will fairly and
adequately protect the interests of the Class.
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27. The prosecution of separate actions by individual members of the Class would
create the risk of inconsistent or varying adjudications with respect to individual members of the
Class, which would establish incompatible standards of conduct for Defendants, or adjudications
with respect to individual members of the Class which would, as a practical matter, be
dispositive of the interests of the other members not parties to the adjudications or substantially
impair or impede their ability to protect their interests.
28. Preliminary and final injunctive relief on behalf of the Class as a whole is entirely
appropriate because Defendants have acted, or refused to act, on grounds generally applicable
and causing injury to the Class.
SUBSTANTIVE ALLEGATIONS
A. Background
29. Originally founded in 1988 as Affiliated Computer Systems, Inc, the Company
started out as a financial data processing company designed to capitalize on a developing new
trend to outsource information processing requirements to third parties. Such outsourcing
allowed businesses to focus on core operations, respond to rapidly changing technologies and
reduce data processing expenses.
30. Under the helm of its founder, defendant Deason, ACS pursued an aggressive
growth through acquisition strategy. In one of its first acquisitions, ACS acquired the data
processing and electronic funds transfer operations of First Texas Gibraltar expanding into more
and diverse services offered. ACS further diversified and expanded out of banking services
when it signed a 10-year data processing outsourcing contract with Southland Corp.
31. In its first two years alone, acquisitions accounted for an estimated 70 percent of
the Companys growth. Revenue in its first fiscal year ending June 30, 1989, was $74 million.
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One year later, revenue for 1990 doubled to nearly $150 million. By 1993, ACSs revenues
nearly double again to $271 million.
32. On September 27, 1994, ACS went public as Affiliated Computer Services, Inc.,
offering 2.3 million shares of stock on the NASDAQ at $16 per share.
33. At the time it went public, ACSs principal line of business was providing ATM
services to banks. By mid-1996 ACS claimed to have more than 5,000 ATMs deployed. The
Company also provided a range of information processing services, including data processing
services for retailers, wholesale distributors, hospitals, and transportation companies.
34. In 1996, ACS acquired Unibase Technologies Inc, founded by defendant Blodgett
and his family. The acquisition expanded ACSs capabilities in the business-process outsourcing
(BPO) services market and created a service segment dedicated to delivering business process
solutions.
35. In 1997 and 1998 ACS made two major acquisitions that gave it a strong presence
serving state and local governments, including, respectively, the acquisition of Computer Data
Systems of Rockville, Maryland, a major systems integrator for federal agencies for $373 million
and BRC Holdings Inc., which specialized in providing automated record-keeping services to
state and local governments.
36. For fiscal 1999, ACS reported revenue ballooned to $1.64 billion. Approximately
one-third of the Companys revenue came from government clients.
37. In light of the dramatic rise of revenues in revenues for BPO services, in 2000
ACS established a new division for BPO. The new BPO division consolidated a variety of
outsourcing services, such as processing insurance claims, a task that was accomplished in part
by 3,000 employees working in Guatemala and Mexico. ACS estimated that BPO would account
for $950 million in fiscal 2000, or about half of the Companys revenue. The BPO division also
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signed a $56 million contract with Government National Mortgage Association (Ginnie Mae)
to support the governments mortgage-backed securities program over a three-year period. These
services include data analysis and systems administration, maintenance, and enhancement
services of Ginnie Maes proprietary systems and applications software.
38. Since its inception in 1988, ACS had completed more than 50 acquisitions
through the end of fiscal 2000. This aggressive growth strategy also resulted in a dramatic
increase in revenues and net income. For fiscal 2000 ACS reported revenue of $1.96 billion and
net income of $109.3 million.
39. In 2002, the Company was named, for the second year in a row, as one of the
most promising BPO companies by Forbes Magazine. Forbes noted that ACS was a leader in the
business-to-business BPO market and was truly positioned as a tier one player. The magazine
called ACS the outsourcer to watch and said the company is a fast-growing up-and-comer.
