Legal News

After Weekend of Lawyering, New Lines Drawn in Battle for Wachovia

By Dan Slater

While you enjoyed the weekend, Law Blog readers, the Wachovia/Wells/Citi situation underwent multiple permutations. Our deal colleagues tell us that, whatever the outcome of the court battle(s), the transaction is certain to reshape the country’s banking industry. We figure it will. But we’d also like to emphasize that, after three days of run-and-gun lawyering, the deal also has potential to lay down some new legal precedent — even if it’s far from clear what that precedent will look like.

By the time of our last post, yesterday, here’s where things stood: Friday’s announcement that Wells Fargo had jumped Citi’s $2.2 billion deal to acquire Wachovia drew battle cries from Citi, which cited a not-very-official-looking exclusivity agreement. On Saturday, lawyers convened at the “stately white Georgian home” of Judge Charles Ramos, located in Cornwall, Conn. (More on this later.) Citi presented its complaint to Judge Ramos, who decided ultimately to extend the exclusivity agreement — which was set to expire yesterday — until Friday. This sent lawyers from both sides scattering to redraw their plans.

For their part, Wells and Wachovia went to federal court to argue that a provision in the new $700 billion Economic Stabilization Act, signed into law on Friday, made the dispute a federal matter. Last night, U.S. District Court Judge John G. Koetl gave lawyers until tomorrow to file briefs. According to Tulane law prof Elizabeth Nowicki, who reached out to us yesterday, Wachovia is arguing that, under federal law, Section 126(c) of the bailout bill voids the exclusivity agreement between itself and Citi, meaning that that Wachovia is free to negotiate with any entity it pleases. While Judge Koetl is apparently willing to entertain that argument, Professor Nowicki tells us she thinks the argument is a non-starter.

Professor Nowicki told the Law Blog that, while the title of the new provision — “Unenforceability of Certain Agreements” — may be misleading, the provision merely says that “deal jumpers” (like Wells Fargo) can’t face liability for violating an exclusivity agreement in another buyer’s acquisition agreement with a target. “This new provision,” says Nowicki, “does not say such exclusivity agreements will automatically be completely null and void. Quite the opposite. The amendment only says that no exclusivity agreement can ‘be enforceable against or impose any liability’ on any person offering to acquire a target otherwise bound by the exclusivity agreement.”

Here are reports from the WSJ and NYT, which both mention that, in addition to the legal wrangling, a new deal, encouraged by the FDIC, could be in the works to split the baby between Wells and Citi. In such a deal, Wachovia’s 3,346 branches could be divvied up along geographic lines.

But let’s return to the law. Late last night, James McGuire, a New York state appeals-court judge reversed Ramos’s ruling. Why? In his one-page order, McGuire cites three reasons:

1) McGuire believes “substantial questions have been raised regarding the authority of Justice Ramos to have issued the order while physically located outside the State of New York.” (Recall that Judge Ramos issued the order from his Connecticut home.)

2) “In addition,” writes McGuire, “it appears that whether [Judge Ramos’s order] has any effect on the rights of the parties is far from clear, as Wachovia is not ordered to do or refrain from doing anything by the terms of the order.”

3) “Thus, it is also not clear that the order, to the extent it is construed to grant injunctive relief, could prevent any injury, irreparable or otherwise.”

Full post as published by Law Blog - WSJ.com on October 06, 2008 (boomark / email).