The North Carolina Business Court today denied Plaintiff’s request for expedited discovery in the putative shareholder class action seeking to enjoin the Wachovia-Wells Fargo Merger, but agreed to decide Plaintiff’s Motion for a Preliminary Injunction on an expedited basis, setting a hearing three weeks from today. (I wrote about the Motion for Expedited Discovery in a previous post.)
After discussion of the appropriate standard for ruling on a motion for expedited discovery, Judge Diaz focused in his 10 page Order on Plaintiff’s burden on the merits to show that Wachovia’s Board of Directors had breached its fiduciary duties, and the deference to be given the Wachovia Board under North Carolina’s Business Judgment Rule.
The Court described the Business Judgment Rule as a "high hurdle," and one which Plaintiff "may well be unable to overcome . . . particularly where (1) Wachovia’s board asserts that quick action on the Merger Agreement was necessary to avoid a government-directed liquidation of the Company, and (2) Plaintiff presents no evidence of a competing offer for the Company." Op. at ¶43.
Judge Diaz then observed that the Plaintiff had stated what he described as "colorable claims":
Plaintiff appears to have alleged colorable claims as to his contentions that (1) the Share Exchange transferring a nearly 40% voting bloc to Wells Fargo in advance of a vote on the Merger Agreement is unduly coercive, and (2) the limited “fiduciary out” clause contained in the Merger Agreement violates the Wachovia board’s continuing responsibility to exercise its fiduciary duties. See generally First Union Corp., 2001 NCBC 9 ¶¶ 81, 89 (stating that (1) a relevant test as to shareholder coercion is whether the vote will “‘be a valid and independent exercise of the shareholders’ franchise, without any specific preordained result which precludes them from rationally determining the fate of the proposed merger,’” and (2) courts should invalidate merger plans that “purport to restrict a board’s duty to fully protect the interests of the corporation and its shareholders”).
Op. at ¶44. Judge Diaz also held that Plaintiff had "present[ed] a colorable claim as to irreparable harm." Op. at ¶45.
Judge Diaz held, however, that expedited discovery was not necessary because "most (if not all) of the facts pertinent to resolving Plaintiff’s request for preliminary injunctive relief are matters of public record." Op. at ¶48. He described those facts as follows:
(1) A mere two weeks before the Company’s demise, Wachovia’s President and CEO was insisting publicly that Wachovia “had a great future as an independent company;”
(2) In the ensuing period, Wachovia’s share price tumbled from $18.75 to $1.84;
(3) Wachovia’s board faced a crisis of historic proportions when it met to consider and approve the Merger Agreement;
(4) Wachovia’s board took very little time to digest and act upon the Merger Agreement;
(5) The Share Exchange gives Well Fargo almost 40% of the vote in advance of a decision by the Company’s shareholders as to approval of the Merger Agreement;
(6) The “fiduciary out” clause in the Merger Agreement prohibits the Wachovia board from walking away from the Wells Fargo deal should a better deal materialize, but instead only allows the board in that instance to make no recommendation to the shareholders, with an explanation;
(7) Should the Merger Agreement be approved by the shareholders, three members of the Wachovia board will be invited to join the Wells Fargo board;
(8) All of the agencies with regulatory authority over the Merger Agreement have approved it; and
(9) Following approval of the Merger Agreement by Wachovia’s board, no other entity has made a bid to purchase the Company.
Op. at ¶49.
The Court gave short shrift to the argument by Plaintiff that the Share Exchange Agreement (which gave Wells Fargo nearly 40% of voting control over Wachovia) was invalid under the Emergency Economic Stabilization Act of 2008. In a footnote, Judge Diaz picked up the language of the Act which says that an agreement that "directly or indirectly . . . affects, restricts, or limits the ability of any person to offer or acquire . . . all or part of any insured depository institution" is unenforceable against an acquirer. He held that Wells Fargo, the only acquirer on the horizon for Wachovia, "obviously has no interest in having the Share Exchange declared unenforceable." Op. at n.7.
The Court set the following schedule for resolution of the Motion for Preliminary Injunction: Plaintiff’s Brief and supporting materials are due November 10th; Defendants’ responsive papers are due November 17th; and Plaintiff’s reply is due November 21st. A hearing is set for 2:00 p.m on November 24th.
[If you read footnote 10 of Judge Diaz’s opinion, he mentioned this blog and referred to me as a "prolific North Carolina business law blogger." I appreciated that. My dictionary defines "prolific" as "marked by abundant inventiveness."]