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.

The problem with the article is that the "deal to be acquired" is a merger. The merger agreement is here. Neither Wachovia nor the NYSE has the authority to waive shareholder approval of a merger. So what's going on?

It turns out that what Wachovia wanted was to avoid shareholder approval of a lock up option issued to Wells Fargo. Under theShare Exchange Agreement filed on Thursday, Wachovia agreed to issue Class M preferred stock to Wells Fargo representing approximately 40% of the target company's voting power. Under the rules of the NYSE, shareholders must approve the transaction. Rule 312.03(c) provides that shareholders must approve the issuance of 20% or more of the voting power of a company. The rules contain exceptions. Rule 312.05 provides that approval is not necessary where, upon application to the Exchange, the "delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise" and the decision to invoke the exception has been "expressly approved by the Audit Committee of the Board."

It is this exception that Wachovia is invoking. The Bank filed a current report on Form 8-K on Friday announcing that it would invoke the exception. As the Company explained in a letter to shareholders:

• Simultaneously and in connection with the entry into the Merger Agreement, Wachovia and Wells Fargo also entered into a Share Exchange Agreement (the “Share Exchange Agreement”), pursuant to which Wachovia will issue and sell 10 shares of Series M, Class A Preferred Stock, no par value, of Wachovia, which shares will represent in the aggregate approximately 39.9% of the voting power of Wachovia’s outstanding voting securities after giving effect to the issuance, in exchange for 1,000 shares of Wells Fargo common stock and the entry by Wells Fargo into the Merger Agreement.
  

What was the purpose of the transaction? To lock up the deal for Wells Fargo. As the letter to shareholders explained, "The share issuance and exchange contemplated by the Share Exchange Agreement was a necessary condition to Wachovia’s ability to obtain the benefits of the Merger Agreement, which in turn were essential to maintaining Wachovia’s financial stability."

The letter also explained that there would be no shareholder approval despite the apparent requirements of the NYSE. This was because "the Audit Committee of Wachovia’s Board of Directors unanimously determined that the delay necessary in securing shareholder approval prior to the issuance of the preferred stock to Wells Fargo would seriously jeopardize the financial viability of Wachovia and has expressly approved the reliance by Wachovia on the exception under Para. 312.05 of the NYSE Listed Company Manual." The letter listed various factors that were considered in reaching the decision, "including factors specific to Wachovia, the extraordinary and highly uncertain econo