Ehrenhaus v. Baker

Ehrenhaus v. Baker, 2008 NCBC 20.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF MECKLENBURG CIVIL ACTION NO: 08 CVS 22632

IRVING EHRENHAUS, On Behalf of Himself and All Others Similarly Situated, Plaintiff, v. JOHN D. BAKER, II, PETER C. BROWNING, JOHN T. CASTEEN, III, JERRY GITT, WILLIAM H. GOODWIN, JR., MARYELLEN ORDER & OPINION C. HERRINGER, ROBERT A. INGRAM, DONALD M. JAMES, MACKEY J.

MCDONALD, JOSEPH NEUBAUER, TIMOTHY D. PROCTOR, ERNEST S. RADY, VAN I. RICHEY, RUTH G. SHAW, LANTY L.

SMITH, G. KENNEDY THOMPSON, DONA DAVIS YOUNG, WACHOVIA CORPORATION and WELLS FARGO & COMPANY, Defendants.

Greg Jones & Associates, P.A. by Greg Jones and Wolf Popper LLP by Robert M. Kornreich, Chet Waldman and Carl L. Stine for Plaintiff.

Robinson, Bradshaw & Hinson, P.A. by Robert W. Fuller, Mark W. Merritt, Garland S. Cassada, and Katherine G. Maynard for Defendants John D.

Baker, II, Peter C. Browning, John T. Casteen, III, Jerry Gitt, William H.

Goodwin, Jr., Maryellen C. Herringer, Robert A. Ingram, Donald M. James, Mackey J. McDonald, Joseph Neubauer, Timothy D. Proctor, Ernest S. Rady, Van I. Richey, Ruth G. Shaw, Lanty L. Smith, G. Kennedy Thompson, Dona Davis Young and Wachovia Corporation.

Hunton & Williams LLP by T. Thomas Cottingham, III, Patrick L. Robson, and Edward J. Fuhr; Wachtell, Lipton, Rosen & Katz by Paul K. Rowe and George T. Conway, III; and Friedman Kaplan Seiler & Adelman LLP by Eric Seiler for Defendant Wells Fargo & Company.

Diaz, Judge.

I.

INTRODUCTION {1} Before the Court is Plaintiff’s Motion for Preliminary Injunction pursuant to Rule 65 of the North Carolina Rules of Civil Procedure (“the Motion”). {2} The Motion presents the following question for decision: Whether Plaintiff has demonstrated a likelihood of success on the merits of his claim that the individual Defendants named in this action, all of whom serve on the board of directors of Defendant Wachovia Corporation (collectively the “Board”), breached their fiduciary duties to the company’s shareholders when they approved a Merger Agreement with Defendant Wells Fargo & Company (the “Merger Agreement”) that provides substantial value to Wachovia shareholders and offered immediate liquidity to Wachovia Corporation at a time of severe economic distress, but that also: (1) includes a separate Share Exchange agreement that grants Wells Fargo & Company 39.9% of the votes to be cast on the Merger Agreement and prohibits Wachovia Corporation from redeeming those shares for eighteen (18) months following a vote on the Merger Agreement; and (2) requires the Board to put the Merger Agreement to a vote even if a superior proposal materializes during the interim (the so-called “limited fiduciary out” clause).

{3} In answering this question, I do not decide the acumen of the business judgments and strategic decisions made by the Board or Wachovia Corporation’s executive officers in expanding the company’s banking franchise during the years preceding the current crisis in the capital markets. {4} Nor do I review the merits of the U.S. government’s seemingly ad hoc choices in picking winners and losers among financial institutions over the past several months. {5} Plaintiff’s Complaint also does not ask me to determine the enforceability of the various employment agreements between Wachovia Corporation and its executive officers that, should the Merger Agreement be approved, may result in payments to these officers totaling over $98 million. 1 {6} As to the question presented by Plaintiff, and after considering the Court file, the Motion, the briefs and supporting materials of the parties, and the arguments of counsel, I am satisfied that the Board’s approval of the Merger Agreement was an informed decision, made in good faith, and with an honest belief that the action was in the best interests of Wachovia Corporation and its shareholders, given the circumstances then facing the Board. Accordingly, with one exception, I find no basis for reversing the Board’s business judgment. {7} I do, however, find merit in Plaintiff’s claim that the eighteen (18)-month “tail” on Wells Fargo & Company’s almost 40% voting power, which survives even in the event of a vote against the Merger Agreement, is an impermissible abrogation of the Board’s duty to the Company. {8} Accordingly, the Court shall GRANT Plaintiff’s request to preliminarily enjoin enforcement of that provision pending the resolution of this action. In all other respects, however, Plaintiff’s Motion is DENIED.

