The future of Wachovia Corp., and its 4,800 St. Louis employees, is in limbo and could be tangled in a prolonged legal fight.
The battle for control tilted toward Wells Fargo on Sunday when a New York state appeals court blocked a lower court ruling that had favored rival bidder Citigroup.
On Saturday, Judge Charles Ramos of the trial-level New York Supreme Court issued an emergency order that preserved an earlier Citigroup agreement with Wachovia "until further order of the court." The decision threatened Wells Fargo’s takeover bid for Wachovia, which was announced Friday.
The legal action was just the latest twist in a week of tumult for Wachovia, the Charlotte, N.C.-based financial services firm that has its securities brokerage unit headquartered in St. Louis.
Citigroup said it would appeal the appeals court decision.
The fight also is being waged in federal court, where Wachovia asked U.S. District Judge John Koeltl to declare invalid part of the Citigroup deal that would have restricted Wachovia from considering competing bids. Koetl scheduled another hearing Tuesday.
With both Wells Fargo and Citigroup vowing to press their legal rights to a deal with Wachovia, analysts warned that a prolonged takeover fight carries enormous risk at a time when the nation’s financial system is under the worst stress since the Great Depression.
Citigroup had announced Sept. 29 that it had received federal government backing to acquire the banking assets of Wachovia for $2.1 billion, a bargain price of $1 a share. Under the Citigroup deal, Wachovia would retain its securities brokerage and mutual fund operation.
Then, late Thursday, San Francisco-based Wells Fargo made a $7-a-share bid, about $15 billion, for all of Wachovia, taking Citigroup by surprise.
Citigroup, however, claims it has an agreement that bars Wachovia from talking to other parties until today. The agreement stated that either party could go to court to force the other to comply with the contract’s terms.
In an angrily worded press release issued Friday, Citigroup said "a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citigroup and Wachovia."
Wachovia spokeswoman Christy Phillips Brown said the financial services firm believes a deal with Wells Fargo "is in the best interest of shareholders, employees and the American taxpayers. Under that agreement, Citigroup is always free to make a superior offer to Wachovia."
Wells Fargo said in a statement Sunday that it has a "firm, binding merger agreement" with Wachovia and remains confident that it will complete the deal.
The litigation among the three banks could go on for a while, as any ruling is likely to be appealed (cash loans).
"I would hope there would not be a long battle because that does not bode well for Wachovia’s existing business," said Ben Halliburton, chief investment officer at Tradition Capital Management. "Any delays in action and uncertainty of who is going to own Wachovia … just causes further problems."
The stakes are high for the other firms, too.
Citigroup, the biggest U.S. bank by assets, is trying to rebuild after $61 billion of losses tied to the collapse of mortgage markets.
If Wells Fargo succeeds in its takeover bid, it will become the nation’s largest bank, with branches stretching across the nation. The deal would also strengthen Wells Fargo’s securities brokerage operations.
The company said Friday that the brokerage, which has 4,800 employees in St. Louis, would remain headquartered here. Wells Fargo also has commercial banking operations in St. Louis.
Wachovia has been under pressure for months due to losses incurred by its mortgage services operations. Wachovia investors, including the biggest shareholder, Dodge & Cox, say they prefer Wells Fargo’s bid.
The bid is in the "best interests of shareholders," according to a statement from Dodge & Cox, Davis Selected Advisers LP and Sandler Family Interests.
The group said other shareholders support their position.
"A transaction that keeps Wachovia’s nationwide franchise intact and recognizes Wachovia’s value as a well-capitalized institution with strong earnings prospects is a far better outcome than what had previously been proposed," the investors said.
The Well Fargo bid has put federal regulators in an odd position. The FDIC has said it would review all proposals and work with regulators of all three institutions to resolve the tug of war.
The shareholders’ support of the Wells Fargo bid and the regulators’ neutrality makes some legal experts think Citigroup cannot block Wells Fargo’s bid to take over Wachovia.
Wachovia’s lawyers could argue that it had to entertain the possibility of a better deal and that to ignore a better offer would violate its fiduciary duties, or its legal obligations to protect the interests of its shareholders.
"Bidders jump deals all the time," said Jill Fisch, a law professor at the University of Pennsylvania. "A new buyer comes in, jumps a deal, makes a better offer."
Bloomberg News, McClatchy Newspapers and The New York Times contributed to this report.
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