Corporate Governance

Wachovia and the Issue of Adequate Enforcement of Listing Standards by the Stock Exchange (Part 2)

By J. Robert Brown

Wachovia agreed to lock the transaction on behalf of Wells Fargo by turning over 40% of the Bank's voting power to the purchaser (by issuing ten shares of supervoting stock, perhaps a new record for the number of votes per share).  With that percentage, Wells Fargo need not worry about any other suitor swooping in and making a better offer.  We have no trouble understanding why Wells Fargo would want the shares and assume that the Wachovia Board issued them in a manner consistent with it fiduciary obligations.  Watching financial institutions drop like stones, the Wachovia Board managed to work out a deal with Wells Fargo that saved some value for its shareholders.

The more problematic part of this, however, is the decision to dispense with shareholder approval and its approval by the NYSE.  The two banks could have avoided the need for a dispensation had Wachovia issued less than 20% of its voting shares, a still formidable percentage that would likely have locked up the transaction for Wells Fargo.  But instead, by going above 20%, Wachovia triggered the obligation to obtain shareholder approval imposed by the NYSE.

There will be no shareholder approval, however.  The NYSE in lightning quick fashion approved the setting aside of the vote, needing only days (perhaps a single day) to do so.  Apparently, the Exchange determined that the delay "would seriously jeopardize the financial viability of the enterprise".  Exactly how was that the case?  No one doubts the importance of Wachovia's need for a rescuer.  But there did not seem to be a shortage of suitors, with Wells Fargo and Citgroup vying for control of the financial institution.  The issuance of the preferred stock seems less likely to have been necessary to induce Wells Fargo to enter the fray than it was to prevent Citigroup from making a competing offer.  In other words, the decision by the NYSE to set aside shareholder approval wasn't about "financial viability" but about allowing Wachovia to favor one side over the other.  

The decision seems questionable on other grounds.  First, there was in fact time to get shareholder approval since shareholders still have to vote on the merger.  Second, the transaction could have been structured to avoid the need for a vote.  Had Wachovia issued less than 20% of the voting shares of the company, the voting issue would have been avoided.  

It is possible that the NYSE weighed all of the facts and concluded that waiver of the requirement was necessary for reasons of financial viability.  It is also possible that the NYSE takes a very broad view of the exclusion, one that allows issuers to dispense with shareholder votes whenever management wants to issue a lock up percentage of shares.  

The central problem is that the NYSE is enforcing a legal requirement (listing standards) but as a for profit company not subject to government transparency requirements (the FOIA, for example), it does so in secrecy with little opportunity for transparency.  The public has no real opportunity to learn the reasons for the decision or to study the patterns to try to determine the true motivation for the decision, something particularly important given the for-profit nature of the business.  If the NYSE is going to stay in the regulatory business, its decisions ought to be subject to transparency requirements.  The decisions to set aside listing standards, particulary those that protect shareholders, and the process by which the decision was reached, should become public, allowing investors to know how often and when the NYSE will set aside the requirement.  Either the Exchange should voluntarily do so or it should be required by federal legislation.

Full post as published by The Race to the Bottom on October 13, 2008 (boomark / email).