II.

PROCEDURAL BACKGROUND {9} On 14 October 2008, Plaintiff filed a purported class action on behalf of himself and all other public shareholders of Defendant Wachovia Corporation (“Wachovia” or the “Company”). 2

In addition, the Charlotte Observer editorial board has weighed in on the controversy. See Let Shareholders Have Their Say on Wells Deal, Charlotte Observer, Nov. 26, 2008, http://www.charlotteobserver.com/408/story/376669.html. It is fair to say that the overwhelming sentiment in this correspondence has been against approval of the Merger Agreement. Many of these missives, however, rain their displeasure on issues that, like those I have noted above, are not properly before me. In any event, this is a court of law, not of public opinion. Accordingly, while I have read each submission, they form no part of my decision.

III.

THE FACTS A.

THE PARTIES {19} Plaintiff is, and has been at all relevant times, the owner of shares of Wachovia common stock. (Compl. ¶ 2.) {20} Wachovia is a North Carolina corporation with its principal office located in Charlotte, North Carolina. (Compl. ¶ 3.) {21} As a financial holding company, Wachovia provides commercial and retail banking services and other financial services in the United States and internationally. (Compl. ¶ 3.) {22} As of 30 September 2008, Wachovia was the fourth largest bank holding company in the United States based on assets.3 See Top 50 Bank Holding Companies Summary Page, http://www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx (last visited Dec. 2, 2008); see also Proxy Statement-Prospectus dated 21 November 2008, at 88 (hereinafter “Proxy Statement”) (asserting that Wachovia is now the sixth largest bank holding company in the United States). 4 {23} Wells Fargo is a Delaware corporation, headquartered in San Francisco, California. (Compl. ¶ 4; Proxy Statement 88.) {24} Wells Fargo operates a financial services company in the United States through its subsidiaries. (Compl. ¶ 4.) {25} As of 30 September 2008, Wells Fargo was the fifth largest bank holding company in the United States based on assets. See Top 50 Bank Holding Companies Summary Page, http://www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx; see also Proxy Statement 88 (asserting that Wells Fargo is now the seventh largest bank holding company in the United States). {26} Wells Fargo is also the only U.S. bank to have the highest possible credit rating from both Moody’s Investor Services and Standard & Poor’s Ratings Services. (Proxy Statement 20.) {27} The individual Defendants are (or have been) directors of Wachovia. (Compl. ¶¶ 5–21.) {28} Except for G. Kennedy Thompson (“Thompson”), the individual Defendants are all outside directors. (Stine Aff. Mot. Prelim. Inj., Ex. L, at 5–9.) 5

B.

EVENTS LEADING TO THE MERGER AGREEMENT {29} The Court’s 3 November 2008 Order and Opinion in this case summarized (in very broad terms) the financial crisis engulfing the Company and the world when the Board met on the evening of 2 October 2008 to consider the Merger Agreement. {30} Although not relevant to my decision here, many experts believe Wachovia’s financial spiral was precipitated by market concerns regarding the Company’s real estate mortgage portfolio and, in particular, the assets the Company acquired as part of its $25.5 billion purchase of Golden West Financial Corporation (“Golden West”), which, when combined with the maelstrom affecting world markets, caused an extended run on Wachovia’s bank deposits. (Green Reply Aff. Mot. Exped. Proc., Ex. A, at 2–3; see also Proxy Statement 28 (stating that “[t]he credit quality of this portfolio has deteriorated significantly in the current mortgage crisis”).) {31} Due in part to losses projected in the Golden West mortgage portfolio, the Company reported a loss of $9.1 billion for the second quarter of 2008. (Proxy Statement 28.) {32} Even before the Company’s announcement of its second quarter loss, however, Wachovia’s increasingly poor financial performance had led the Board to fire Thompson, who was then serving as the Company’s Chief Executive Officer. (Proxy Statement 28.) {33} For several months prior to 2 October 2008, the Board was monitoring the troubled capital markets and considering strategic alternatives. (Young Aff. ¶ 3.) 6 {34} Between 7 September 2008 and the Board’s vote on the Merger Agreement, the following events roiled the world financial markets: • On 7 September 2008, the U.S. government seized control of mortgage giants Fannie Mae and Freddie Mac;

