On October 2, 2008, Wells Fargo presented Wachovia with a signed and Board-approved offer to purchase Wachovia Corporation without government assistance in a stock-for-stock merger transaction valued at $10 billion.  Prior to receiving this proposal, Wachovia had been negotiating with Citigroup to complete a merger transaction that included assistance from the federal government.Following the announcement of the Well Fargo merger, a Wachovia shareholder brought a lawsuit in the North Carolina business court seeking to enjoin the merger between Wells Fargo and Wachovia on an expedited basis, arguing that the merger should be enjoined because it violates the guidelines of Congress’ financial industry bailout program (the “Wachovia Action”).  In the Wachovia Action, the plaintiff seeks to enjoin the merger and asserts that the merger is illegal under the Emergency Economic Stabilization Act, the federal umbrella legislation that authorizes and administers more than $700 billion in rescue funds for banks and investment companies with losses related to subprime loans, because the Wachovia directors and Wells Fargo improperly used the fiscal crisis as an excuse to push through the merger at a “fire sale” price at the expense of Wachovia shareholders.  The plaintiff contends that Wachovia’s Board negotiated a Merger Agreement with, among other things, an inadequate “fiduciary out” clause, a draconian and unlawful Share Exchange [that circumvents the voting process and renders the vote on the Merger essentially meaningless], and at an inadequate exchange ratio for Wachovia shareholders, all at the same time assuring that Wachovia’s senior executives would receive lucrative “golden parachutes,” whether or not they continued to work for Wells Fargo.

In response to the plaintiff’s request for expedited proceedings, the defendants contended that expedited proceedings were “not warranted here because Plaintiff was seeking to prohibit or modify a merger necessary to ensure Wachovia’s continued viability-and equally necessary to avoid the damage to customers, depositors, employees, shareholders and the public that would occur if the merger were to be put in doubt, delayed, or blocked.”

In a recent ruling in the Wachovia Action (Ehrenhaus v. Baker et al., No. 2008 NCBC 19, 2008 WL 4928824 order issued (N.C. Super. Ct. Nov. 3, 2008)), the judge agreed to put the Wachovia Action on track for an expedited resolution but refused to order expedited discovery.  The judge said that since most of the key facts in the case were a matter of public record, he could render a quick decision on the injunction request without discovery.

In considering the plaintiff’s request for expedited proceedings, the Court noted that it “must not lose sight of plaintiff’s burden on the merits.”  On one hand, “Plaintiff may well be unable to overcome the high hurdle imposed on him here by the business judgment rule.”  However, in concluding that it may resolve the Wachovia Action on an expedited basis, the court found that the Wachovia shareholder presents a colorable claim as to irreparable harm and “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.”

The Court heard argument on the motion for preliminary injunction on November 24, 2008 and is expected to issue a decision before the shareholder meeting scheduled for December 23, 2008.  We will monitor the Wachovia Action and will report on the court’s decision on whether it will enjoin the Well Fargo-Wachovia merger.