Banking Law

Double Take

Many of us who practice banking law had a "WTF?" moment Friday morning when we read that Wachovia had spurned what was announced as a done deal to sell itself (or, at least, its commercial bank) to Citigroup, and had accepted a better offer from Wells Fargo. We thought (correctly, it turns out) that Wachovia had signed an exclusivity agreement with Citigroup that would prevent it from negotiating a deal with any other potential acquirer.

Of all the commentary I read, none captured the typical lawyer's bewilderment better than this post from The Wall Street Journal's "Law Blog."

After hearing news this morning of Wells Fargo?s $15.4 billion takeover of Wachovia, we figured there?d be some legal fallout. After all, it was only days ago that the world thought that Wachovia had reached a $2.16 billion deal with Citigroup (albeit a deal only for Wachovia?s banking operations). So we weren?t entirely surprised when we got word that Citi was threatening legal action over its jilting by Wachovia. Citi claims the letter of intent it reached with Wachovia contained an exclusivity agreement prohibiting Wachovia from trying to lure other bidders.

The Law Blog linked to a copy of the exclusivity agreement. Assuming that's the signature of a corporate officer of Wachovia with authority to bind the corporation (its general counsel, press reports state), then it's apparently binding. A New York State Supreme Court judge apparently believed it likely is binding, because last night he issued a temporary restraining order against Wachovia consummating the Wells Fargo deal and set a hearing for this Friday. The possible rationales considered by Wachovia and Wells Fargo for thinking that they could "work around" the exclusivity agreement are discussed in the comments section of the blog, and-except for some notable snark-with the kind of consideration and respect for opposing views that is uncharacteristic of many of that blog's (and many other blogs') comments sections, which can often devolve into pure ad hominem snark fests ("Not that there's anything wrong with that."--Jerry Seinfeld). Obviously, we'll know more about Wachovia's thinking when they present their case in court this week. Until then, speculation may be interesting to wonks, but most of us have other work to do.

When asked for a comment by a business reporter on Friday afternoon, I told him that I thought that since the Wells Fargo deal appeared to be the better one for both the shareholders of Wachovia and for the FDIC (at least it does at first blush), if the federal regulators (especially the Fed) wanted to make sure that it happened, it would happen, notwithstanding the FDIC's initial response that it stood behind its agreement with Citigroup and notwithstanding the validity and enforceability of the exclusivity agreement. That's a cynic's view, perhaps, but then, old guys can get that way. The regulators can find a myriad of ways to exert pressure on Citigroup to back off, with the "unwritten understanding" that Citi would be at the front of the queue for future deals (of which there will be an unfortunately substantial number). To those who think that elbowing Citigroup out of the way in such a fashion might discourage future "white knights," I'd disagree (respectfully). No honor is expected among thieves (Oops, there goes the cynic again!). If there's big money to be made on future deals, the usual suspects will be front and center, regardless of the healing knife wound in the still-sore backside.

I have no idea whether or not anyone "missed" the exclusivity agreement, or gave it short shrift. On the other hand, I was amused by the Law Blog's mention of this article about sleep-deprived M&A lawyers putting together deals in the wee hours. H. Rodgin Cohen, lead counsel for Wachovia (and a man lauded in a previous post) talked about "not sweating the small stuff." The Law Blog wondered whether, in the grand scheme of things, the exclusivity agreement was considered "small stuff." Personally, I doubt it. If it was, it just got a whole lot bigger. At least until Friday.

Looking at this deal and other recent government-assisted transactions, the former general counsel of a thrift institution created in late 1988 out of more than a dozen failed Texas savings associations e-mailed me Friday and reminisced about the similar 24/7 frenzy of the Southwest Plan government-assisted bank deals of that era. The attorney talked about how the management team that was being brought into to manage the new giant thrift was told in the wee hours by the government negotiators that the deal was dead. They wearily trudged off to bed. When they awoke a few hours later, the government had done a 180-degree turn and the deal was miraculously done. As this observer with first-hand experience opined, "If the public ever knew what these transactions were really like they would fire everyone in DC."

Only in a prefect world. In this world, the Chinese Fire Drill is likely to continue to be the template.

UPDATE 10/06/08: This just gets better and better. Last night, a New York state appellate judge suspended the lower court restraining order, and a U.S. District Court judge set a hearing for tomorrow on the dispute, so we should have a public statement as to the legal rationale of Wells Fago and Wachovia for "working around" the exclusivity agreement with Citigroup long before Friday. According to today's Wall Street Journal, the Fed is pushing both Wells Fargo and Citigroup to reach a compromise that doesn't involve government assistance. No surprise there.

Full post as published by Bank Lawyers Blog on October 05, 2008 (boomark / email).