Wachovia Shoots Back: Says Its Board Of Directors Fulfilled Its Fiduciary Duties In Negotiating Merger With Wells Fargo

Wachovia has filed its Brief in opposition to Plaintiff's Motion for Preliminary Injunction, laying out the case why its Board of Directors fulfilled their fiduciary duties in agreeing to the Merger with Wells Fargo.

The principal factual support for Wachovia's Brief is the Affidavit of Dona Davis Young, a member of the Wachovia Board of Directors, which relies heavily on the Form S-4 filed by Wells Fargo on October 31st, which discloses the background for the Merger.

Young's Affidavit lays out a day by day chronology of the downward financial spiral in which Wachovia found itself over the months of September and October 2008, and concludes with the approval of the Merger Agreement on October 3rd.

The Affidavit emphasizes that if the Board hadn't voted to approve the Merger, "it was likely . . . that Wachovia would not be able to fund normal banking activities and thus would again face the very real prospect of FDIC receivership."  Young Aff. ¶9.

As Young describes the situation, it was essential to sew up the deal with Wells Fargo in order to obtain the cash needed to sustain operations pending the closing of the Merger:

It was important that Wells Fargo have assurance that the merger could close in order to have an incentive to establish interim funding arrangements with Wachovia, and it was equally important that the financial markets and the Federal Reserve have the same assurance so that Wachovia could obtain funding from these sources as well. Absent the ability to obtain such funding, Wachovia faced receivership, which would have destroyed the value of Wachovia as a business franchise and left its shareholders with worthless stock.  Shortly after the merger agreement was signed and the merger was announced, Wachovia was able to obtain the financing it needed from Wells Fargo and from other sources of funding.

Young Aff. ¶11.

On the key issue of the Share Exchange Agreement which gave 39.9% voting control over Wachovia to Wells Fargo, the Young Affidavit says that Wells Fargo had initially demanded a 50% stake.  Young says that Wachovia negotiated that percentage down to 39.9%. Young Aff. ¶10. (It is a bit unsatisfying that Young's "testimony" on this pivotal point is really double hearsay -- she says in ¶10 the Board was "informed" by an unidentified person that someone, also unidentified, acting on behalf of Wachovia had engaged in this sharp negotiation with Wells Fargo).

Wachovia relied on a Delaware Chancery opinion from 1999, In re IXC Communications, Inc. Shareholders Litig., 1999 WL 1009174 (Del. Ch. 1999) which held that giving away 40% voting control doesn't lock up a merger and which emphasized the power of the remaining 60%:

Here, an admittedly independent majority of IXC's shareholders (owning nearly 60% of all IXC shares) may still freely vote for or against the merger, based on their own perceived best interests, and ultimately defeat the merger, if they desire. The defendants have not, in fact, 'locked up' an absolute majority of the votes required for the merger through the GEPT deal. Plaintiffs themselves, notwithstanding vigorous argument questioning the fairness of the GEPT deal, tacitly admit that the vote-buying agreement does not make the outcome of the vote a foregone conclusion. They can only say that the GEPT deal 'almost completely lock[s] up the vote-thus giving shareholders scant power to defeat the Merger...'  'Almost locked up' does not mean 'locked up,' and 'scant power' may mean less power, but it decidedly does not mean 'no power.'

Wachovia makes much of the absence of a material adverse change provision in the Merger Agreement, stating:

A few days after the Merger Agreement was executed, Wachovia posted a loss in excess of $20 billion for the third quarter of 2008 -- but faced no risk that Wells Fargo could terminate the Merger Agreement because the Agreement contains no material adverse change provision.  Wachovia obtained exceptional value in return for the so-called 'deal protection provisions' afforded to Wells Fargo.

Wachovia Brf. 17-18.

As it's spun out by Wachovia, one could argue that Wachovia, near financial death, out-negotiated Wells Fargo on this deal.  The Board got $7 per share for the Wachovia shareholders no matter how bad thing get, short of bankruptcy, insolvency, or a receivership.  Wachovia Brf. 15 n.7.  That's pretty impressive -- "exceptional value" in Wachovia's words -- considering the dire circumstances painted by the papers and the continuing implosion of the financial markets.

Plaintiff's reply brief is due Friday (November 21), then there's a hearing Monday (November 24).

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