Company to consider acquisition proposals from an unidentified third-party suitor. (Proxy Statement 29.) {38} Wachovia’s management initiated that process the next day when the Company signed a confidentiality agreement with an unidentified financial institution. 9 Those talks, however, broke off without an agreement. (Proxy Statement 29.) {39} On 25 September 2008, the combination of the seizure of Washington Mutual by federal regulators and Congress’ rejection of the U.S. Treasury’s bailout plan exacerbated Wachovia’s liquidity crisis and caused a precipitous decline in the Company’s share price. 10 (Young Aff. ¶ 6.) {40} The Board met by telephone the following day to discuss its options. (Proxy Statement 31.) {41} At that meeting, management informed the Board “that if a combination with another partner could not be arranged by Monday, September 29, the FDIC would place Wachovia’s bank subsidiaries in receivership.” (Proxy Statement 31; see also Steel Aff. ¶ 19.) {42} Over the weekend of 27–28 September 2008, Wachovia engaged in parallel negotiations with Citigroup, Inc. (“Citigroup”) and Wells Fargo over terms of a potential merger. (Proxy Statement 31.) {43} Both suitors, however, were unwilling to move forward without government assistance in the form of a loss-sharing arrangement. (Proxy Statement 31–32.) Citigroup, moreover, was only willing to consider the acquisition of the Company’s bank subsidiaries. (Proxy Statement 31; Steel Aff. ¶ 6.) {44} On 28 September 2008, the FDIC notified the Company that, because the potential failure of Wachovia posed a “systemic risk” to the banking system, it intended to exercise its authority under federal law to force the sale of Wachovia to The Company had also begun merger talks with another suitor on 17 September 2008. In addition, on 20 September 2008, the Company began merger discussions with Citigroup Inc. and Wells Fargo. (Proxy Statement 29.)

In addition, Mr. Steel holds certain Wachovia stock options, all of which currently have no cash value and will not have value until Wells Fargo common stock reaches certain price thresholds. (Augliera Aff. ¶¶ 5–7.) {68} The Board also was aware that the FDIC had rebuffed an earlier attempt by Wachovia’s management to obtain government assistance to allow Wachovia to remain a stand-alone entity. (Proxy Statement 40; see Proxy Statement 32.) {69} Company management advised the Board that the FDIC was again threatening to place Wachovia into receivership if a merger did not materialize with either Citigroup or Wells Fargo by the end of the day on 3 October 2008, which in turn would likely result in Wachovia shareholders receiving little or no value for their equity. (Steel Aff. ¶ 19; Proxy Statement 35, 40.) {70} After discussing the options available to them, the Board concluded that the Merger Agreement “provided an opportunity for enhanced financial performance and shareholder value” and that it was otherwise fair to, and in the best interest of, Wachovia shareholders. (Proxy Statement 36, 35.) Accordingly, the Board voted unanimously to approve it. (Steel Aff. ¶ 19; Proxy Statement 35.) {71} On 3 October 2008, following the Board’s approval of the Merger Agreement, Wachovia’s share price closed at $6.21, up from the prior day’s close of $3.91. (Merritt Aff., Ex. 3.) Additionally, the public announcement of the Merger Agreement immediately alleviated Wachovia’s liquidity crisis. (Young Aff. ¶ 11.) {72} A few days after the Merger Agreement was executed, Wachovia posted a loss of almost $24 billion for the third quarter of 2008. (See Wachovia 10-Q Report for Third Quarter 2008.) 17 {73} On 12 October 2008, the Board of Governors of the Federal Reserve System (the “Fed Board”) approved the Merger Agreement. (Merritt Aff. Mot.

Exped. Proc., Ex. 7.) {74} The Fed Board acted quickly, noting that “the unusual and exigent circumstances affecting the financial markets [and] the weakened financial condition of Wachovia . . . justified expeditious action on [the Merger Agreement].” (Merritt Aff., Ex. 7, at 2.)

IV.

CONTENTIONS OF THE PARTIES {79} Plaintiff contends the Merger Agreement provides for inadequate consideration to Wachovia’s shareholders and substantially deprives the shareholders of their ability to “determine the appropriateness and fairness of the transaction.” (Pl.’s Br. Mot. Prelim. Inj. 1.) {80} According to Plaintiff, the approximately $7-per-share valuation of the Company’s stock at the time of execution of the Merger Agreement on 2 October

2008 was substantially below the stock’s market price a week earlier and was inconsistent with pronouncements made to the media by the Company’s President and CEO two weeks earlier purportedly touting Wachovia’s viability as an independent entity. (Pl.’s Br. Mot. Prelim. Inj. 1, 3–4.) {81} Plaintiff’s principal complaints, however, are related to the defensive measures embedded in the Merger Agreement and, in particular, the Share Exchange, by which the Board “handed to Wells Fargo almost 40% of Wachovia’s voting rights whether the Merger was ultimately approved or not.” (Pl.’s Br. Mot.

