October 10, 2007
SLM: A Few More Thoughts
- I noted yesterday that SLM was not retaining its deal counsel, Davis Polk, for the Delaware litigation and thought it interesting for a reason I couldn't peg. But, the reason for this is likely nothing more than a simple conflict. The defendants in this suit include two of the biggest banks in the world, J.P. Morgan Chase and Bank of America. By simple presence, Davis must be representing one of them or have represented one of them recently. And for those who follow their Wall Street history they will guess it is likely J.P. Morgan. John W. Davis was J.P. Morgan's personal lawyer as well as the lawyer for J.P. Morgan, the bank. This also likely explains why SLM went to a litigation boutique, Susman Godfrey, and not another Wall Street law firm -- they are all likely conflicted or otherwise do not want to be seen as suing such a large potential client.
- I spoke to a number of reporters yesterday, and the article coming out of TheStreet.com was perhaps the funniest. I quote his article:
J.C. Flowers officials declined to comment, as did representatives of Sallie Mae. An official following the private equity group's position cited a blog written by Wayne State University's Assistant Professor of Law Steven Davidoff.
Now if only I could get Flowers to pay me a scintilla of what they are paying Wachtell et al. for the same analysis. But in all seriousness, I call these disputes as I see them based on the public information available to me. And an important caveat there: I do think Flowers has a good case a MAC occurred but I am not privy to the non-public information. This could establish a much better case for SLM than it currently appears to be. Or, heaven forbid, I could be wrong on the legal analysis.
- This leads me to my final thought. I was on the phone with another reporter yesterday who said that he had to believe SLM's argument that only if the difference between the proposals and the enacted Bill is a material adverse effect itself is it not excluded from the definition of MAC. This is despite the plain language of the merger agreement which has no such materiality requirement and only requires that the difference be adverse (see my post explaining this difference here). Anyway, his reason -- SLM could never agree to such a risky proposition. That, if a proposal $1 more adverse to SLM than the proposals in the 10-K were enacted, the buyers could walk based on a MAC. He posited that, faced with this decision, SLM would have chosen the other competing bid which was a $1.50 lower but provided more certainty (this was pure speculation on his part).
My answer: First, the $900 million reverse termination fee already provided a significant walk right to the buyers by capping their maximum liability in such cases. You have to take all of these provisions into account when assessing each one of them. Second, this was a highly negotiated provision and if the buyers, SLM and their very highly paid lawyers wanted to say this, they could have (see, e.g., the MAC in the Fremont General Corporation Investment Agreement negotiated by Skadden and Gibson Dunn and my comment on it here/ This MAC did include a materiality provision in its Applicable Law exclusion). Third, we don't have all of the public information, but if we are to believe the Flowers group the parties very specifically negotiated this as the maximum limit of losses the Flowers group would take. This position is disputed by SLM, but appears supported by the Flowers group's assertion that it would not take the risk on the 10-Q disclosure of the second Kennedy proposal (which is not included in the 10-K). Finally, and more scarily, legal negotiations are often on separate tracks than the financial. The business people may have been focused on the top-line bid number and picked that deal leaving the lawyers to ex post facto negotiate the legal terms for a chosen deal. Once a bidder is picked the push-to-close sets in and heuristic biases push lawyers to accept changes that in the cold light of day they may regret. Claire Hill at Minnesota has written extensively on related but relevant issues of contract negotiation -- you can access her articles here.
At market close the Flowers group issued their own statement:
We regret that our offer to amend the terms of the Sallie Mae transaction was allowed to expire without discussion. Instead, Sallie Mae filed what we firmly believe is a meritless lawsuit. We now look forward to having this matter resolved in the Delaware Chancery Court."
I too look forward to the Delaware Chancery Court hearings.
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