According to Forbes, as corporate tech spending stalled that year, many companies suffered
sagging revenues and stock prices. Despite the reduction in spending, there remained bright
spots in the technology sector in areas such as BPO services, and niche offerings such as
customer relationship management and supply chain management, areas vital for corporate cost
reduction, increased quality and greater productivity. This was illustrated when the Company
reported revenue of $3.79 billion and net income of $306.8 million for fiscal 2003.
40. During fiscal year 2006 the Board of Directors authorized a modified Dutch
Auction tender offer (the Tender Offer) to purchase up to 55.5 million shares of the
Companys Class A common stock. That Tender Offer was completed in March 2006 and
7.4 million shares of Class A common stock were purchased in the Tender Offer. In connection
with the Tender Offer, defendant Deason entered into a voting agreement with the Company
dated February 9, 2006 in which he agreed to limit his ability to cause the additional voting
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power he would hold as a result of the Tender Offer to affect the outcome of any matter
submitted to the vote of the stockholders of the Company after consummation of the Tender
Offer.
41. On December 7, 2007, the Board of the Directors approved an amendment of the
voting agreement, to provide that Deasons voting power with respect to 1,989,864 shares of
Class A common stock and 6,599,372 shares of Class B common stock held by him as of
December 7, 2007, would not exceed 45% as a result of share repurchases by the Company
pursuant to the Companys share repurchase program.
42. Most recently, the Company has once again performed well under the current
economic climate. For example, on April 30, 2009, the Company reported strong earnings
results for the Third Quarter and Nine Months Ended March 31, 2009 that beat analysts'
expectations as the Company signed new contracts at a record pace. For the quarter, the
Company reported sales of $1.61 billion, up from $1.54 billion in the same period last year and
net profit of $93.2 million, or 95 cents per share, from $82.6 million, or 85 cents per share, a year
ago. Excluding certain charges, earnings per share came in at $1. Analysts had been expecting
a profit of 93 cents per share. For the nine months, the Company reported net income of
$252,396,000 or $2.58 earnings per share diluted, pretax profit of $407,988,000 on revenues of
$4,826,953,000 against net income of $230,378,000 or $2.32 earnings per share diluted, pretax
profit of $351,565,000 on revenues of $4,546,895,000 against a year ago. Commenting on the
results, defendant Blodgett stated:
[O]ur business demonstrated remarkable performance in the current economicclimate. We signed a record level of new business, we grew revenues and profit,and generated the highest level of adjusted earnings per share in history. Theseresults can be attributed to diverse client base, hard working employees andresilient business model which continues to perform at a very high level.
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43. In an interview, as reported by the Dallas Morning News (April 30, 2009),
defendant Blodgett reiterated: To me, the future is very bright, . . . We're very, very bullish.
44. Furthermore, on the April 30, 2009, third quarter fiscal year 2009 earnings
conference call, defendant Blodgett stated:
I am very proud of ACS and our performance this quarter. At a time when mostcompanies are seeing a slowdown in new business opportunities, we posted thehighest booking quarter in our history at $342 million of annual recurringrevenue. In an environment where our peer group showed revenue declines ofmid-single digits, we grew 5%, excluding divestitures. Our adjusted marginsincreased to 11.3%; and finally, we posted the highest adjusted EPS in our historyat $1.00.
45. Similarly, on August 6, 2009, ACS announced record results for the Fourth
Quarter and Full Year Ended June 30, 2009. Fourth quarter fiscal year 2009 revenues of $1.70
billion, represented a 6% increase, compared to the prior year quarter Fourth quarter new
business signings were the second highest in the Companys history and totaled $271 million of
annual recurring revenue with an estimated total contract value of $1.2 billion. Total contract
value of all signings, including new business signings, renewals and non-recurring revenue, was
$2.2 billion for the fourth quarter of fiscal year 2009. Adjusted net income was $97.1 million or
$0.99 per diluted share against $93.1 million or $0.95 per diluted share for the same period a
year ago. Net cash provided by operating activities was $426 million against $267 million for the
same period a year ago. Free cash flow was $326 million against $177 million for the same
period a year ago.