Prelim. Inj. 1.) {82} Plaintiff contends the Share Exchange is unduly coercive because it effectively discourages any third-party suitors from coming forward with a better offer and does not allow for a “‘valid and independent exercise of the shareholders’ franchise.’” (Pl.’s Br. Mot. Prelim. Inj. 18 (quoting First Union Corp. v. SunTrust Banks, Inc., 2001 NCBC 9A ¶ 81 (N.C. Super. Ct. Aug. 10, 2001), http://www.ncbusinesscourt.net/opinions/2001%20NCBC%2009A.pdf).) {83} Plaintiff also contends the Board breached its fiduciary duties by “agreeing to an improper ‘fiduciary out’ clause in the Merger Agreement.” (Pl.’s Br. Mot.

Prelim. Inj. 2.) {84} According to Plaintiff, the Board has improperly tied its hands because it cannot back out of the Merger Agreement, but instead can only withdraw its recommendation for approval. (Pl.’s Br. Mot. Prelim. Inj. 2.) {85} Defendants respond that Plaintiff is not entitled to an injunction because he has no likelihood of success on the merits. (Wells Fargo Br. Opp’n Mot. Prelim.

Inj. 4; Wachovia Br. Opp’n Mot. Prelim. Inj. 12.) {86} Defendants assert that “[u]nder the circumstances facing the Wachovia directors when they approved the Wells Fargo merger, they fulfilled their statutory duties and are entitled to the full deference accorded by the business judgment rule.” (Wachovia Br. Opp’n Mot. Prelim. Inj. 1.) {87} Defendants dispute the notion that the transfer to Wells Fargo of almost 40% of Wachovia’s aggregate voting rights pursuant to the Share Exchange effectively disenfranchises Wachovia’s public shareholders and precludes any competing bid for the Company, noting that (1) the Share Exchange was a necessary part of the consideration for the merger, (2) a majority of the Wachovia shareholders remains free—despite the 40% Wells Fargo voting bloc—to vote down the Merger Agreement, and (3) there is no credible evidence of an option superior to the Merger Agreement. (Wachovia Br. Opp’n Mot. Prelim. Inj. 1, 14–16; Wells Fargo Br. Opp’n Mot. Prelim. Inj. 11.) {88} As for Plaintiff’s attack on the “fiduciary out” clause in the Merger Agreement, Defendants respond that the Board may still exercise its fiduciary duties in the face of a superior proposal (should one materialize) by withdrawing its recommendation of the Merger Agreement and explaining its reasons for doing so. (Wells Fargo Br. Opp’n Mot. Prelim. Inj. 12–13.) {89} Finally, Defendants assert that Plaintiff is in no position to provide adequate security should the Court grant preliminary injunctive relief. (Wells Fargo Br. Opp’n Mot. Prelim. Inj. 18–20; Wachovia Br. Opp’n Mot. Prelim. Inj. 20.)

V. PRINCIPLES OF LAW A.

PRELIMINARY INJUNCTION STANDARD {90} A party seeking preliminary injunctive relief in the context of a merger transaction must demonstrate (1) “a reasonable likelihood of success on the merits,” (2) “a reasonable threat of irreparable injury if the court does not issue an injunction,” and (3) “that the threat of injury from not issuing the injunction outweighs the possible injury from issuing the injunction.” Marcoux v. Prim, 2004 NCBC 5 ¶ 62 (N.C. Super. Ct. Apr. 16, 2004), http://www.ncbusinesscourt.net/opinions/2004%20NCBC%205.htm (citing Phelps Dodge Corp. v. McAllister, 1999 Del. Ch. LEXIS 202 (Del. Ch. Sept. 27, 1999)). 19 {91} With respect to enjoining a proposed merger, “in the absence of a competing offer a plaintiff must make a particularly strong showing on the merits to obtain a preliminary injunction because an injunction in such circumstances risks significant injury to shareholders.” Id. at ¶ 64 (citing In re The MONY Group, Inc. S’holder Litig., 2004 Del. Ch. LEXIS 16 (Del. Ch. Feb. 18, 2004); In re Aquila, Inc. S’holder Litig., 805 A.2d 187, 189 (Del. Ch. 2002)). {92} Finally, before a preliminary injunction may issue, a plaintiff must post a bond in an amount the Court determines “for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.” N.C. R. Civ. P. 65(c) (2007).

B.

