A Citigroup challenge to Wells seen facing hurdles

NEW YORK (Reuters) - Citigroup Inc (C.N), the initial suitor for troubled rival Wachovia Corp WB.N, may have trouble using the courts to quash a counterbid by Wells Fargo (WFC.N), experts in mergers and acquisitions said.

Wells Fargo made a surprise announcement on Friday that it had agreed to buy Wachovia for more than $16 billion, four days after Citi agreed to acquire Wachovia's banking operations for $2.2 billion in a deal backed by the U.S. government.

Wachovia's board approved Wells Fargo's higher offer Thursday night.

"It is highly unlikely that Citigroup is going to be able to prevent Wachovia from being acquired by Wells Fargo," said Professor Samuel C. Thompson Jr of Pennsylvania State University's Dickinson School of Law.

"I don't think you are going to have a binding contract here," Thompson said.

Citigroup said Wachovia's deal with Wells Fargo "constitutes tortious interference" with an exclusivity agreement it had to negotiate with Wachovia.

Thompson and other legal experts compared the situation with the mid-1980s court struggle between Texaco Inc and Pennzoil Co. A jury found Texaco illegally enticed Getty Oil Co out of a merger with Pennzoil.

The courts found that an agreement in principle between Pennzoil and Getty was a binding contract and that Texaco "tortiously interfered" with that contract and ultimately Texaco became liable to Pennzoil for $10 billion.

Any legal action by Citigroup may hinge on what kind of exclusivity provisions were spelled out in its agreement-in-principle with Wachovia, said Keith Gottfried, an attorney at law firm Blank Rome LLP in Washington who specializes in merger law. He is not involved in the dispute.

"When people say a deal is subject to definitive documentation, it sounds like you're kind of engaged, but not quite married," Gottfried said.

But Donald Zakarin, a partner at law firm Pryor Cashman LLP in New York, who is not involved in the case, said he thinks Citigroup could have strong legal claims.

He views exclusivity agreements as enforceable, though he expects Wachovia would argue that it had a fiduciary responsibility to shareholders to seek a better deal for its shareholders.

"Citigroup entered into an agreement and it sounds to be binding," he said. "If it does not get itself resolved I think you could find a lot of interesting legal issues arising."

U.S. banking regulators said they will seek to resolve the rival acquisition proposals.

Federal Deposit Insurance Corp Chairman Sheila Bair said in a statement that the new offer "does not require FDIC assistance."

"It should be emphasized that both the Citigroup proposal as well as the new Wells proposal would stand behind all creditors including depositors, insured and uninsured," she said.

The FDIC announced a shotgun merger proposal between Citigroup and Wachovia on Monday, with the FDIC agreeing to absorb up to $42 billion in losses should Wachovia's $312 billion pool of loans later turn sour.

But a deal with Wells Fargo could wipe out potential risks to the government and taxpayers that a government-approved Citi deal would include.

(Reporting by Grant McCool and Martha Graybow; Editing by Tim Dobbyn)