46. For the full year, the Company reported operating income of $686 million, pretax
profit of $554.23 million and net income of $345 million or $3.57 per diluted share on revenues
of $6,523.16 million against operating income of $645.1 million, pretax profit of $496.2 million
and net income of $329.01 million or $3.32 per diluted share on revenues of $6,160.6 million for
the same period a year ago.
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52. In connection with the execution of the Merger Agreement, defendant Deason,
owner of 43.6% of the outstanding voting power of ACS as of September 28, 2009, entered into
a voting agreement, dated as of September 27, 2009 (the Voting Agreement), with Xerox,
pursuant to which, among other things, Deason agreed to vote his shares in favor of the adoption
of the Merger Agreement and against any takeover bid by a third party. The Voting Agreement
is subject to limitations if the ACS board of directors changes its recommendation with respect to
the Merger.
53. Pursuant to the Merger Agreement, at the effective time of the Merger, each
outstanding share of ACSs Class A common stock, other than shares owned by Xerox, Merger
Sub, or ACS and other than those shares with respect to which appraisal rights are properly
exercised and not withdrawn will be cancelled and converted into the right to receive a
combination of (i) 4.935 shares of common stock of Xerox and (ii) $18.60 in cash, without
interest.
54. Additionally each outstanding share of Class B common stock of ACS (of which
defendant Deason owns 100%), will be converted into the right to receive (i) 4.935 shares of
Common Stock, (ii) $18.60 in cash, without interest and (iii) a fraction of a share of a new series
of convertible preferred stock to be issued by Xerox and designated as Series A Convertible
Perpetual Preferred Stock (Convertible Preferred Stock) equal to (x) 300,000 divided by (y)
the number of shares of Class B common stock of ACS issued and outstanding as of the effective
time of the merger. The Convertible Preferred Stock is anticipated to carry an annual cumulative
dividend of 8%. Additionally, each share of Convertible Preferred Stock may be converted at
any time, at the option of the holder, into 89.8876 shares of Common Stock (which reflects an
initial conversion price of approximately $11.125 per share of Common Stock, which is a 25%
premium over $8.90, which was the average closing price of the Common Stock over the 7-
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trading day period ended on September 14, 2009), subject to customary anti-dilution
adjustments. On or after the fifth anniversary of the issue date, Xerox will have the right, at its
option, to cause, under certain circumstances, any or all of the Convertible Preferred Stock to be
converted into shares of Common Stock at the then applicable conversion rate.
55. The Merger Agreement also provides that, upon termination under specified
circumstances, the Company would be required to pay Xerox a termination fee of up to $194
million.
56. In connection with the announcement of the Merger, defendant Deason stated:
When ACS was founded, we had a vision of becoming a best-in-class company by working harder than our competitors. More than 20 years and 74,000employees later, as the world's top BPO company, we have now found a partnerto help us reach even greater heights, . . . This is a tremendous outcome for ourshareholders driven by the commitment of a strong management team andincredibly dedicated employees. At closing, I will become one of the combinedcompany's largest individual shareholders, and I intend to remain a long-terminvestor because I could not be more optimistic about the future of the combinedcompany.
57. Moreover, Ursula M. Burns, Xeroxs CEO stated:
By combining Xerox's strengths in document technology with ACS's expertise inmanaging and automating work processes, we're creating a new class of solution provider, . . . A game-changer for Xerox, acquiring ACS helps us expand ourbusiness and benefit from stronger revenue and earnings growth.
Xerox becomes a $22 billion global company, of which $17 billion is recurringrevenue - a significant boost to our profitable annuity stream, . . . The revenue wegenerate from services will triple from $3.5 billion in 2008 to an estimated $10billion next year.
58. The consideration offered to ACSs public stockholders in the Merger is unfair
and grossly inadequate because, among other things, the intrinsic value of ACSs common stock
is materially in excess of the amount offered for those securities in the proposed acquisition
given the Companys prospects for future growth and earnings.
