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The fight over Wachovia intensified over the weekend as the Charlotte bank asked a U.S. federal court judge to declare its merger with San Francisco-based Wells Fargo valid despite an earlier agreement with Citigroup.
At a hearing Sunday in New York, U.S. District Court Judge John Koeltl said Wachovia “appears” to have been permitted to consider merger offers other than Citi's, but he did not make a decision. Another judge will take up the issue at a hearing scheduled for Tuesday.
The legal battle broke out after Wachovia agreed to a $15 billion sale to Wells Fargo early Friday, trumping a previously announced transaction between Citi and Wachovia that included assistance from the Federal Deposit Insurance Corp. Sunday's outcome appeared to give Wachovia the upper hand in the struggle only a day after Citi claimed a victory when a New York state judge extended an agreement that prevented Wachovia from talking to other suitors.
At stake is which company gets control of one of the nation's biggest banks and a major Charlotte employer.
“All you can say right now is that there is a lot of uncertainty on the legal front,” said Carl Tobias, professor at University of Richmond's law school.
While the legal drama is expected to intensify this week, it's also possible that new bids could emerge from Citi, Wells or other institutions. The current Wells offer appears to be the better one for Wachovia shareholders, but it's not clear which would be better for Charlotte in terms of layoffs and remaining operations.
At issue in the courtroom fight is an “exclusivity agreement” between Citi and Wachovia that said Wachovia could not negotiate with another party or enter into another merger before today. However, Wachovia contends in its complaint filed in federal court that a provision in the congressional bailout legislation approved on Friday prohibits any existing or future agreement from barring an offer to buy a bank. The suit also notes that the exclusivity agreement should be invalid under state law because it prevents the Wachovia board from executing its duty to consider a better offer.
After Sunday's hearing, Wachovia said it was pleased that Judge Koeltl granted its motion seeking an “expedited resolution of the exclusivity agreement between Wachovia and Citigroup.” Citi said it was pleased that Wachovia was not granted an immediate decision. In a filing, Citi had asked that Wachovia's complaint be dismissed, arguing that the bailout legislation does not apply to the Wachovia-Wells transaction.
Citi launched the first legal strike on Saturday. At Citi's request, New York Supreme Court Judge Charles Ramos extended the exclusivity agreement pending a hearing scheduled for Friday. Judge Koeltl's ruling, however, temporarily vacated that order.
Wachovia said Sunday that it does not believe Ramos' order has “any effect on the validity” of a merger agreement between Wachovia and Wells. That agreement “is in the best interests of shareholders, employees, creditors and retirees as well as the American taxpayers and it imposes no risk to the FDIC fund,” Wachovia added.
In its deal, Citi would buy parts of Wachovia for $2.16 billion, with the FDIC agreeing to absorb loan losses above $42 billion. Left behind would be Wachovia's brokerage and asset management businesses. In its transaction, Wells would buy all of Wachovia and it wouldn't need government assistance, although it could reap billions in tax advantages.
Wachovia, battered by mortgage loan losses, fell into the arms of Citi last weekend after concerns about its deposit base and its ability to get loans from other banks following the failure of Washington Mutual. The FDIC arranged the deal with Citi after Wells Fargo stepped aside as a potential suitor.
In its federal court complaint, Wachovia painted a picture of a deal forged under extreme duress.
If Wachovia didn't agree to Citi's proposal early Monday, the FDIC was set to seize its assets later in the day, according to the complaint. Wachovia said it signed on to a non-binding agreement with Citi under the understanding that it had to reach a definitive merger agreement by the end of Sunday, or face seizure by the FDIC.
In its filing, Wachovia said it had worked “tirelessly” from Monday until Thursday on a merger agreement with Citi, but it said the negotiations were “exceedingly” complex because of the difficulty of splitting apart its operations.
In its filing, Wachovia said it had no contact with Wells from the signing of the exclusivity agreement until being contacted by Wells on Thursday. Wells' offer was unsolicited, Wachovia said.
The possibility of new bids for Wachovia remains. Wachovia said Sunday that Citi is free to make a “superior offer.” Citi on Saturday said it is “prepared to continue negotiations with Wachovia on the parties' previously agreed-to transaction.” The Wall Street Journal reported that Citi was considering extending a sweeter offer last week but those terms were uncertain.
In a statement Sunday, Wells Fargo said it has a “binding merger agreement” with Wachovia.
“That agreement represents a transaction that, in stark contrast to Citigroup's proposal, provides significant and certain value to Wachovia shareholders, keeps Wachovia intact, is better for all of Wachovia's stakeholders including its employees and does not demand financial support from our government,” Wells said in the statement. “We are confident that we will complete our announced merger with Wachovia. Nothing in the court's temporary order impacts our ability to ultimately do that.”
It was quite possible that litigation among the three banks could go on for some time; any ruling by either judge was likely to be appealed. A protracted court fight raised the possibility that Wachovia, already hurt by billions of dollars in losses from failed mortgages, will further weaken. However, the government, which has closed and then seized failing banks including Washington Mutual, the nation's largest thrift, would likely step in if the bank were in jeopardy.
“I would hope there would not be a long battle because that does not bode well for Wachovia's existing business,” said Ben Halliburton, chief investment officer at Tradition Capital Management in Summit, N.J. “Any delays in action and uncertainty … just causes further problems for the operating entity.”
There are several ways the legal battle could unfold, said Thomas Lee Hazen, a law professor at UNC Chapel Hill.
For example, a court could find in Wachovia's favor if it rules the bank's board of directors had a fiduciary duty to their shareholders that trumps the terms of the contract, he said.
If the court does rule in Wachovia's favor, it would likely say Wachovia and Wells Fargo can go ahead with the merger but that Citi could still sue for damages. In another possible scenario, there could be more out-of-court negotiations, Hazen said. He said regulators might encourage this, depending on how the market responds to the battle on Monday. In that situation, Wachovia or Wells could agree to pay Citi a fee for breaching the exclusivity contract.
Of the legal battle in general, Kevin Lee, a law professor at Campbell University, said he didn't expect Citi's complaint to be successful in the long run, because the Wachovia-Wells deal doesn't show sufficient irreparable harm. He said there should be a way to compensate Citi monetarily, though.
