Citigroup fired the first shot in what could be a prolonged legal battle, persuading a New York judge to temporarily block Wells Fargo from acquiring Wachovia, Citigroup announced in a news release sent late Saturday night.
Citigroup has accused Wells Fargo of wrecking its plan to acquire Wachovia's banking operations for $2.2 billion, or $1 a share, in a deal arranged by the Federal Deposit Insurance Corp. Four days after that deal was struck, it fell apart when Wachovia agreed to Wells Fargo's offer to pay seven times as much for the entire company.
The underlying battle is over which company will emerge from the current economic crisis in a stronger position among a smaller number of global financial giants. A person briefed on the situation said that Citigroup was seeking a total of $60 billion in damages.
Citigroup contends that the deal with Wells Fargo violates an agreement that prohibited Wachovia from having any sale or merger discussions with anyone other than Citigroup until Oct. 6. The order issued by a judge on Saturday extends the term of that agreement until further court action, according to Citigroup's news release.
“Wachovia believes its agreement with Wells Fargo is proper, valid and in the best interest of shareholders, employees, and the American taxpayers," Wachovia spokeswoman Christy Phillips-Brown told the Observer early Sunday. "Under that agreement, Citigroup is always free to make a superior offer to Wachovia.”
The litigation could be a blockbuster, pitting some of the nation's largest surviving financial institutions against one another and giving work to the most expensive legal talent money can buy. Citigroup is represented by the New York lawyer Gregory Joseph; Wachovia by David Boies of Boies, Schiller & Flexner; and Wells Fargo by Wachtell, Lipton, Rosen & Katz, according to people briefed on the matter.
Until late Thursday, Citigroup believed that it had reached a deal with Wachovia after marathon talks last weekend under intense pressure from federal regulators worried about Wachovia's financial condition.
Wells Fargo, which had walked away from a deal with Wachovia, returned late Thursday with a shocking bid. Wells Fargo offered to buy all of Wachovia, not just its banking operations, for about $15 billion in stock, far more than Citigroup offered. And its deal, which takes advantage of a lucrative tax loophole, would be structured without any government support.
The move left Citigroup officials fuming. Saturday morning, they huddled in a makeshift war room at the law offices of Davis Polk & Wardwell in midtown Manhattan.
Citigroup raised the stakes Saturday afternoon, asking Justice Charles Ramos of the trial-level state Supreme Court to issue an emergency order blocking the deal between Wachovia and Wells Fargo. Late Saturday, Ramos issued an injunction effectively blocking the Wells Fargo deal, pending a hearing scheduled for later in the week.
The agreement with Wachovia that Citigroup has cited and that contains the ban on negotiating with any other potential bidders was not a final merger contract, but a letter agreement to “continue to proceed to negotiate definitive agreements.”
The letter agreement does not state that a deal must be completed. It also specifically rules out the collection of money damages if the agreement to negotiate were breached.
Lawyers not involved in the battle said that Wachovia could defend the Wells Fargo deal by arguing that it is better for its shareholders. Wachovia is likely to claim that its fiduciary obligations – its responsibility to protect the interests of its investors – required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.
The litigation could put regulators in a difficult spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit.
Observer reporter Christina Rexrode contributed to this report.