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59. According to a research note by Credit Swiss on September 28, 2009, Xeroxs
$6.4 billion offer for ACS values the Company at 14x current year 2010 Earnings Per Share
(EPS) estimates of $4.51. By comparison, Dell, Inc. is paying a 68% premium, or about 30x
EPS for Perot Systems Corporation. Moreover, Hewlett-Packard Companys acquisition of
Electronic Data Systems Corporation last year was valued at 16x EPS.
60. On September 28, 2009, Bloombergreported that the Merger will help [Xerox]
expand into a market Xerox values at about $150 billion and gives [Xerox] a foothold in
managing administrative operations for multiple arms of the U.S. government. Moreover,
according to analyst firm NelsonHall, the BPO market is forecast to hit $450 billion by 2012.
61. Although the Individual Defendants are duty-bound to protect the interests of
ACS shareholders by obtaining the maximum value reasonably available in any sale or merger of
the Company, Defendants entered into the Merger at a woefully inadequate price. Despite the
insufficient consideration offered in the Merger, certain of the Individual Defendants and certain
executive officers of ACS stand to receive lucrative payments upon consummation of the
Merger, including the automatic vesting and triggering of cash payments associated with stock
options and restricted stock, as well as change-in-control payments.
62. While the Individual Defendants were negotiating the Merger, they also arranged
for the continued employment of certain defendants and executives of ACS with Xerox.
63. Specifically ACS, which will operate as an independent organization and initially
will be branded ACS, a Xerox Company, will be led by defendant Blodgett who will report to
Ursula Burns, Xeroxs CEO.
64. Additionally, on September 27, 2009, ACS and Xerox entered into Senior
Executive Agreements (the Executive Agreements) with defendant Blodgett, Tom Burlin
(ACSs Executive Vice President and Chief Operating Officer), John Rexford (ACSs Executive
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Vice President for Corporate Development), Kevin Kyser (ACSs Executive Vice President and
Chief Financial Officer) and Tom Blodgett (ACSs chief operating officer of ACSs commercial
operations and brother of defendant Blodgett). The Executive Agreements provide that the
executive officers listed above will be eligible to receive aggregate retention payments generally
equal to the payments each executive officer would have otherwise been entitled to receive
immediately upon the effective time of the Merger under his prior change of control agreement
with ACS (or in the case of defendant Blodgett, under his prior employment agreement with
ACS).
65. These retention payments equal $5,013,300, $3,104,100, $2,664,354, $2,224,605
and $2,835,129, respectively (plus, in each case, an amount equal to a pro-rata portion of the
target annual bonuses based upon the percentage of the fiscal year which expires as of the date
of the Merger), 30% of which will be paid upon the second anniversary of the effective time of
the Merger and 70% of which will be paid upon the third anniversary of the effective time of the
Merger (except for Mr. Kysers payments, which will be paid in three equal installments on each
of the first three anniversaries of the effective time of the Merger), subject to the executive
officers continued employment on such dates.
66. In addition, with respect to stock options to purchase ACS common stock granted
to each of the executive officers in August 2009 (which will be converted into stock options to
purchase Xerox common stock pursuant to the Merger Agreement), each executive officer
agreed to waive accelerated vesting of such stock options, and they will instead vest according to
their regular vesting schedule, subject to accelerated vesting upon the achievement of certain
performance goals. Additionally, the Executive Agreements provide for an initial grant of
performance shares with respect to Xerox common stock. The target value of the performance
shares will equal each executive officers annual rate of base salary, and the performance shares
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will vest upon the third anniversary of the effective time of the Merger, subject to achieving
specified performance goals. In addition, the vesting of the August 2009 stock options will fully
accelerate, and the vesting of the performance shares will accelerate on a prorated basis based
upon actual performance, in the event the executive officer is terminated without cause or for
good reason, or due to death or disability (with full vesting of the performance shares at target
in the event of death). The Executive Agreements also provide for health and welfare benefits
during continued employment through the end of 2012 (and continued coverage through the third
anniversary of the Merger in the event of termination without cause or for good reason prior to
the third anniversary of the Merger), participation in Xeroxs equity incentive plans during
continued employment, outplacement services for 1 year in the event of termination without
cause or for good reason prior to the third anniversary of the Merger, continued directors and
officers liability insurance until the fifth anniversary of the Merger and a golden parachute
excise tax gross-up payment, which each executive officer is already entitled to receive pursuant
to his employment agreement or change of control agreement with ACS.
