Xerox Corp.'s (XRX) third-largest shareholder, Darwin Deason, filed a lawsuit Tuesday seeking to block the document technology company's recently announced combination with Fujifilm Holdings Corp. (FUJIY) , arguing that the deal represents a breach of fiduciary duty to shareholders.

The lawsuit comes after corporate raider-turned activist Carl Icahn escalated his own campaign at Xerox earlier this week by urging other shareholders to vote and block the deal, based on the argument that it will make it impossible for the document technology company's investors to ever receive a control premium for their shares.

Carl Icahn
Carl Icahn

Deason's lawsuit, filed in the Supreme Court of New York County against Xerox's board, is seeking to block what it calls a "fraudulent" scheme "where by Fuji will acquire majority ownership and control of Xerox, a virtual American icon, for virtually nothing."

Based on statements and the lawsuit, it is clear that Deason and Icahn, who together own about 15% of Xerox, would prefer to see the company sell itself rather than merge with Fujifilm.

As part of the deal, announced in January, Fujifilm will own 50.1% of Xerox shares. Under the terms of the agreement, Xerox shareholders will receive a $2.5 billion special cash dividend, or about $9.80 a share, funded from the combined company's balance sheet, and own 49.9% of the combined company at closing. The cash dividend represents a 30% premium to Xerox's unaffected share price of $30.35 on Jan. 10 before the reports of a possible deal surfaced.

A key point of contention between Xerox and both Deason and Icahn is a joint venture set up by Xerox and Fujifilm years ago. The Deason lawsuit zeros in on the JV, pointing to a Xerox slide presentation noting that the partnership "limits Xerox's Strategic Flexibility." The lawsuit said that the agreement contained a "crown jewel," lock-up rights that allowed Fuji to control Xerox's intellectual property and manufacturing rights in the Asian Pacific market. The suit suggested that the joint venture "effectively blocks any chance of a transparent and fair" sale process.

Xerox in a statement Feb. 12 pushed back on assertions that the company didn't fully evaluate all its options, noting that the independent members of the board conducted over many months a "comprehensive" review of strategic and financial alternatives, with legal advisers that concluded after considering "several other options" that the Fuji deal was the best one to create value for shareholders. It is unclear whether those other options involved seeking to evaluate whether a sale of the company made more sense. A Xerox spokesman declined to comment, noting that no date has yet been set for a vote of shareholders on the Fuji combination.

Xerox CEO Jeff Jacobson will be making a presentation on the deal at the Goldman, Sachs & Co. technology and Internet conference in San Francisco.

The lawsuit argues that Xerox had an opportunity to terminate the joint venture, Fuji Xerox, after a recent accounting scandal, which would have made it possible for the document technology company to conduct a real auction process for itself. According to reports in June, Fuji Xerox said that due to losses from accounting problems in the South Pacific it had overstated revenue by about $340 million.

"Had the director defendants terminated the joint venture agreements, they would have been able to engage in a fair and equitable bidding process and achieve a fair value and control premium for Xerox shareholders," the suit said.

Icahn and Deason, last month joined forces to form a group targeting Xerox, its CEO Jeff Jacobson, and its joint venture with Fujifilm.

Editor's note: This article originally appeared on The Deal , our sister publication that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.

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