February 27, 2009 12:48 PM

Davis Polk, Cleary, Sidley, Hogan, Gibson Dunn All on Citi Deal

Posted by Zach Lowe

We'll leave it up to economists and financial reporters to explain the historic significance of the agreement Citigroup reached with the Treasury Department to increase the federal government's (read: your) stake in the ailing mega-bank to as much as 36 percent ownership of outstanding shares. In all, Citi plans to raise its common equity by as much as $81 billion in by having the government and several big-time private investors exchange their preferred stock for common shares, according to Bloomberg. Treasury will match the private investors on a dollar-for-dollar basis, but will cap the exchange at $25 billion; the investors will exchange a maximum of $27.5 billion of preferred shares.

The government will not pour any additional cash into the bank--for now; Citi has already received about $45 billion in federal bailout money. 

Our job is to tell you about the legal work involved, and it breaks down like this: Davis Polk & Wardwell took the lead in advising Citi and negotiating with the private investors, a group that, according to a Citi statement, includes Capital Research Global Investors and Capital World Investors (two funds under the same umbrella), the Government of Singapore Investment Corporation (Singapore's sovereign wealth fund) and the Saudi prince Alwaleed bin Talal (at one point the largest individual shareholder in Citi). The Kuwait Investment Authority also plans to participate in the exchange, according to several lawyers involved in the talks.

Cleary Gottlieb Steen & Hamilton advised Citi on drafting the various securities agreements, a complicated task considering there are all sorts of contingency agreements should Citi shareholders vote down the exchange plan. (One such contigency: Preferred stock investors will have the opportunity to buy up a capped amount of common stock for the price of a single penny per share in the event shareholders reject the original plan.)

As for the investors: Hogan & Hartson advised bin Talal, a loyal Hogan client since before the first Persian Gulf War, according to Hogan partner Bruce Gilchrist. The firm advised bin Talal in the early 1990s, when he first invested $600 million in Citi; back then, the bank, known as Citicorp, was also struggling to find capital, Gilchrist says. (Hogan got the work because one of the prince's advisers was close with a Hogan partner at the time, Gilchrist says). The prince's holdings illustrate the complications of the deal. He holds both preferred and common shares, meaning the exchange he agreed to may end up diluting the value of common stock he already owns, lawyers say. 

Several sources say Gibson, Dunn & Crutcher advised the Kuwaiti authority, but Steven Guynn, who advised the authority in its initial $3 billion investment in Citi preferred stock last year, declined to comment and would not confirm whether the authority will participate in this exchange. (One fun Am Law note: Guynn's brother, Randall, was the lead banking partner on the Davis Polk team advising Citibank.) 

Sidley Austin reprised their role advising Singapore's sovereign wealth fund, according to Susan Lewis, the lead Sidley partner on the deal. (The firm also advised the Singapore fund when it gobbled up billions in Citi preferred shares last January). Sidley has been representing the fund in various investments for more than 15 years, Lewis says.

The Capital Group relied on in-house counsel, says Andrew Felner, the deputy GC for Citi who handled much of the internal work on the exchange plan. 

Citi's shares dropped about 40 percent upon the deal's announcement, mostly over fears that the exchange will dilute the value of common shares, according to Bloomberg and CNBC. Citi, which lost about $28 billion last year, also agreed to eliminate the dividend on preferred stock and re-jigger its board of directors so that a majority of directors are new and independent.

Cleary will also be handling Citi's disclosure work and filings with federal regulators. Partners David Lopez, Neil Whoriskey, Alan Beller Jeff Karpf are leading the firm's team.

The Davis Polk team consists of Guynn, M&A partners Gar Bason, Louis Goldberg and Michael Davis and tax partners Avishai Shachar and Neil Barr.

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