67. Additionally, ACS, Xerox and defendant Deason entered into a Separation
Agreement (the Separation Agreement). The Separation Agreement provides that upon
consummation of the Merger, Deason will resign as Chairman of ACS. The Separation
Agreement further provides that until May 18, 2014, Deason will receive base salary and annual
bonus continuation payments, at his current annual rate of base salary ($1,017,437) and at his
current target annual bonus ($2,543,591.20), health and welfare benefits (subject to earlier
cessation of such health and welfare benefits if Deason becomes employed by a new employer in
certain circumstances), home office support and, subject to certain limitations, his current
perquisites and fringe benefits. In addition, Deason will be entitled to continued Directors and
Officers liability insurance through May 18, 2014 (and throughout the period of any applicable
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statute of limitation), additional service and age credits through May 18, 2004 for purposes of
determining eligibility under the Companys post-retirement welfare benefits, to be reimbursed
for any incremental taxation he incurs on such entitlements by virtue of no longer being an
employee, and to tax gross up payments for any golden parachute excise taxes incurred by him
pursuant to Section 4999 of the Internal Revenue Code. The Separation Agreement generally
preserves Deasons rights under his current Amended and Restated Employment Agreement with
the Company, dated December 7, 2007 and amended as of December 30, 2008 (the Deason
Employment Agreement). Also, pursuant to the Deason Employment Agreement, Deason
became entitled to a change of control payment upon the approval of the Merger by the Board of
Directors of ACS.
68. Under the employment agreement, Deason will be entitled to a payment if:
(i) ACS undergoes a consolidation or merger in which ACS is not the surviving company or in
which ACSs common stock is converted into cash, securities or other property such that holders
of ACS common stock do not have the same proportionate ownership of the surviving
companys common stock as they held of ACS common stock prior to the merger or
consolidation; (ii) ACS sells, leases or transfers all or substantially all of the Companys assets to
a company in which ACS owns less than 80% of the outstanding voting securities; (iii) ACS
adopts or implements a plan or proposal for ACSs liquidation; (iv) a person or entity (other than
one or more trusts established by ACS for the benefit of the Companys employees) becomes the
beneficial owner of 20% or more of ACS outstanding common stock; or (v) during any period of
24 consecutive months there is a turnover of a majority of the Board of Directors.
69. The benefit to be received by Deason upon a change of control event includes a
lump sum payment, equal to:
(a) the number of years (including partial years) remaining under his employmentagreement times the sum of (i) his per annum base salary at the time of the change
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of control, plus (ii) the greater of (x) his bonus for the immediately precedingfiscal year or (y) the average of his bonus for the immediately preceding twofiscal years, plus (b) his target bonus for the then-current fiscal year, pro rated toreflect the number of days the executive was employed by us in that fiscal year.Among other things, the employment agreement also provides that we will, (a) for
up to three years following Deasons termination of employment, continue to(i) provide insurance (medical, dental, life insurance, disability and accidentaldeath and dismemberment) benefits to the executive at the highest level ofcoverage provided to Deason prior to the change of control until the executivesecures employment that provides replacement insurance and (ii) provideinsurance benefits to the executive to the extent any new insurance the executivereceives from a subsequent employer does not cover a pre-existing condition, and(b) provide outplacement counseling assistance and (c) maintain directors andofficers liability insurance on behalf of the executive, at the level in effectimmediately prior to the change of control, for the three (3) year period followingthe change of control, and throughout the period of any applicable statute of
limitations. Under the employment agreement, we will also pay accrued butunpaid compensation and deferred compensation upon termination ofemployment. Also, when determining Deasons eligibility for post-retirement benefits under any welfare benefit plan, he will be credited with three years of participation and age credit. Deason will also become vested in the benefitsprovided under any Company retirement or successor plan.
