In what may be the first reported case to emerge from the ongoing financial crisis, the North Carolina Superior Court considered a shareholder’s challenge to the proposed merger between Wachovia and Wells Fargo banks. In Ehrenhaus v. Baker (Nov. 3, 2008), a Wachovia shareholder claims that the merger price and other particulars of the deal are unfair, constituting a breach of the directors’ fiduciary duties. In particular, the merger permits:

• A stock-for-stock exchange, 0.1991 shares of Wells Fargo common stock for each share of Wachovia common stock, valued at $7.00 per share;
• A share exchange agreement, whereby Wells Fargo gains nearly 40% aggregate voting rights;
• A “fiduciary out” provision, which prohibits the Wachovia board from walking away from the Wells Fargo deal should a better offer come along; and,
• Three Wachovia board members to join the Wells Fargo board.

In considering the plaintiff’s motion to enjoin the merger and expedite discovery, the court began with a dire assessment of the current U.S. economy:

For several months, this nation has been engulfed by a financial storm the likes of which have not been seen since the Great Depression. Venerable financial institutions thought to be permanent pillars of both Wall Street and Main Street have been sold at the equivalent of a federal fire sale, nationalized, or put into bankruptcy or receivership.

Although the court denied the plaintiff’s request for speedy discovery, under the circumstances it did agree to expedite the injunction proceedings, asking the parties to file briefs in time for a November 24, 2008 hearing. Look for a complete abstract of the court’s decision in the January 2009 Business Valuation Update™, and additional reports of case proceedings in the BVWire™.