Sallie Mae takes JC Flowers to court

The phoney war between Sallie Mae and JC Flowers came to an end last Monday (8 October) when the student lender filed a lawsuit in Delaware Chancery Court against the private equity house and its buyer group.

As reported last Monday (1 October), Flowers’ $25bn buyout of SLM, known to everybody as Sallie Mae, looked to be off after Flowers cited not one but two material adverse effect clauses, or MACs.

Then last Monday, Sallie Mae’s legal team filed a suit that raised the stakes. It seeks a declaration from Flowers and the banks that they repudiated the merger agreement, that no material adverse effect has occurred, and that Sallie Mae may terminate the merger agreement and collect damages of $900,000,000.

The deal is significant for businesses involved in similar highly leveraged deals outside the US as it highlights the willingness of sellers to litigate.

The trigger for firing the starting gun on what could be the highest-profile dispute resulting from the credit crunch was a letter from Sallie Mae to Flowers. According to a source close to the deal, this was an attempt to start the marketing period for the deal and set a closing date.

“The buyers refused,” said source. “They made it clear that they didn’t want to go through with the transaction.”

For their part, Flowers and the acquiring banks, JP Morgan Chase and Bank of America, maintain that recent legislative changes and the economic downturn over the summer triggered two MACs, allowing them to walk away from the deal without incurring a $900m break fee. The group remains confident that Sallie Mae’s best option is to renegotiate. Unless either side changes its position, however, it looks as though a Delaware court will be the one to decide.

Wachtell Lipton Rosen & Katz and Sullivan & Cromwell are advising Flowers and the banks while the lead trial lawyer for Sallie Mae will be well-known Susman Godfrey litigator, Steve Susman.