70. In the Companys Proxy Statement, Schedule 14A, filed on April 14, 2009, it was
estimated that the Change of Control benefits, including: (i) the estimated amounts of cash
compensation and the estimated value of non cash benefits per the terms of the employment and
change of control agreements, as well as the Supplemental Executive Retirement Agreement for
Deason; (ii) the estimated excise tax amounts based on the cash and non cash benefits and the
values attributable to the accelerated vesting of stock options under Rev. Proc. 2003-68; and
(iii) the vesting of unvested stock options, assuming a change of control on June 30, 2008 (and
the closing price of $53.49 for the Class A shares on that date), payable at June 30, 2008,
amounted to $43,803,934.
71. In addition to the Change of control payments, on September 29, 2009, the Wall
Street Journalreported that defendant Deason will net approximately $800 million in a mix of
cash and Xerox stock, citing a person familiar with the matter. According to the article:
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[Deason] will receive about $167 million in cash and Xerox stock for his Class Aand B shares. There is also a special sweetener of $300 million in convertible preferred Xerox stock for his Class B ACS shares. (Deasons Class B sharesessentially give him voting control over the company). In addition, Deasonreceives 44 million in Xerox common stock, which today is worth about $325
million . . .
72. Moreover, defendant Deason has structured the Merger to obtain a premium over
and above what the public shareholders of ACS will receive, despite agreeing to limit his voting
power to 45%. On September 29, 2009, theNY Times reported:
Mr. Deason, who owns 6.6 million class B shares with 10 votes each, will receivean additional $300 million in Xerox convertible preferred. This works out to $45per class B share and an additional $32 a share for all of Mr. Deasons holdings
above the class A price.
In comparison, the public shareholders are receiving $63.11 a share. Note that allof these prices came at the time of the announcement. Xeroxs shares declined 14percent on Monday, lowering these amounts.
This is still approximately a 50 percent premium for Mr. Deason over the publicshareholders, a premium paid to a man who was a buyer two and a half years ago,albeit at a slightly lower price.
Such dual-class differential payments are not common and often heavilycriticized. The most recent one I can remember is Constellation Brandsacquisition of the Robert Mondavi Corporation in 2004. In Delaware, though,they are allowed as a premium paid for control. But in this case, Mr. Deason doesnot have true control since he is limited by an agreement with the company to a45 percent ownership or voting stake.
73. Under the circumstances, however, the Individual Defendants are obligated to
explore all alternatives to maximize shareholder value.
74. Moreover, the Merger suffers from serious conflicts of interests. The press
release announcing the Merger notes that Citigroup Global Markets Inc. (Citigroup) served as
one of the financial advisors to ACS. Citigroup, however, has a close working relationship with
Xerox that compromises its independence as adviser to ACS. In 2007, it was reported that
Citigroup served as one of the Joint Bookrunning Managers and several other participating
underwriters in connection with Xerox Corporation's registered offering of $1.1 billion of senior
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notes. In 2008, it was reported that Citigroup served as one of the underwriters in connection
with Xerox's registered offering of $1.4 billion of senior notes comprised of $400,000,000 5.65%
Senior Notes due 2013 and $1,000,000,000 6.35% Senior Notes due 2018. In 2009, it was
reported that Citigroup served as one the underwriters in connection with Xeroxs registered
offering of $750,000,000 of 8.25% senior notes due 2014.
75. Moreover, Anne M. Mulcahy, Xeroxs current chairman and CEO is a board
director of Citigroup.
76. The value offered to Xeroxs public shareholders in the Merger is inadequate
when considering both the monetary value of the Xerox common stock they will receive as well
as the fact that ACS is poised to achieve significant growth in the near future.
