Will Jilted Citigroup Sue?
"Hell hath no fury like a white knight spurned."
- Jonathan D. Glater writing for the Wall Street Journal.
Wachovia had a "silent run" losing scads of big depositors. Citigroup came to the rescue - loaning them cash. With FDIC guidance, Citigroup stepped in to prevent Wachovia from collapsing on Monday September 29 having made a deal to buy Wachoiva for $ 1 per share. The loans, in an undisclosed amount, were made with the idea that the Citigroup acquisition of Wachovia was a done deal.
How does Wachovia thank Citigroup? By turning tail and making a deal with Wells Fargo.
Citigroup claims Wachovia was contractually barred in an exclusivity agreement from negotiating with anyone else until October 6. The Wells Fargo deal was struck in the wee hours of the morning on October 3.
Is this deja vu? Twenty years ago the brawl was Pennzoil and Texaco over Getty Oil. In that fight Pennzoil was the jilted suitor turned away by Getty in favor of a deal with Texaco. Pennzoil claimed that Texaco jumped into the middle of its deal with Getty Oil. There was no formal, written merger contract between Getty and Pennzoil, but the jury found that an "informal agreement" was still binding and found in favor of Pennzoil. The result: An $11 billion verdict against Texaco that bankrupted the company.
Citigroup’s press release said "a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citigroup and Wachovia. In addition, Wells Fargo’s conduct constitutes tortious interference. . . " Sounds nasty. Here’s a copy of the agreement. You be the judge.
As Glater reported in the Wall Street Journal, courts do not always tolerate companies’ efforts to tie their own hands, especially when doing so might hurt investors. Wachovia might have been in worse trouble if it didn't pursue the Well Fargo deal which was a much better deal for shareholders ($7 per share instead of $ 1 per share). They could have been breaching their fiduciary duty.
Wachovia is incorporated in North Carolina and that state's law will determine its directors' duties to its shareholders.
The Wells Fargo/ Wachovia deal was worth $15.1 billion in stock - obivously better for shareholders than Citigroups’s proffered $2.2 billion. Not to mention the taxpayers come off better not having to absorb any Weachovia liabilities. Will Citigroup sue? And can it win? Who knows. What about all the Wachovia shareholders who dumped their stock when they heard the terms of the Citigroup deal which valued Wachovia stock at just $1 per share. Were they deceived?
This deal is far from over. Stay tuned.
I made the observation that the board of Wachovia is in for a difficult time over this. If the contract restriction is not upheld, what does that say about the ability to enforce contracts in NY? If it is, the board better have their insurance paid up with a company that can handle the exposure.
Gavin Craig
www.twincitiesbusinesslitigation.com