THE SHARE EXCHANGE {93} Sections 55-11-02 and 55-11-03 of the North Carolina General Statutes govern share exchanges. Under these provisions, “[a] corporation may acquire all of the outstanding shares of one or more classes or series of another corporation if the board of directors of each corporation adopts and its shareholders (if required by [section] 55-11-03) approve the exchange.” N.C. Gen. Stat. § 55-11-02(a) (2007) (emphasis added). {94} The concept of “outstanding shares” is governed by section 55-6-03 of the North Carolina General Statutes. A corporation is entitled to “issue the number of shares of each class or series authorized by the articles of incorporation.” N.C. Gen. Stat. § 55-6-03(a) (2007). “Shares that are issued are outstanding until they are reacquired, redeemed, converted, or cancelled.” Id. Thus, shares must be issued in order to be outstanding.

C.

THE BUSINESS JUDGMENT RULE {95} In North Carolina, corporate directors owe fiduciary duties to the corporation. See Pierce Concrete, Inc. v. Cannon Realty & Constr. Co., 77 N.C. App. 411, 413–14, 335 S.E.2d 30, 31 (1985) (citing Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983)). More specifically, the law requires directors to discharge their duties “(1) In good faith; (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) In a manner [they] reasonably believe[] to be in the best interests of the corporation.” N.C. Gen. Stat. § 55-8-30(a) (2007). {96} Our General Assembly has also made clear that “[t]he duties of a director weighing a change of control situation shall not be any different, nor the standard of care any higher, than otherwise provided in [section 55-8-30].” N.C. Gen. Stat. § 55- 8-30(d) (2007). {97} In discharging their duties, directors are entitled to rely on information, opinions, reports, or statements from officers and employees of the corporation, as well as legal counsel, accountants, and financial experts. N.C. Gen. Stat. § 55-8- 30(b) (2007). {98} North Carolina law recognizes the business judgment rule. This rule “operates primarily as a rule of evidence or judicial review and creates, first, an initial evidentiary presumption that in making a decision the directors acted with due care (i.e., on an informed basis) and in good faith in the honest belief that their action was in the best interest of the corporation, and second, absent rebuttal of the initial presumption, a powerful substantive presumption that a decision by a loyal and informed board will not be overturned by a court unless it cannot be attributed to any rational business purpose.”

Hammonds v. Lumbee River Elec. Mbrshp. Corp., 178 N.C. App. 1, 20–21, 631 S.E.2d 1, 13 (2006) (quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law, § 14.06, at 14-16 to 14-17 (2005)). {99} In applying the business judgment rule to a director’s decision to accept deal protection measures in a stock-for-stock merger: [T]he court will first review the transaction, including the adoption of deal protection measures, to determine if the directors have complied with their statutory duty of care under [section] 55-8-30 [of the North Carolina General Statutes]. The burden is upon the shareholder challenging their actions to prove that a breach of duty has occurred.

First Union Corp., 2001 NCBC 9A ¶ 70. {100} In that regard, this Court has made clear that [d]irectors receive the benefit of court deference to business decisions that are made in good faith and on an informed basis. As long as the decision to include the deal protection measures in the merger transaction was informed and in good faith, it will not be disturbed by the courts absent proof by clear and convincing evidence of interference with shareholder voting rights or statutory duties.

Id. at ¶ 72. {101} If Plaintiff fails to prove a breach of duty, the action of the directors is entitled to a strong presumption of reasonableness and validity, including noncoercion, and the court should not intervene unless the shareholder can rebut that presumption by clear and convincing evidence that the deal protection provisions were actionably coercive, or that the deal protection provisions prevented the directors from performing their statutory duties.

Id. at ¶ 70. {102} If, on the other hand, Plaintiff does establish a breach of duty, the burden shifts to the directors to prove that their actions were reasonable . . . and, if at issue, that the deal protection measures were not actionably coercive and did not prevent the directors from performing their statutory duties. Where the court finds that the deal protection measures are coercive or require directors to breach their statutory duties, the court must then weigh the harm to the shareholders in enjoining either the deal protection measures, the vote on the transaction or the merger, if the transaction is approved, against the harm resulting from not entering injunctive relief.

Id. {103} As then Delaware Chancery Court Vice-Chancellor Myron T. Steele noted, 20 the relevant question is whether the deal protection measures are actionably coercive on the shareholders, that is, whether “the vote will be a valid and independent exercise of the shareholders’ franchise, without any specific preordained result which precludes them from rationally determining the fate of the proposed merger.” In re IXC Commc’ns, Inc. S’holder Litig., 1999 Del. Ch. LEXIS 210, at *3 (Del. Ch. Oct. 27, 1999). {104} Finally, under this review process, courts should “invalidate[] plans that purport to restrict a board’s duty to fully protect the interests of the corporation and its shareholders.” First Union Corp., 2001 NCBC 9A ¶ 88 (citing Paramount Comm’cns, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994)).