77. The Merger comes at a time when the Companys stock price is undervalued but
its prospects for growth and increased revenue are substantially increasing as the economic
recession is ending. ACS insiders are well aware of the Companys intrinsic value and that ACS
shares are significantly undervalued. Xerox recognized ACSs solid performance and potential
for growth and determined to capitalize on the recent downturn in the Companys stock price at
the expense of ACSs public shareholders. Xerox is seeking to engage in a transaction that
secures an opportunity to benefit from the Companys growth, while the Companys
shareholders are provided inadequate consideration without the benefit of a full and fair
transaction process.
FIRST CAUSE OF ACTION
Claim for Breach of Fiduciary Duties Against the Individual Defendants
78. Plaintiff repeats and realleges each allegation set forth herein.
79. The Individual Defendants have violated fiduciary duties of care, loyalty, candor
and good faith owed to public shareholders of ACS and certain of them have acted to put their
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personal interests ahead of the interests of ACS shareholders or acquiesced in those actions by
fellow directors or executive officers.
80. By the acts, transactions and courses of conduct alleged herein, defendants,
individually and acting as a part of a common plan, are attempting to unfairly deprive plaintiff
and other members of the Class of the true value of their investment in ACS.
81. As demonstrated by the allegations above, the Individual Defendants failed to
exercise the care required, and breached their duties of loyalty, good faith, candor and
independence owed to the shareholders of ACS because, among other reasons, they failed to take
steps to maximize the value of ACS to its public shareholders, by, among other things, failing to
adequately consider potential acquirers, instead favoring their own, or their fellow directors or
executive officers, interests to secure all possible benefits with a friendly suitor, rather than
protect the best interests of ACSs shareholders.
82. The Individual Defendants dominate and control the business and corporate
affairs of ACS, and are in possession of private corporate information concerning ACSs assets,
business and future prospects. Thus, there exists an imbalance and disparity of knowledge and
economic power between them and the public shareholders of ACS which makes it inherently
unfair for them to benefit their own interests to the exclusion of maximizing shareholder value.
83. By reason of the foregoing acts, practices and course of conduct, the defendants
have failed to exercise ordinary care and diligence in the exercise of their fiduciary obligations
toward plaintiff and the other members of the Class.
84. As a result of the actions of defendants, plaintiff and the Class will suffer
irreparable injury in that they have not and will not receive their fair portion of the value of
ACSs assets and businesses and have been and will be prevented from obtaining a fair price for
their common stock.
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85. Defendants are engaging in self-dealing, are not acting in good faith toward
plaintiff and the other members of the Class, and have breached and are breaching their fiduciary
duties to the members of the Class. Unless defendants are enjoined by the Court, they will
continue to breach their fiduciary duties owed to plaintiff and the members of the Class, all to the
irreparable harm of the members of the Class.
86. Plaintiff and the members of the Class have no adequate remedy at law. Only
through the exercise of this Courts equitable powers can plaintiff and the Class be fully
protected from the immediate and irreparable injury which defendants actions threaten to inflict.
SECOND CAUSE OF ACTION
On Behalf of Plaintiff and the Class
Against Xerox for Aiding and Abetting the
Individual Defendants Breach of Fiduciary Duty
87. Plaintiff incorporates by reference and realleges each and every allegation
contained above, as though fully set forth herein.
88. Xerox has acted and is acting with knowledge of, or with reckless disregard to,
the fact that the Individual Defendants are in breach of their fiduciary duties to ACSs public
shareholders, and has participated in such breaches of fiduciary duties.
89. Xerox knowingly aided and abetted the Individual Defendants wrongdoing
alleged herein. In so doing, Xerox rendered substantial assistance in order to effectuate the
Individual Defendants plan to consummate the Merger in breach of their fiduciary duties.
90. Plaintiff has no adequate remedy at law.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff demands injunctive relief in its favor and in favor of the Class
and against Defendants as follows:
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