Shareholders not settling for Wachovia deal

CHARLOTTE -- Piece by piece, Wells Fargo has been revealing how it intends to run Wachovia.

Not so fast, some of Wachovia's shareholders are protesting, though they're facing long odds.

A Charlotte judge is scheduled to hear a shareholder's class-action lawsuit today that seeks to block the impending purchase, claiming that Wells is not offering a fair price or allowing a fair vote.

A ruling in favor of the shareholders could make way for a higher bidder, force Wells to offer a higher price, or even enable Wachovia to remain an independent company.

The outcome also could have broader implications, setting a standard for how much voting power companies can gain and shareholders can lose.

To buy Wachovia, Wells needs the approval of its shareholders. But San Francisco-based Wells has practically clinched the ballot. That's because it controls nearly 40 percent of the Wachovia shareholder vote. A clause in its purchase agreement required Wachovia to grant it preferred shares worth 39.9 percent of the Charlotte bank's voting power.

Normally, Wachovia would need shareholder approval to grant those shares. But the New York Stock Exchange provides an exception in urgent deals in which a delay "would seriously jeopardize the financial viability of the enterprise." Wachovia says the voting superpower was "a necessary condition" for its sealing the Wells agreement and for "maintaining Wachovia's financial stability." Wachovia issued the newly created shares to Wells on Oct. 20.

For those who oppose the Wells deal, the odds are against them: Shareholders rarely trump the will of company managers. For Charlotte, the stakes are high. Wachovia is a major civic and economic engine and the city's second-largest employer, with 20,000 local workers. The deal would make Charlotte the East Coast base for Wells Fargo but could result in hundreds or thousands of local layoffs.

Some experts worry that other companies will follow suit, quashing shareholders' rights whenever they prove inconvenient.

"If that deal is so good, you shouldn't have to give away 40 percent of the vote," state Treasurer Richard Moore said earlier this month.

Not a unique tactic

The voting-power transfer has a recent precedent. In March, JPMorgan Chase upped its offer for a failing Bear Stearns from $2 a share to $10 - in exchange for the right to purchase 39.5 percent of Bear's common shares before the shareholder vote.

Chris Cernich, a research analyst at Proxy Governance, said the voting-power arrangements indicate "a lot of anxiety on the part of the acquirer."

"It looks like they're just trying to sew up something that didn't get completely sewed up," said Cernich, whose company advises institutional investors. "I don't mean to say that it's underhanded, but I think a lot of people will see it that way."

The lawsuit also alleges that the voting-power provision precludes other bidders from stepping in to offer a higher price. In court filings last Monday, Wells Fargo shot back, saying that very few, if any, financial institutions are big enough or stable enough to buy Wachovia.

"More than a month has elapsed since the announcement of the transaction without any word of a competing offer," the bank said.

Carl Stine, a partner at the New York law firm that filed the suit, responded: "Of course there aren't any other bidders. They've got 40 percent of the vote."

Others have a say

Institutional investors, such as pension and mutual funds, hold about two-thirds of Wachovia stock, according to Bloomberg data, and their views will play a large role in the vote's outcome. Shareholder advisory firms, such as Proxy Governance, generally don't issue their recommendations on a shareholder vote until after a date for the vote is set. Wells says it plans to hold the vote for this deal in December but hasn't set a date.

Some shareholders who oppose the deal want Wells to simply offer a higher price for a stock that was trading at close to $40 per share a year ago. (It closed Friday at $4.13. The deal was originally valued at $15 billion or about $7 per share.) Others, including Treasurer Moore, would prefer that Wachovia remain independent.

It appears that Wachovia did try to remain independent in its final hours. According to a recent Wells Fargo regulatory filing, in the early morning of Monday, Sept. 29, Wachovia asked whether it could get assistance directly from the Federal Deposit Insurance Corp. rather than sell itself to another bank. The FDIC rejected the idea.

The lawsuit says that Wachovia could have remained a stand-alone company if it had had a chance to qualify for the government's bank bailout funds. The original plan passed Congress on the day the Wells deal was announced.

Wells equates those arguments to Monday-morning quarterbacking, noting that Wachovia was on the brink of bankruptcy and that there is no guarantee it would have qualified for the bailout funds.

On Friday, Wachovia spokeswoman Christy Phillips-Brown said the merger with Wells "is in the best interests of all Wachovia constituencies: our shareholders, customers, colleagues and communities."