Developments In The North Carolina Merger Litigation Involving Citigroup And Wachovia

There were some late breaking developments today in the North Carolina lawsuit regarding the Wachovia-Citigroup-Wells Fargo situation, including the unsealing of detailed Affidavit testimony from Wachovia's CEO about Wachovia's courtship dance with its two potential acquirors, a modification of the TRO entered on Sunday evening, a transfer of the case to the North Carolina Business Court, and then a standstill agreement with regard to the three pending lawsuits. 

First, Judge Johnston unsealed the Affidavit of Robert Steel, Wachovia's CEO, which had been filed with the Complaint.  The Affidavit is identical to an Affidavit filed in the New York lawsuit brought by Wachovia against Citigroup.  It describes the chronology of the negotiations between Wachovia and the two banks which so badly want to acquire it.  Briefly: 

  • Before September 29th, Both Wells Fargo and Citigroup were in negotiations to acquire either all of Wachovia's stock (Wells Fargo) or only Wachovia's banking subsidiaries (Citigroup).
  • Wells Fargo ended negotiations on September 28th, saying that it could not complete the acquisition of all of Wachovia's stock on a compressed timetable without substantial government assistance.
  • The Chairman of the FDIC then told Steel that the situation posed "a systemic risk to the banking system" and that the FDIC was prepared to "effect an open bank assisted transaction."
  • The next day, Steel told the Wachovia Board of Directors that its only options were to file for bankruptcy or to negotiate a deal with Citigroup.
  • The Wachovia Board voted to pursue the deal with Citigroup, and a three party Agreement-in-Principle was signed on September 29th by Wachovia, Citigroup, and the FDIC.  (The Agreement is Exhibit A to the Steel Affidavit).
  •  Under the terms of the Agreement, the FDIC committed to limit Citigroup's losses on a $312 billion loan portfolio to $42 billion.  In exchange, the FDIC was to receive $12 billion of preferred stock in Citigroup. 
  • The Exclusivity Agreement at issue in the lawsuit was also signed  on September 29th.
  • Wachovia thereafter conducted negotiations with Citigroup "earnestly and in good faith," but those negotiations were "complicated and difficult," according to the Affidavit.
  • The Chairman of the FDIC called Steel on October 2nd that Wells Fargo would be proposing a merger transaction, and encouraged him to "give serious consideration to that offer."
  • Wachovia's General Counsel advised the FDIC Chairman that Wachovia could not consider this proposal without a signed and Board-approved merger agreement from Wells Fargo.
  • That same day, at around 9:00 p.m., Wells Fargo presented an Agreement and Plan of Merger (which is attached to the Steel Affidavit as Exhibit C).
  • Two hours later, Wachovia's Board of Directors met and reviewed the Wells Fargo Agreement.  Steel states in his Affidavit that "[t]he Company's advisors and I told the Board that we believed that unless a definitive merger agreement was signed with either Citigroup or Wells Fargo by the end of the day Friday, October 3 that the FDIC was prepared to place Wachovia's banking subsidiaries into receivership."
  • Steel signed off on the Wells Fargo Agreement early in the morning on October 3rd, after receiving oral fairness opinions from Goldman Sachs and Perella Weinberg Partners.

Second, Judge Johnston entered an Order amending the TRO entered on October 5th, to DELETE the underlined language: 

“(i) filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the second paragraph of the Letter Agreement; (ii) making public representations about the validity of the second paragraph of the Letter Agreement; (iii) making public representations about the invalidity of the Wachovia/Wells Fargo merger agreement.

There was no indication for the modification, but presumably there were prior restraint issues.

Third, the case was designated by Citigroup to the North Carolina Business Court.  It has been assigned to Judge Diaz.  The Preliminary Injunction hearing is currently scheduled for Thursday, October 9th, at 2:00 p.m.

Finally, it's not clear whether that hearing will be held, because the three banks have entered into a brief standstill while they attempt to resolve their dispute.  Per a Citigroup press release, the terms of the agreement are: 

  1. A standstill of all formal litigation activity effective immediately;
  2. Cease any formal discovery activities, and
  3. Cooperate in good faith to agree among themselves to secure orders where necessary in all applicable cases in all jurisdictions tolling any schedules for the filing of litigation papers or court appearances or any other formal litigation deadlines, with the goal of preserving the status quo during the litigation standstill period.

This standstill agreement will terminate at noon on Wednesday, October 8, 2008, the day before the scheduled Preliminary Injunction hearing, unless otherwise extended.

 

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