Xerox's Largest Individual Shareholder Sues to Block Split

The founder of a technology outsourcing firm who sold his business to Xerox is suing to block the company's plan to spin off its Business Process Outsourcing (BPO) business.

Darwin Deason owns a 6.1 percent stake of Xerox and claims he is entitled to shares in both the company's traditional copier and printer business and well as BPO business under the terms of his 2010 sale of Affiliated Computer Services (ACS) to Xerox for $6.4 billion, according to a filing Tuesday in U.S. District Court in Dallas.

"Xerox seeks to … [pull] the business Mr. Deason created out from under him and leav[e] him solely with an investment in an unattractive, low-growth document technology business," wrote Deason's lawyer, David Moran, in a 28-page complaint. "If Xerox has its way, Mr. Deason will be deprived of his bargained-for stake in the globally significant business that he built."

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Xerox told CRN that Deason's lawsuit was without merit and that the company would seek its dismissal. Norwalk, Connecticut-based Xerox, whose Global Services business is No. 9 on the CRN Solution Provider 500, said it is continuing to move forward with the split, which it expects to complete by the end of the year.

In January, Xerox announced plans to separate its $11 billion Document Technology and Document Outsourcing business from its $6.7 billion Business Process Outsourcing division, undoing the ACS acquisition from six years earlier. The BPO division will be renamed Conduent once the split is complete.

Deason said he obtained $300 million of preferred convertible stock as part of the sale of ACS to Xerox, which he maintains means that he should own a share in both the BPO and DTDO businesses.

But Deason said Xerox's current proposed reorganization will trap his investment in the DTDO business, which even Xerox's financial advisors claim will cause the value of his investment to fall by $11 million, according to Deason.

Deason said he spent several months negotiating with Xerox to ensure the company preserved the value of his investment, but he said the dialog ultimately proved fruitless, with the company stranding all of his investment in Xerox without any ability to convert it into Conduent stock.

"After stringing Mr. Deason along for months, Xerox refused to provide Mr. Deason with sufficient information or provide assurances that it will not over-lever the BPO business by saddling it with expenses, liabilities and excessive debt that should remain with Xerox," Moran wrote.

Deason's counsel first sat down with Xerox's counsel on April 20, and the two parties signed a confidentiality agreement June 30 whereby the company could provide him with non-public information, the suit states. But Deason said the information was insufficient for him for make an informed decision on whether Xerox's proposals would preserve the value of his investment.

Deason asked the court to ensure that Xerox provides a mechanism that makes his investment convertible into Conduent common stock in a value-preserving manner. He also asked that the court prohibit Xerox from completing the reorganization.

Xerox's stock price fell 2.6 percent in trading Thursday to $9.55 per share. The lawsuit first attracted media coverage midday Thursday.

Deason is Xerox's largest individual investor, falling behind institutional investors Ichan Associates Corp., The Vanguard Group and BlackRock, according to a filing with the U.S. Securities and Exchange Commission (SEC). Ichan, Vanguard and BlackRock hold 9.1 percent, 8.2 percent and 6.3 percent stakes, respectively, in Xerox.

Deason founded ACS in 1988 as a data services provider to the financial services industry, and transformed the company over the next two decades into a global BPO and IT services provider with 74,000 employees. He was chairman and CEO of ACS until 1999, and executive chairman of the company until its sale to Xerox. ACS was renamed Xerox Business Services in 2012.

"The reorganization will extinguish important right and massively destroy the value of Mr. Deason's unique investment," Moran wrote. Mr. Deason will lose the opportunity to participate in the growth of the BPO business that Mr. Deason was responsible for building."