August 9, 2007
SLM Corporation: Playing Hardball
SLM Corporation's press release on Tuesday and its Wednesday 10-Q filing focused primarily on rebutting the buyer consortium's claim that a Material Adverse Effect would occur if Congress passes pending legislation which would adversely effect SLM (for more see my post SLM Corporation's Material Adverse Change Clause). But in its press release, SLM also asserted that it could force the buyer consortium to raise the $4 billion in high-yield debt required to finance and close the transaction:
Sallie Mae has been advised by the Buyer that FDIC approval for the application pending before the FDIC regarding the transfer of Sallie Mae Bank is likely to be obtained in September. If FDIC approval is not obtained in September, Sallie Mae believes it can take steps that will trigger the Buyer’s debt marketing period to begin in September. As previously announced, all other material conditions to closing the transaction will have been met on Aug. 15, 2007 . . . .
SLM is playing hardball here. It is not only asserting that there is no MAE, but that, under the terms of the merger agreement, it can force the private equity consortium to raise the necessary financing and close the transaction. Here, SLM is relying not only on the buyer's agreement in Section 8.01 of the merger agreement to use all "reasonable best efforts" to complete the deal but the specific buyer obligations with respect to financing in Section 8.10. The Section states:
Parent shall . . . . complete the Equity Financing as part of the consummation of the Merger and shall use its reasonable best efforts to arrange the Debt Financing . . . . In the event any portion of the Debt Financing becomes unavailable . . . . Parent shall use its reasonable best efforts to arrange to obtain alternative financing from alternative sources . . . . in an amount sufficient to consummate the transactions contemplated by this Agreement, as promptly as possible.
The Section then spells out specific provisions related to the necessary high-yield financing:
For the avoidance of doubt, in the event that (i) all or any portion of the high yield notes issuance described in the Debt Commitment Letter (the “"High-Yield Financing”) has not been consummated, (ii) all closing conditions contained in Article 9 (other than those contained in Section 9.02(a)(iii) and Section 9.03(iii)) shall have been satisfied or waived, and (iii) the bridge facilities contemplated by the Debt Commitment Letter are available on the terms and conditions described in the Debt Commitment Letter, then Parent shall cause the proceeds of such bridge financing to be used in lieu of such contemplated High-Yield Financing, or a portion thereof, as promptly as practicable following the final day of the Marketing Period.
This effectively means that SLM can require the buying consortium to use a bridge loan to finance and close the acquisition following the Marketing Period. And Marketing Period is defined in the Section to mean:
the first period of 30 consecutive calendar days (i) during and at the end of which Parent shall have (and its financing sources shall have access to), in all material respects, the Required Information (as herein defined) and (ii) throughout and at the end of which the conditions set forth in Section 9.01 and Section 9.02 (other than the receipt of the certificate referred to therein) shall be satisfied. . . . provided further that the Marketing Period shall end on any earlier date that is the date on which the High-Yield Financing and the Debt Financing (other than any portion of the Debt Financing that constituted bridge financing with respect to such High-Yield Financing) is consummated; provided further that the Marketing Period must occur either entirely before or entirely after the periods (i) from and including August 18, 2007 through and including September 3, 2007 or (ii) from and including December 22, 2007 through and including January 1, 2008.
In plain English, this means that once SLM provides the necessary information and the other conditions to the completion of the merger are satisfied, the Marketing Period begins. The buyers will then have 30 consecutive calendar days to obtain its $4.0 billion in high-yield financing and confirm its approximately $12 billion in remaining financing. But if the buyers do not obtain the necessary high-yield financing during this 30 day period, then SLM can force the buyers to close using a bridge loan for the $4.0 billion. Also, note that the Marketing Period cannot start during the last few weeks of summer -- everyone has to have a vacation every once in a while.
So, the question now comes down to whether the other conditions to closing the agreement will be satisfied such that the Marketing Period can be triggered by SLM. Here, assuming SLM stockholder approval is obtained, all of the conditions to the merger would be satisfied except the one requiring that "no Applicable Law shall prohibit the consummation of the Merger". This provision refers to the required approval of the FDIC. Since SLM owns and operates Sallie Mae Bank, a Utah chartered industrial bank, the buyer consortium is required to file a notice under the Change in Bank Control Act with the FDIC and obtain FDIC approval prior to acquiring control of the bank. FDIC approval has not yet been obtained. At first blush, it would therefore appear that SLM must wait until this approval comes before it can claim that all of the conditions to the agreement are satisfied and trigger the Marketing Period.
However, note that SLM claimed in its press release that it did not need such approval to begin the marketing period. What's going on? Here, SLM is relying on the hold-separate clause in Section 8.01 of the merger agreement. This Section states:
Parent shall agree to hold separate or to divest any of the businesses or properties or assets of the Company and its Subsidiaries, and the Affiliates of Parent agree to restructure the equity ownership of Parent and the related governance rights with respect to Parent or the Company and its Subsidiaries to obtain HSR Act clearance (the “Specified Actions”), if and as may be required (i) by the applicable Governmental Authority in order to resolve such objections as such Governmental Authority may have to such transactions under any Applicable Law (it being understood and agreed that the foregoing shall include the prompt divestiture, liquidation, sale or other disposition of, or other appropriate action (including the placing in a trust or otherwise holding separate) with respect to Company Bank, if Parent has been unable to obtain the requisite regulatory approvals relating to Company Bank in a reasonably timely manner customary for other transactions of a similar nature) . . . .
In its proxy statement, SLM asserts that this clause would require the buyers to "divest, hold separate or take other appropriate action with respect to Sallie Mae Bank, if necessary" to obtain FDIC and other bank regulator approval. If SLM is correct then the buyer group would have to take such steps to satisfy the applicable law condition, and SLM is also likely correct that as of Sept. 3 it could force the buyers to begin the marketing period provided the customary time period for approval of these transactions by the FDIC had elapsed. So easy right?
Well, not so fast. The above provision is (intentionally or unintentionally) not very clearly drafted. The inclusion of the modifier HSR Act in it (my bold) could lead one to conclude that this hold-separate clause only requires such actions to obtain HSR clearance, not FDIC clearance. But, the clause then goes on to refer to clearances to be obtained for the Sallie Mae Bank (referred to as the Company Bank) which clearly implicate obtaining FDIC approval. In short, the clause is ambiguous enough that the buyers can reasonably take the position it only applies to clearances to be obtained under the HSR Act and, consequently, SLM cannot force the marketing period to begin without such approval. Whether the buyer group actually takes this position depends upon their own assessment of the likelihood a court will interpret a clause this way and how much hard ball they also want to play.
In sum, it appears that SLM is on uncertain ground in it assertion that it can force the marketing period to begin and trigger a close without necessary FDIC approval.
Addendum: Note there appear to be other possible arguments the buyer consortium could raise to dispute SLM's assertion, such as claiming that a customary time period for FDIC approval has not elapsed and the hold-separate clause consequently not triggered. Also, the financing banks themselves could invoke the MAE in their own debt commitment letters thereby forestalling the buyer group's obligation to close -- but this would expose them to significant liability, something they would be loathe to do -- and so, it is an unlikely event.
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