Court’s history a good omen for Sallie Mae
washington -- Sallie Mae can expect a sympathetic ear from the Delaware court hearing its argument that a buyout group should pay $900 million for trying to back out of acquiring the student lender.
Whether it can keep the $25-billion deal from falling apart is another matter. The buyout group, led by private equity firm J.C. Flowers & Co., said Tuesday that its reduced, $21-billion offer for Sallie Mae had expired and that the student lender’s lawsuit was “meritless.”
Sallie Mae, officially known as SLM Corp., sued Monday in Delaware Chancery Court, arguing that the J.C. Flowers-led group broke the terms of its original deal by proposing a lower price.
Judges traditionally have been skeptical of buyers’ efforts to walk away from acquisitions by arguing that economic or regulatory conditions have changed so much that deals should be terminated, several lawyers who specialize in mergers and acquisitions and corporate litigation said.
For example, Bear Stearns Cos. in 1988 won its lawsuit against a Hong Kong brokerage house that wanted to withdraw from an agreement to buy a stake in the investment bank after the 1987 stock market plunge. In 2001, a Delaware Chancery Court judge ruled that Tyson Foods Inc. could not back out of its $4.7-billion acquisition of South Dakota meatpacker IBP Inc., saying he was not persuaded by Tyson’s claims that it was kept in the dark about financial problems.
For buyers seeking to renegotiate deal terms, cases involving so-called material adverse event clauses are “very hard to win,” said David M. Lindley, a partner with law firm Pillsbury Winthrop Swap Pittman in New York.
The would-be buyers of Reston, Va.-based Sallie Mae, including Bank of America Corp. and JPMorgan Chase, have said that student loan legislation signed into law by President Bush last month and weaker economic conditions have made the $60-a-share price agreed upon in April unacceptable.
Last week the group reduced the offer to $50 a share, plus the potential for an additional payment of more than $7 a share if the company’s performance met its own projections.
“We regret that our offer to amend the terms of the Sallie Mae transaction was allowed to expire without discussion,” J.C. Flowers said in a statement Tuesday.
The Flowers group argued that legislation passed by Congress would cut subsidies to the student loan industry by 45% more than Bush originally proposed. The buyout group said it specifically drafted its merger agreement to allow the deal to be canceled in the event of unfavorable legislation because it was “not willing to accept the risk” of new laws that cut subsidies further than the Bush administration’s proposal.
Sallie Mae said that the buyout group was on notice about the new law, and that the anticipated reduction in earnings wasn’t a valid reason for the buyers to back out of the deal.
