Managers and the Legal Environment 7th Edition by David Madsen, Constance Bagley

Exercise 2

On September 29, 2008, at a time when Wachovia bank teetered on the edge of insolvency, the Federal Deposit Insurance Corporation (FDIC) voted to authorize financial assistance to facilitate the acquisition of Wachovia by Citigroup pursuant to section 13 of the Federal Deposit Insurance Act. The FDIC also recommended that the Secretary of the Treasury invoke the "systemic risk" provision in section 13, which authorizes the FDIC to take action to avoid or mitigate serious adverse effects on economic conditions or financial stability. That same day, Wachovia and Citigroup entered into a nonbinding agreement in principle whereby Citigroup would acquire Wachovia's operations for $1 per share. They also entered into an exclusivity agreement in which Wachovia agreed that it would not solicit acquisition proposals from any third party or enter into negotiations with any third party for the purpose of securing an acquisition proposal. On October 2, 2008, while Wachovia and Citigroup were still negotiating, Wells Fargo made an unsolicited offer to acquire Wachovia for $7 per share. Unlike the Citigroup deal, the Wells Fargo offer did not require any FDIC assistance. Wachovia and Wells Fargo signed a definitive merger agreement on October 3, 2008, and announced the merger that same day.
Also on October 3, 2008, President Bush signed the Emergency Economic Stabilization Act.41 Section 126(c) of the Act provided:
[No provision in any existing or future agreement that] affects, restricts, or limits the ability of any person to offer or acquire... all or part of any insured depository institution... in connection with any transaction in which the [FDIC] exercises its authority under Section 11 or 13 [of the Federal Deposit Insurance Act], shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.
Does section 126(c) violate the Contracts Clause of the U.S. Constitution? Is the Wachovia-Citigroup exclusivity agreement enforceable? If not, what effect is that holding likely to have on the willingness of future acquirers to acquire a bank in distress? [Wachovia Corp. v. Citigroup, Inc., 634 F. Supp. 2d 445 (S.D.N.Y. 2009).]