VI.

ANALYSIS A.

DID THE SHARE EXCHANGE REQUIRE A STOCKHOLDER VOTE? {105} Plaintiff contends the Board breached its fiduciary duties by failing to obtain shareholder approval for the Share Exchange, which Plaintiff contends is required under North Carolina law. The Court disagrees. {106} It is clear enough that a director’s failure to see to it that the corporation is operated according to law is a breach of fiduciary duty. See Clark v. B.H. Holland Co., 852 F. Supp. 1268, 1275 (E.D.N.C. 1994) (citing Loy v. Lorm Corp., 52 N.C. App. 428, 435, 278 S.E.2d 397, 902–03 (1981), for the proposition that the failure of a director to comply with the statutory procedures required for a corporate merger is a breach of fiduciary duty). {107} The Court concludes, however, that the Share Exchange does not violate any substantive provision of North Carolina law. {108} Section 55-11-02(a) of the North Carolina General Statutes provides that “[a] corporation may acquire all of the outstanding shares of one or more classes or Vice-Chancellor Steele is now Chief Justice of the Delaware Supreme Court. series of another corporation if the board of directors of each corporation adopts and its shareholders (if required by [law]) approve the exchange.” N.C. Gen. Stat. § 55- 11-02(a) (2007). {109} By its terms, this section does not apply to Wachovia’s issuance of Class M preferred shares under the Share Exchange. As Wachovia correctly notes, section 55-11-02(a) “provides a process by which all of the holders of a class of already existing and outstanding shares can be compelled to exchange their shares for shares of another corporation when only the holders of a majority of shares favor the exchange.” (Defs.’ Sur-Reply Br. Mot. Prelim. Inj. 1. (emphasis added).) {110} In this case, the Share Exchange required Wachovia to issue new shares of Class M preferred stock in exchange for 1,000 shares of Wells Fargo common stock. (Proxy Statement 85.) The transaction did not, however, compel any shareholder to exchange already outstanding shares and, therefore, did not require a shareholder vote under the relevant statute. {111} Accordingly, because the Board did not violate North Carolina substantive law when it issued shares pursuant to the Share Exchange without a shareholder vote, Plaintiff is not entitled to preliminary injunctive relief on this ground. 21 B.

DID THE BOARD OTHERWISE BREACH ITS FIDUCIARY DUTIES? 22 {112} Judicial review of this issue begins with a determination of the Board’s compliance with its statutory duties under section 55-8-30 of the North Carolina General Statutes. First Union Corp., 2001 NCBC 9A ¶ 70. {113} The question is whether the Wachovia directors approved the Merger Agreement in “good faith,” “[w]ith the care an ordinarily prudent person in a like

Mot. Prelim. Inj. 1.) 23 {116} The Court’s analysis of this issue “is governed by the statutory direction that directors act as an ordinarily prudent person under like circumstances.” First Union Corp., 2001 NCBC 9A ¶ 134; see Thompson v. Enstar Corp., 509 A.2d 578, 582 (Del. Ch. 1984) (stating that the “judgment of the directors must be measured on the facts as they existed [when they acted]”), rev’d on other grounds, In re Enstar Corp., 604 A.2d 404 (Del. 1992).

