The Plaintiff in the would be class action seeking to enjoin the Wachovia and Wells Fargo merger is pursuing his effort to obtain expedited discovery.  The parties have staked out the broad outlines of the claims and defenses in their briefs on that Motion. Plaintiff’s Brief is here, Wachovia’s Brief, filed yesterday afternoon, is here.

The essence of Plaintiff’s argument is that the $7 per share offered by Wells Fargo in the Merger Agreement is an inadequate price, and that the Wachovia Board of Directors violated its fiduciary duty by approving the merger and by entering into the Share Exchange Agreement that gave Wells Fargo nearly 40% of the outstanding voting stock of Wachovia.

The Claim Of Inadequate Price

On the claim that the price being paid by Wells Fargo is inadequate, Plaintiff argues that Wachovia stock was trading at $10 per share on September 26, 2008, before the bailout bill was passed, and that the effect of the bailout is to make Wachovia more valuable because the federal government will purchase its non-performing assets. 

As Wachovia points out (in its Brief at page 4 n.2), there is no certainty that it would be entitled to federal funds, which are to be allocated in the discretion of the Treasury. 

Wachovia says, based on the previously presented Affidavit testimony of Robert Steel, that the "stark choice" for Wachovia was either to accept the Wells Fargo offer or to enter receivership. (Wach. Brf. at 4)

Fiduciary Duty Claim

Plaintiff’s claim of violation of fiduciary duty is based on the argument that the Share Exchange Agreement has rendered the shareholder vote on the merger "essentially meaningless," and precludes any competing bid from being made. 

Plaintiff contends that the Share Exchange is invalid under the Emergency Economic Stabilization Act of 2008.  He points to the Section 126(c) of the Act, which reads:


No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly

(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

(B) prohibits any person from offering to acquire or acquiring, or

(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.

Wachovia launched a full frontal attack in response to the assertion that there is another potential buyer or merger partner:

Plaintiff’s application to this Court is based on the unsubstantiated and illogical notion that Wachovia has alternatives to the Wells Fargo merger and that somehow shareholders are being prevented from taking advantage of these supposedly superior opportunities.  This makes no sense.  It is now more than a month since Wachovia first announced that it was available for a transaction, and no offers other than those by Citigroup and Wells Fargo have been made.  If any capable third party was interested in making such an offer, it could have done so. 

Wach. Brf. at 5.  Wachovia also says that "any bank large enough to consider acquiring Wachovia knows how to formulate and communicate such an offer." (Wach. Brf. at 10-11).

The parties are also at odds over the significance of the "fiduciary out" in Section 6.3 of the Merger Agreement.  Plaintiff says that the fiduciary out does not permit Wachovia to terminate the Agreement in the event of a superior offer, but instead requires it to present the merger to the shareholders for a vote without a recommendation. 

On the point of motive, Plaintiff contends that the motive for this alleged breach of duty was to obtain "lucrative ‘golden parachutes’" for Wachovia’s executive team and for them to retain employment with the merged bank. Wachovia responded that the only management employee who voted to approve the merger is Robert Steel, who has publicly stated that he will not take a position with the merged entity.

Wachovia’s Other Arguments

Wachovia stresses the need to close its transaction, and says that the consummation of the merger is "crucial to the stability of the United States banking system" in the judgment of the Federal Reserve.  Wach. Brf. at 2. 

The Charlotte bank says that Plaintiff can have no hope of posting a bond even it it obtains injunctive relief.  As Wachovia puts it:

it is inconceivable that this shareholder could possibly post a bond for the potential costs and damages resulting from obtaining a wrongful injunction against a multi-billion merger that is critical to the stability of the financial system

Wach. Brf. at 3. That would be quite a bond.