Should Citigroup sue to stop Wachovia's sale to Wells Fargo, history falls in Wachovia's favor. But with a government bailout in the works and unparalleled turbulence in the financial markets, anything is possible, legal experts say.
“This is unprecedented,” said UNC Chapel Hill law professor Thomas Lee Hazen. “(Bank mergers and acquisitions) have become such a systemic economic issue for the whole economy, that it brings in other (issues) that may not occur in a typical merger case.”
Judges award monetary damages, or breakup fees, “99.9 percent of the time” when exclusivity agreements have been broken, according to legal experts. Wachovia and Citigroup signed such an agreement Monday, when the New York banking giant announced it was buying Wachovia for $2 billion and breaking it apart.
Wachovia then snubbed Citibank on Friday and announced it was selling itself to another suitor, San Francisco-based Wells Fargo, for $15.1billion. Citibank responded with a statement saying Wachovia's agreement with Wells Fargo is “in clear breach of an Exclusivity Agreement between Citi and Wachovia. In addition, Wells Fargo's conduct constitutes tortious interference with the Exclusivity Agreement.”
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Such agreements are common and used to keep negotiating parties moving together on the same track, said Carl Tobias, professor at University of Richmond's law school. He said he's seen an increasing number end up in the courts.
“Business isn't like a handshake anymore,” he said.
He said he doubts a judge would force Wachovia to sell itself to Citigroup, even if ruling in Citigroup's favor. Monetary damages are more likely. A lawsuit would be heard in New York, according to the agreement, and likely put on a fast track, experts say.
“They way I see it, (Citigroup) might be using this to try and get as much money as they could from Wachovia and Wells Fargo,” said Tobias, who reviewed the exclusivity agreement at the Observer's request.
Overall, “it's very messy,” he said, “and really hard to predict.”
Experts also say regulators may get involved.
UNC's Hazen speculated that if Citigroup sued, it might argue Wachovia was only strong enough to enter into a new deal because Citigroup “put it back on its feet Monday.” Wachovia, meanwhile, could argue it had a fiduciary duty to shareholders to consider a Wells Fargo proposal, legal experts said. Otherwise, shareholders could sue.
N.C. banks have fought in court before over deals gone bad.
In 2001,Wachovia and First Union surprised Wall Street when they announced their merger. Wachovia had long been seen as a perfect fit with SunTrust, and the two had negotiated on and off for years. SunTrust fired off a hostile takeover bid a month later sparking a bitter corporate battle that spilled over into local and national newspapers ads and into an N.C. Business Court. Wachovia shareholders approved the First Union merger by what Wachovia said was a 3-to-1 margin.
Last year, an investor group tried to stop the sale of Chicago-based LaSalle bank to Bank of America. Dutch bank ABM Amro Holding had agreed to sell LaSalle to the Charlotte bank, but a rival consortium led by Royal Bank of Scotland wanted to bid for all of ABM Amro, spurring a historic takeover battle. Ultimately, a Dutch court ruled in Bank of America's favor.