There were some major developments over the weekend in the attempted Citigroup acquisition of Wachovia’s banking operations.  Wells Fargo stepped in on Thursday with what many consider to be a superior proposal (search through merger agreements clauses for superior proposals here) for all of Wachovia’s assets, only to have Citigroup claim that it has an exclusivity agreement with Wachovia (see the alleged citigroup-wachovia-exclusivity-agreement here).  This copy of the exclusivity agreement was faxed out of the New York office of Davis Polk according to the fax number at the top of the document – I’ll leave that for someone else to chase down.

Citigroup was able to obtain a preliminary injunction halting the Wells Fargo acquistion from a New York state court judge late Saturday night, although this ruling was temporarily blocked by a federal district court on Sunday, with a hearing scheduled for Tuesday.

Exclusivity agreements (also known as no shop agreements) are commonly entered into in conjunction with merger agreements, and as the name suggests they are generally used to provide a buyer with protections that the potential seller won’t be able to continue to shop around for a better deal.  The strength of the protections is a matter for negotiation, but it’s generally agreed that there are certain “fiduciary outs” for the seller in the event that the company to be acquired receives a superior proposal. 

The Citigroup-Wachovia exclusivity agreement, assuming it is valid, bars Wachovia from seeking out another buyer, providing information to another buyer, or entering into talks that might enable another buyer to make a bid.  Wells Fargo has claimed that it did not receive any new information from Wachovia and that it had simply continued its analysis from previously received information, so there was no violation by Wachovia of the exclusivity agreement.  Wells Fargo had reportedly passed on the Wachovia deal in late September based on concerns about Wachovia’s troubled loan portfolio.

A potentially major reason for Wells Fargo’s change of heart – the IRS changed a regulation which may make it increasingly likely that stronger banks will continue to snap up troubled smaller institutions.  Under the change, banks may take tax deductions on loan losses recorded as a result of a takeover.  Assuming this applies to the estimated $74 billion in loan costs that Wells anticipates, this could have a favorable tax impact running into the tens of billions of dollars for Well.s