|
|
Battle over Wachovia highlights
tension between state and federal laws
By Sheri Qualters / Staff reporter
National Law Journal
13 October 2008
The legal battle over whether Citigroup Inc. or Wells Fargo & Co. should be able to buy Wachovia Corp. is on hold for now, but the clash highlights the tension between state corporate laws and federal laws that govern banks as the government tinkers with banking-sector rescues.
The Oct. 6 end-of-day announcement among the three companies and the Federal Reserve to halt three separate lawsuits until at least noon on Oct. 8 means the three sides are likely to reach an agreement about how to divvy up Wachovia, said John Singer, partner and co-founder of New York-based Singer Deutsch.
If the parties can't reach a deal, the disputes are most likely to be consolidated into the New York federal court case, which invokes the brand new Emergency Economic Stabilization Act of 2008, Singer said.
Lawyers say the clash also throws into question the shareholders' right to the best possible deal, which is standard under Delaware corporate law, and various other states corporate laws, when the government takes a place at the table.
On Sept. 29, Citigroup announced an agreement-in-principle to acquire Wachovia's banking operations for about $2.16 billion in stock and assumption of Wachovia's senior and subordinated debt for about $53 billion.
As part of the deal, the Federal Deposit Insurance Corp. agreed to provide loss protection to Citigroup.
On Oct. 3, Wells Fargo announced a competing definitive deal with Wachovia to buy the company for $7 a share or about $15.1 billion.
On Oct. 4, Citigroup filed a lawsuit against Wachovia Corp. in the Supreme Court of the State of New York — the trial-level court — seeking $20 billion in compensatory damages and more than $40 billion in punitive damages from Wells Fargo for "tortious interference" with Citigroup's deal with Wachovia.
On Oct. 4, Wachovia filed a lawsuit in a New York federal court seeking a declaratory judgment that its proposed deal with Wells Fargo is not prohibited by Wachovia and Citigroup's proposed deal. Wachovia Corp. v. Citigroup Inc., No. 1:08-cv-08503 (S.D.N.Y.)
Also over the weekend, on Oct. 5, Wachovia shareholders got a temporary restraining order in a superior court in North Carolina barring Citigroup from enforcing the exclusivity terms of its merger agreement with Wachovia.
Although he's not personally involved with the negotiations, Robert C. Myers a partner in the New York office of Dewey & LeBoeuf, said the exclusivity agreement that Wachovia purportedly signed with Citigroup is unusual in mergers-and-acquisitions deals.
"Typically an exclusivity agreement would contain a fiduciary out," Myers said. "If the target were approached, they could terminate the exclusivity agreement. But in the meantime would agree not to go out and solicit other bidders."
Still, Myers isn't sure if that issue is relevant under North Carolina law.
Even if the exclusivity agreement violated any of the applicable corporate laws, the issue may be moot, Myers said.
"As a practical matter, the government is going to have more of a say than shareholders trying to vindicate their rights," Myers said. Even if the shareholders could have gotten a better deal without the government involvement, it will be hard for them to prove breach of fiduciary duty, he said.
The federal government's beefed up role in the banking crisis "has thrown a monkey wrench in what laws are exclusively a state law area," said Larry Ribstein, a professor at the University of Illinois College of Law. "It used to be complicated enough when the state of the merger agreement — New York — was battling the state of incorporation North Carolina," Ribstein said. "Now you've got the federal government."
