North Carolina Business Litigation Report

Shareholder Class Action Filed In North Carolina Business Court To Enjoin Wachovia-Wells Fargo Merger

The first Complaint I'm aware of seeking to enjoin the merger between Wachovia and Wells Fargo has been filed in North Carolina and designated to the North Carolina Business Court.

In the Notice of Designation to the Business Court of the case, Ehrenhaus v. Baker, the Plaintiff describes his claim as follows: 

"This is a class action on behalf of the public stockholders of Wachovia Corporation (“Wachovia” or the “Company”) in connection with a proposed acquisition of Wachovia by Wells Fargo & Company (“Wells Fargo”) in breach of defendants’ fiduciary duties (the “Merger”).  Plaintiff alleges that he and the other public stockholders of the Company’s common stock are entitled to enjoin the Merger, or alternatively, to recover damages in the event the Merger is consummated.  Plaintiff alleges that the Merger provides Wachovia’s public shareholders with inadequate consideration and is the product of a severely flawed sales process. Wachovia’s Board of Directors (the “Board”) has essentially disenfranchised the voters of Wachovia and locked up the vote in favor of the Merger when, in connection with the Merger Agreement, Wachovia and Wells Fargo entered into a share exchange agreement under which Wachovia is issuing Wells Fargo preferred stock that votes as a single class with Wachovia’s common stock representing 39.9 percent of Wachovia’s voting power."

Ehrenhaus has also filed a Motion for Preliminary Injunction and a Motion for Expedited Proceedings.  The case has been assigned to Judge Albert Diaz. 

Here's a little bit of background on the issue raised by the lawsuit regarding the shares to be issued by Wachovia to Wells Fargo:  In connection with their Merger Agreement , Wachovia and Wells Fargo entered into a Share Exchange Agreement, which provides that Wachovia will issue 10 shares of its "Series M, Class A Preferred Stock" to Wells Fargo in exchange for 1,000 shares of Wells Fargo Common stock.

What is "Series M, Class A Preferred Stock"?  The Form 8-K filed by Wachovia in connection with the Share Exchange Agreement says each one of those shares of stock represents 3.99% of the aggregate voting power represented by the shareholders of Wachovia common stock.  So, those ten shares have 39.99% of the voting power of Wachovia shareholders.

The effect of the issuance of those "super shares" to Wells Fargo will be to essentially to lock up the deal for Wells Fargo.  No other suitor for Wachovia can hope to obtain the necessary approval for an alternative merger deal while Wells Fargo holds a 40% voting bloc.  The lock up effect of the share issuance seems to be the main thrust of the Ehrenhaus Complaint.

It appears, however, that Wachovia complied with regulatory and statutory requirements regarding the issuance of those shares.  The New York Stock Exchange has a Shareholder Approval Policy which says that:

(c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:
(1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or
(2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.

The NYSE Rules provide for an exception when a delay in obtaining stockholder approval "would seriously jeopardize the financial viability of the enterprise," if the Audit Committee of the listed company expressly approves reliance on the exception.  The Rules further require that a company relying on this exception must mail a letter to its shareholders not less than 10 days before the securities will be issued, informing them of its intention to issue the securities without a shareholder vote.

Wachovia invoked the exception and sent the required letter to its shareholders, so it has complied with this particular requirement.

What about the North Carolina Business Corporation Act, which applies because Wachovia is a North Carolina corporation?  The Board of Directors of Wachovia has the power under North Carolina law, if the articles of incorporation so provide, to "determine, in whole or part, the preferences, limitations, and relative rights (within the limits set forth in G.S. 55‑6‑01) of (1) any class of shares before the issuance of any shares of that class or (2) one or more series within a class before the issuance of any shares of that series."  N.C. Gen. Stat. § 55‑6‑02.  The Articles of Incorporation of Wachovia presumably grant the Wachovia Board this authority and it was therefore presumably entitled to issue "Class M" shares with supervoting powers.

It will be interesting to see what happens with this case, which may be the first of many shareholder class actions over this merger.

 

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Mack Sperling
Brooks Pierce, LLP
2000 Renaissance Plaza
230 North Elm Street
Greensboro, NC 27401
336.373.8850

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Raleigh, NC 27601
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