Alert July 21, 2009

Federal District Court Rejects Citigroup’s Claim that Exclusivity Agreement Bars Wells Fargo Wachovia Acquisition

In Wachovia Corp. v. Citigroup Inc., the U.S. District Court for the Southern District of New York  (the “Court”) rejected the claim of Citigroup Inc. (“Citigroup”) that an exclusivity agreement in connection with its planned acquisition of Wachovia Corp. (“Wachovia”) barred Wachovia from reaching a separate agreement to be acquired by Wells Fargo Corp. (“Wells Fargo”).  This is the first decision to interpret and apply Section 126(c) (“Section 126(c)”) of the Emergency Economic Stabilization Act (“EESA”).

The claim arose from Citigroup’s attempted acquisition of Wachovia in September 2008.  Citigroup and Wachovia  entered into an agreement in principle that involved FDIC assistance.  Barring a purchase of Wachovia by another institution, the FDIC was planning to put Wachovia into receivership by October 6, 2008.  Although the terms of an exclusivity agreement (the “Exclusivity Agreement”) with Citigroup barred Wachovia from seeking competing offers, Wells Fargo made a successful offer for Wachovia on October 2, 2008 and a definitive agreement was signed on October 3, the same day EESA was signed into law.  Citigroup sued Wachovia and Wells Fargo, claiming that the exclusivity clause made the Wells Fargo-Wachovia transaction unenforceable under Section 126(c), which prohibits agreements that restrict acquisitions in connection with emergency actions by the FDIC.  Wachovia responded to Citigroup’s claim seeking declaratory judgment that the merger between Wachovia and Wells Fargo was valid, proper and not prohibited by the exclusivity agreement with Citigroup due to the effect of Section 126(c).

The Court agreed with Wachovia, stating that Section 126(c) makes the exclusivity clause in the Citigroup-Wachovia agreement unenforceable.  The Court found that the Wells Fargo-Wachovia transaction “was part of an FDIC-supervised rescue and therefore was permitted to benefit from Section 126(c).  The Court further found that “there is no doubt that Wells Fargo’s offer to acquire [Wachovia] ... was ‘in connection with’ a sale of Wachovia, and therefore Section 126(c) applies to render the Exclusivity Agreement unenforceable.”

This decision is likely to strengthen the FDIC’s ability to encourage acquisitions of troubled institutions, however, it is also likely to create uncertainty in such transactions because they could be subject to intervention by federal regulators.