Citigroup Inc. v. Wachovia Corporation; Handicapping the Outcome

Citigroup announced today that it is abandoning its effort to acquire parts of Wachovia, and will not pursue an injunction preventing Wells Fargo from acquiring Wachovia. But it does assert that “it has strong legal claims against Wachovia, Wells Fargo and their officers, directors, advisors and others . . . ,” and intends “to pursue these damage claims vigorously on behalf of its shareholders.” So how successful might Citigroup be?

On Citigroup’s allegations there would seem little doubt that, by entering into its merger agreement with Wells Fargo, Wachovia breached its September 29, 2008 Exclusivity Agreement with Citigroup, and that Wells Fargo induced the breach. The questions are what damages, if any, Citigroup can establish; and the effect Section 126(c) of the Emergency Economic Stabilization Act of 2008 (“EESA”) has on Citigroup’s claims.

A. Citigroup’s Allegations

Citigroup’s complaint, filed October 4, the day after Wells Fargo entered into its merger agreement with Wachovia (when do lawyers sleep on these deals?), filed in New York State Supreme Court (no. 602874/08), tells a dramatic and, from Citigroup’s standpoint, nefarious tale. After reciting its chivalrous efforts to save Wachovia, and the inducements offered to it to do so by the FDIC, in consultation with the Federal Reserve, the Secretary of the Treasury, and the President, Citigroup and Wachovia entered into the Exclusivity Agreement on September 29, 2008. Pursuant to the Agreement Wachovia agreed not to negotiate or enter into a competing deal with any other party during the exclusivity period, which was extended to October 6, 2008. The Agreement contemplated that Citigroup and Wachovia would negotiate definitive deal documents during this period.

The drama that ensued, according to Citigroup’s complaint, is worth reciting in full:

“12. Early in the morning on Thursday, October 2, 2008, the principals of Citigroup and Wachovia met and reached high-level agreement on all remaining issues. At that meeting, Citigroup and Wachovia further agreed that these points would be quickly documented and that final documents would be executed before the close of business on the following day.

13. Following this meeting, teams of lawyers worked through the day and night on Thursday to finalize the definitive deal documents. Their work had nearly been completed by early Friday morning.

14. According to press reports, and unknown to Citigroup, at approximately 7:30 p.m. on Thursday, October 2, 2008, unnamed "federal regulators" advised Wachovia to expect an acquisition proposal from Wells Fargo.

15. Wachovia did not disclose to Citigroup that it expected to receive a competing offer from Wells Fargo, but instead Wachovia and its lawyers continued to participate in discussions with Citigroup to document their agreement until approximately 2 a.m. on Friday, October 3, 2008.

16. At approximately 2:15 a.m. on Friday, October 3, 2008, Wachovia's Chief Executive Officer, Robert Steel, advised Citigroup that Wachovia had entered into an acquisition agreement with Wells Fargo, at which point Wachovia refused to participate in further discussions with Citigroup.

17. At approximately 7:15 a.m. on October 3, 2008, Wachovia issued a press release announcing that Wachovia and Wells Fargo had ‘signed a definitive agreement for the merger of the two companies.’ This agreement and the negotiations that preceded it flagrantly violate the express language of the Exclusivity Agreement.”

B. Liability and Damages

There would seem little doubt that Citigroup, on the facts alleged, has a claim for breach of contract against Wachovia. Wachovia did not deal exclusively with Citigroup under the Exclusivity Agreement; indeed, it jettisoned the deal it was about to enter into with Citigroup in favor of a better deal with Wells Fargo. The question is what damages did Citigroup suffer as a result of any Wachovia breach of the Exclusivity Agreement? The measure of contractual damages is to award the non-breaching party the “benefit of the bargain.” How does one measure such damages for breach of an exclusive agreement to negotiate a definitive merger agreement?

On the facts alleged, it would also appear that Citigroup has made out a valid case for intentional interference with contract against Wells Fargo. As stated in Section 766 of the Restatement of the Law of Torts (Second), this tort consists of the following:

“One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.”

