Can it be that the Share Exchange Agreement, which gave Wells Fargo 40% of the voting control over Wachovia stock, is invalid? That’s exactly what the Plaintiff in the shareholder class action asking for an injunction regarding the Wachovia-Wells Fargo merger is saying in his Reply Brief filed yesterday.
In this new argument — not raised in Plaintiff’s opening Brief — Plaintiff says that a share exchange, under North Carolina law, requires the approval of the shareholders, and that this approval wasn’t obtained. If Plaintiff is right, the substantial voting power obtained by Wells Fargo in connection with that Agreement would be invalid.
Plaintiff is certainly right about the need for approval of a share exchange under North Carolina law. Section 55-11-03 of the General Statutes says that:
After adopting a . . . share exchange, the board of directors . . . of the corporation whose shares will be acquired in the share exchange, shall submit the . . . share exchange for approval by its shareholders.
N.C. Gen. Stat. ¶55-11-03(a). If this is the type of share exchange which is subject to the statute in the first place (Wachovia could just as easily have sold these shares to Wells Fargo for $10, and not exchanged shares, so it may not be), this will be a significant issue.
The won’t be the end of the inquiry, however, because not every share exchange requires shareholder approval. The North Carolina statute requires approval only for a forced, involuntary transaction The commentary to Section 55-11-02 says that:
This section introduces a concept that is new to North Carolina, i.e., a share exchange, which is defined as a transaction by which a corporation becomes the owner of all the outstanding shares of one or more classes of another corporation by an exchange that is compulsory on all owners of the acquired shares.
The statute specifically states that "this section does not limit the acquisition of all or part of the shares of one or more classes or series of a corporation through a voluntary exchange or otherwise." N.C. Gen. Stat. §55-11-02(d).
Apart from being dictated by the severe financial pressures which Wachovia faced, the share exchange would seem to be voluntary. If that’s the case, it didn’t require shareholder approval.
[Update: On Sunday, November 23rd, Wachovia filed a Motion for leave to file an additional Brief addressing this issue. The Proposed Brief was attached to the Motion. In addition to arguing that the statute does not apply to a voluntary transaction, Wachovia argues in the new Brief that the statute does not apply to an issuance of new shares. I wrote about the process by which these shares were issued in an earlier post.]