On Friday, Wells Fargo & Company and Wachovia Corporation announced that they had signed a definitive agreement to merge in an all-stock transaction valued at $15.1 billion that would not require any FDIC assistance.  Subject to Wachovia shareholder approval, each share of Wachovia common stock will be converted into 0.1991 shares of Wells Fargo common stock.  Using a device first deployed in JPMorgan Chase’s acquisition of Bear Stearns, the parties “entered into a share exchange agreement under which Wachovia is issuing Wells Fargo preferred stock that votes as a single class with Wachovia’s common stock representing 39.9 percent of Wachovia’s voting power.”

Citigroup, which last Monday announced an “agreement in principle” to acquire Wachovia’s banking operations in an FDIC-assisted transaction, issued a press release in which it claimed that “Wachovia’s agreement to a transaction with Wells Fargo is in clear breach of an Exclusivity Agreement between Citi and Wachovia. In addition, Wells Fargo’s conduct constitutes tortious interference with the Exclusivity Agreement.” 

The Exclusivity Agreement provides that Citigroup and Wachovia “will continue to proceed to negotiate definitive agreements … relating to the Transaction in form and substance satisfactory to each of them with a view toward executing” the definitive agreement prior to October 6, 2008.  It further provides that until October 6, 2008, Wachovia agrees that it will not, among other things, “enter into any agreement in principle, letter of intent, term sheet, merger agreement, acquisition agreement, option agreement or other similar instrument relating to an Acquisition Proposal,” which is defined to include any merger involving more than 15% of Wachovia’s consolidated assets. 

FDIC Chairman Shiela Bair issued a statement on Friday noting that Wells Fargo’s “offer … does not require FDIC assistance,” but stating further that “the FDIC stands behind its previously announced agreement with Citigroup. The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.”

The Federal Reserve and the OCC also issued a joint statement on Friday noting the Wells Fargo proposal and stating that “The Citigroup proposal has undergone extensive review by the Federal Reserve and the Office of the Comptroller of the Currency.  We have not yet reviewed the new Wells Fargo proposal and the issues that it raises.  The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.”

Citigroup subsequently filed suit in New York Supreme Court and, on Saturday, announced that it had obtained “emergency injunctive relief extending the Exclusivity Agreement … until further order of the court.”  According to Citigroup’s announcement, the court will hold a hearing on Friday, October 10. 

On Sunday, a New York Court of Appeals justice reportedly stayed the lower court’s injunction, and Wachovia reportedly filed an action in federal court seeking a declaratory judgment that it was free to enter into the Wells Fargo agreement.