But again, what damages has Citigroup suffered by reason of any Wells Fargo interference the Citigroup/Wachovia Exclusivity Agreement?

One reasonable measure of such damages would be the breakup fee that Citigroup would have been entitled to under any definitive agreement it entered into with Wachovia under the Exclusivity Agreement. The deal Citigroup agreed in principle to do with Wachovia, as alleged in the Citigroup complaint, is that it would “acquire Wachovia’s commercial banking subsidiaries and other businesses for approximately $2.1 billion plus the assumption of approximately $54 billion of secured and unsecured Wachovia debt at the holding company level, and the insured and uninsured deposits and other obligations to Wachovia’s creditors.” Complaint ¶ 4.

Wachovia’s October 3rd Merger Agreement with Wells Fargo is a superior deal. It involves the acquisition of all of Wachovia’s businesses (and the assumption of all of its debt). Wachovia’s shareholders will receive 0.1991 shares of Wells Fargo common stock in exchange for each share of Wachovia common stock. Based upon Wells Fargo’s closing price of $35.16 on October 2, 2008 (the day before the deal was inked) the transaction had a value of $7.00 per Wachovia common share, for a total equity value of approximately $15.1 billion. (After the stock market massacre of this week, Wells Fargo closed Friday, October 10, at $28.31.)

It is reasonable to assume that any Citigroup/Wachovia definitive Merger Agreement would have contained a fiduciary out, permitting the Wachovia board to terminate the agreement for a better deal. The Wells Fargo proposal is a better deal. On the assumption that breakup fees range from 2% to 4% of transaction value, that would equate to a breakup fee under any putative Citigroup/Wachovia merger agreement of from $42 million to $84 million, plus expenses. If Citigroup can throw in assumed debt ("enterprise value"), then the fee would be much higher.

While in the context of $700 billion bailouts, damages in the range of $42 million to $84 million is pocket change, it’s not bad for a few days’ work, even late into the evenings.

C. EESA § 126(c)

Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. § 1823(c)) permits the FDIC to provide assistance to any insured depository institution on the terms set forth therein. In what would appear to be an effort to provide cover for Wells Fargo’s “white knight” capture of Wachovia from Citigroup, the EESA, by Section 126(c), amends Section 13(c) by adding new paragraph (11) thereto, as follows:

“(11) Unenforceability of Certain Agreements — No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly —

“(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

“(B) prohibits any person from offering to acquire or acquiring, or
“(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.”

This appears to protect Wells Fargo, but it has many ambiguities, as one would expect given the haste with which it was undoubtedly drafted. First, Wells Fargo is not a party to the Citigroup/Wachovia Exclusivity Agreement. In suing Wells Fargo, Citigroup is not seeking to “enforce” the Exclusivity Agreement, it is suing Wells Fargo in tort. Second, while Citigroup alleges that the FDIC agreed to provide “open bank assistance” to support the Citigroup/Wachovia acquisition, it is not clear that that represents an “exercise” of the FDIC’s authority within the contemplation of Section 126(c). Third, while the new paragraph is headed “Unenforceability of Certain Agreements,” the language appears only to protect parties such as Wells Fargo, not Wachovia, a party to the Agreement. If Wachovia is not protected, then neither is Wells Fargo since, after the merger, Wachovia will become a wholly-owned subsidiary of Wells Fargo.

Demonstrating that the best defense is often to go on offense, Citigroup actually alleges, in its complaint, that by entering into the merger agreement with Wells Fargo, Wachovia and Wells Fargo violated Section 126(c) of the EESA! The basis for this allegation?

“… because it [the Wells Fargo/Wachovia merger agreement] would affect, restrict or limit Citigroup’s ability to acquire Wachovia’s insured bank subsidiaries in connection with the FDIC’s exercise of its authority under Section 13 of the FDIA to provide open bank assistance in support of Citigroup’s proposed acquisition of Wachovia’s insured depository institution subsidiaries.”
Complaint ¶ 79.

It will be interesting to see the parties’ arguments over the application of 126(c) to the litigation.