October 7, 2008

More on Wells Fargo’s Exclusivity Agreement

Yesterday, John Jenkins blogged on the battle between Citigroup and Wells Fargo for Wachovia. Yesterday, Citi filed a $60 billion lawsuit over the battle. Here are a thoughts on Wells Fargo’s exclusivity agreement:

1. Wachovia apparently didn’t violate any of the no-shop provisions in the exclusivity agreement (e.g., soliciting, facilitating, discussing, negotiating, waiving a standstill) other than clause (iv) – by entering into a merger agreement with Wells Fargo – but Wachovia’s board may have a strong argument that it was required to accept the Wells Fargo offer in order to fulfill its fiduciary duties and that any contractual provision that purports to prevent a board from fulfilling its fiduciary duties is void and unenforceable. That would seem a reasonably likely result in Delaware but not sure about how a New York court will apply North Carolina law.

2. Citi has the right to seek specific enforcement of the exclusivity agreement not the nonbinding term sheet regarding Citi’s proposed asset acquisition – at most that might mean a judge could delay the agreement with Wells Fargo till the end of the exclusivity period on Monday, which isn’t very meaningful relief.

3. In any event, monetary damages might be viewed as speculative because there was no guarantee that a definitive deal would have been struck with Citi and the Citi transaction required Wachovia shareholder approval and they wouldn’t have approved in light of a significantly higher offer for the whole bank.

4. Wells Fargo may have statutory protection against tortious interferance claims – see pages 82 (begin on line 20) and 83 of the Emergency Economic Stabilization Act of 2008, which states:

21 Section 13(c) of the Federal Deposit Insurance
22 Act (12 U.S.C. 1823(c)) is amended by adding at the end
23 the following new paragraph:
24 No provision contained in any existing or

1 future standstill, confidentiality, or other agreement
2 that, directly or indirectly-
3 ”(A) affects, restricts, or limits the ability
4 of any person to offer to acquire or acquire,
5 ”(B) prohibits any person from offering to
6 acquire or acquiring, or
7 ”(C) prohibits any person from using any
8 previously disclosed information in connection
9 with any such offer to acquire or acquisition of,
10 all or part of any insured depository institution, in
11 cluding any liabilities, assets, or interest therein, in
12 connection with any transaction in which the Cor
13 poration exercises its authority under section 11 or
14 13, shall be enforceable against or impose any liabil
15 ity on such person, as such enforcement or liability
16 shall be contrary to public policy.”.