{120} After careful review of these circumstances, I conclude that Plaintiff has not established that the Board breached its duties. {121} To the contrary, I am satisfied that—except for the eighteen (18)-month “tail” on the Board’s ability to redeem the preferred shares that give Wells Fargo 39.9.% of the Company’s total voting power—the Board’s decision-making process, although necessarily compressed given the extraordinary circumstances confronting it, was reasonable and fell within the standard of care demanded by law. {122} What makes this case unique is the presence of the 800-pound gorilla in the Wachovia board room, in the form of the U.S. government’s pervasive regulatory oversight over bank holding companies. {123} Indeed, there is little doubt that the threat of government intervention (in the form of a forced liquidation of the Company’s banking assets) weighed heavily on the Board as it considered the Merger Agreement. {124} In that regard, this case does not fit neatly into conventional business judgment rule jurisprudence, which assumes the presence of a free and competitive market to assess the value and merits of a transaction. See First Union Corp., 2001 NCBC 9A ¶ 66. {125} But other than insisting that he would have stood firm in the eye of what can only be described as a cataclysmic financial storm, Plaintiff offers nothing to suggest that the Board’s response to the Hobson’s choice before it was unreasonable. {126} Plaintiff faults the Board for not waiting to act on the Merger Agreement until after the House vote on a revised bailout bill, which was slated for 3 October 2008. {127} But as Defendants note, the House had previously rejected the original bill and no one could predict how it would treat the Senate’s amended proposal. In any event, there is no evidence in this record that the U.S. government was then, or is now, prepared to help Wachovia remain independent. {128} Instead, what was clear to the Board as it met late in the evening on 2 October 2008 was that if it failed to consummate a merger with either Citigroup or Wells Fargo by the end of the day on 3 October 2008, it faced the very real prospect of a government-directed liquidation of the Company’s banking assets and, with it, the loss of most, if not all, of the shareholder equity. {129} Plaintiff contends that judicial approval of the terms of the Share Exchange would set a dangerous precedent and effectively eviscerate shareholder rights. (Pl.’s Br. Mot. Prelim Inj. 17.) {130} But what precedent was there for the crisis confronting the Board on 2 October 2008 when it concluded that the Merger Agreement was in the best interest of the shareholders? {131} The stark reality is that the Board (1) recognized that Wachovia was on the brink of failure because of an unprecedented financial tsunami, (2) understood the very real and immediate threat of a forced liquidation of the Company by government regulators in the absence of a completed merger transaction with someone, and (3) possessed little (if any) leverage in its negotiations with Wells Fargo because of the absence of any superior merger proposals. {132} Against that backdrop, the Board had two options: (1) accept a merger proposal that, although partially circumscribing the shareholders’ ability to vote on its merits, nevertheless still gave the shareholders a voice in the transaction and also provided substantial value; or (2) reject the Merger Agreement and face the very real prospect that Wachovia shareholders would receive nothing. {133} Pared to its essence, Plaintiff’s argument is that he would have voted to reject the Merger Agreement and take his chances with the government had he been sitting on the Board on 2 October 2008. But it is precisely this sort of post hoc second-guessing that the business judgment rule prohibits, even where the transaction involves a merger or sale of control. {134} As the Delaware Supreme Court has explained in such a context: [A] court should not ignore the complexity of the directors’ task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking [sic] body best equipped to make these judgments. Accordingly, a court [reviewing a board’s judgment] should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors’ decision was, on balance, within a range of reasonableness.

Paramount Commc’ns, Inc., 637 A.2d at 45–46 (citing Nixon v. Blackwell, 626 A.2d 1366, 1378 (Del. 1993); Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1288 (Del. 1988); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955–56 (Del. 1985)). {135} Thus, so long as the decision to include the deal protection measures in the Merger Agreement was informed and in good faith, the Court will not intervene absent proof by clear and convincing evidence “that the deal protection provisions were actionably coercive, or . . . prevented the directors from performing their statutory duties.” First Union Corp., 2001 NCBC 9A ¶ 70; see also Thompson, 509 A.2d at 584 (refusing to grant injunctive relief as to directors’ approval of a “lock- up” option where the provision was a “necessary prerequisite” to the suitor making its tender offer); In re Bear Stearns Litigation, Index No. 600780/08, at 32 (N.Y. Sup. Ct. Dec. 4, 2008) (reviewing a merger that was entered into in the face of governmental pressure due to the acquired investment bank’s liquidity crisis and concluding that “[t]he financial catastrophe confronting Bear Stearns, and the economy generally, justified the inclusion of the various merger protection provisions [including the grant of a 39.5% interest to the acquiring company and a ‘no solicitation’ clause] intended to increase the certainty of the consummation of the [merger]”). 24 {136} I turn now to discuss why, with one exception, Plaintiff has failed to meet his burden.

1.

THE SHARE EXCHANGE {137} Plaintiff contends the Share Exchange is coercive because it does not allow for the “‘valid and independent exercise of the shareholders’ franchise.’” (Pl.’s Br.

Mot. Prelim. Inj. 19 (quoting First Union Corp., 2001 NCBC 9A ¶ 81).)

Prelim. Inj. 17.) {147} But as the Court has already noted, the House had previously rejected such a bill and no one could predict how it would treat the Senate’s revised proposal. {148} In any event, what evidence exists in this record indicates that the U.S. government was prepared to abandon Wachovia on 2 October 2008, and there is nothing to suggest that it now has the desire or appetite to subsidize Wachovia should the Merger Agreement fail. {149} Nor is there a reasonable prospect that a superior offer will materialize even absent the Share Exchange. {150} As of 30 September 2008, Wachovia was the fourth largest bank holding company in the United States. Above it were: (1) JP Morgan Chase (who recently merged with Bear Stearns Companies, Inc., and acquired the failed banking subsidiaries of Washington Mutual, Inc.); (2) Citigroup (who made an inferior offer to purchase the Company and has recently found itself teetering on the brink of collapse); and (3) Bank of America (who is still digesting its recent acquisitions of Countrywide Financial Corp., Lasalle Bank Corp., and Merrill Lynch & Co.). 26

2.

