N.C. Judge Expedites Wells Fargo-Wachovia Merger Challenge

A Wachovia Corp. shareholder has convinced a North Carolina business court judge to fast-track his bid to stop the subprime-troubled regional bank's $10 billion "fire sale" merger with Wells Fargo, but the judge refused to order expedited discovery.

Judge Albert Diaz, who presides over the Superior Court division that specializes in corporate and business disputes, said plaintiff Irving Ehrenhaus is entitled to a speedy ruling on his claim that the merger should be enjoined because it violates the guidelines of Congress' financial industry bailout program.

The suit makes the novel claim that the stock-swap merger is illegal under the Emergency Economic Stabilization Act, the federal umbrella legislation that authorizes and administers more than $700 billion in rescue funds for banks and investment companies battered by the subprime financial storm.

The suit says the Wachovia directors and Wells Fargo improperly used the fiscal crisis as an excuse to push through a merger that shortchanges shareholders.

Judge Diaz found that Ehrenhaus raised sufficient concerns about the Wachovia board's quick turn-about acceptance of the offer and its decision to sell Wells Fargo a 40 percent share in the company ahead of the merger vote, even though that could skew the results.

However, the judge said that since most of the key facts in the case were a matter of public record, he could render a quick decision on the injunction request without discovery.

Ehrenhaus and other disgruntled investors in the Charlotte, N.C.-based Wachovia filed the suit to stop what they say is Wells Fargo's opportunistic use of the current fiscal crisis to acquire the bank at a bargain-basement price.

The suit claims that the Wachovia directors breached their fiduciary duty to get the best price possible in the sale of the company and that parts of the merger agreement are unenforceable under the bailout legislation.

Wachovia stockholders will get less than two-tenths of a share of Wells Fargo stock for each of their shares in the deal, Ehrenhaus claims.

That works out to less than $7 per share, even though Wachovia stock was selling for around $10 in the days before the merger offer, the plaintiff says.

Wachovia officers say the sudden collapse of the subprime mortgage market forced their hand.

They claim that the bank chain was suddenly pushed into an ocean of red ink and was only days away from being taken over by the federal government when the Wachovia board accepted Wells Fargo's offer.

Even if the court found a reason to enjoin the merger, Ehrenhaus does not have the resources to put up the sizable security bond he would be required to post to reimburse the merger partners for the damages that would be caused by mistakenly delaying the merger, the defendants argue.

Plaintiffs who seek a preliminary injunction in a business dispute often are required to post a bond that could be forfeited to pay for damages if they are unable to back up the allegations that prompted the court to grant that injunction.

In his ruling Judge Diaz noted that Ehrenhaus' burden of proof in this case is high because there is no competing offer or other alternative to the Wells Fargo deal.

However, the judge said the allegation concerning the sale of a 40 percent share to Wells Fargo before the merger vote is a "colorable claim" because such a transaction could be "unduly coercive."

That, coupled with the Wachovia board's acceptance of severe restrictions on its ability to shop for a better price while the Wells Fargo offer was on the table, is enough to fast-track the injunction proceeding, Judge Diaz said.

He ordered the parties to complete all briefing by Nov. 21 and scheduled a hearing on the preliminary injunction for Nov. 24.

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