THE FIDUCIARY OUT CLAUSE {154} I also conclude that the Board’s decision to approve the so-called “limited fiduciary out clause” was reasonable and not actionably coercive. {155} It is true that the Merger Agreement prohibits Wachovia from soliciting third-party bidders for the Company and requires that the Merger Agreement be put to a shareholder vote even if the Board determines subsequently that it can no longer recommend it. (Proxy Statement A-20.) {156} Nevertheless, as Wells Fargo notes, “[t]he fiduciary out in the merger is not absolute and permits the Wachovia board to exercise its [fiduciary] duties” by, for example: (1) responding to an unsolicited superior proposal should one be presented to the Board before the vote on the Merger Agreement; and (2) “withdrawing its recommendation of the Wells Fargo merger and fully and publicly explaining its rationale . . . which would have the practical effect of advising shareholders to vote down the merger.” (Wells Fargo Br. Opp’n Mot. Prelim. Inj.

13.) {157} My review of the relevant clause satisfies me that it does not impermissibly abrogate the Board’s fiduciary obligations to the Wachovia shareholders. At worst, it requires the Board to submit the Merger Agreement to a vote even if they later determine they no longer recommend it. And, as the Court has already noted, the lack of any third-party bidders is a function of the realities of the market, not the deal protection devices of which Plaintiff complains. {158} Accordingly, the Court declines to grant preliminary injunctive relief on this ground.

3.

THE EIGHTEEN-MONTH “TAIL” ON REDEMPTION OF THE CLASS M PREFERRED SHARES {159} Plaintiff notes correctly in his reply brief that, as part of the Merger Agreement, the Board agreed that “the shares of [Class M Preferred Stock tendered to Wells Fargo in the Share Exchange would] remain outstanding in the event that the Merger [Agreement] is not consummated for at least 18 months, a date which extends [Wells Fargo’s 39.9% voting bloc] far beyond the time of a shareholder vote.” (Pl.’s Reply Br. Mot. Prelim. Inj. 3.) {160} The Court has already determined that the Board acted in good faith, on an informed basis, and in the best interests of the Company in approving the Merger Agreement. {161} Nevertheless, the Court also concludes that should the Wachovia stockholders vote down the Merger Agreement, the Board’s duty to seek out other merger partners should not be impeded by a suitor with substantial voting power whose overtures have already been rejected. {162} Accordingly, because this particular provision serves no beneficial purpose in such an instance and, in fact, prevents the Board from fulfilling its fiduciary duties, Plaintiff has demonstrated a likelihood of success on his claim that the clause is invalid. Cf. First Union Corp., 2001 NCBC 9A ¶¶ 152–63 (concluding that a non-termination clause in a merger agreement extending the life of the agreement five months beyond a shareholder vote disapproving the merger was invalid, as “an impermissible abrogation of the duties of the Wachovia directors and an actionably coercive condition impeding the free exercise of the Wachovia shareholder’s right to vote on the merger”). {163} Finally, I have considered the balance of hardships in enjoining enforcement of this amendment. I find that the narrow injunctive relief contemplated here will cause little, if any, harm to Wachovia or Wells Fargo because “[t]his is not a provision that affects the value or structure of the [Merger Agreement].” First Union Corp., 2001 NCBC 9A ¶ 163. {164} Additionally, should the Merger Agreement be voted down, the parties remain free to negotiate and submit a new proposal to the Wachovia shareholders.

“On the other hand, the [Wachovia] shareholders have the benefit of knowing their directors’ hands are not tied and that they are in a position to fully perform their statutory duties.” Id. {165} Accordingly, the Court shall GRANT preliminary injunctive relief as to the Board’s decision to extend Wells Fargo’s 39.9% voting bloc beyond the date of the vote on the Merger Agreement.

VII.

CONCLUSION {166} For the reasons set forth above, the Court: (1) DENIES the Motion to enjoin enforcement of the Share Exchange and “fiduciary out” provisions contained in the Merger Agreement; but (2) GRANTS the Motion to preliminarily enjoin enforcement of the provision prohibiting Wachovia from redeeming the Class M Preferred Shares for eighteen (18) months following a shareholder vote on the Merger Agreement. {167} Under the circumstances of this case, the Court concludes that Plaintiff shall not be required to post a bond at this time. Should the Merger Agreement be voted down on 23 December 2008, the Court will then consider the amount of the bond (if any) that Plaintiff shall be required to post in order to obtain preliminary injunctive relief.

SO ORDERED, this the 5th day of December, 2008.