M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Monday, October 8, 2007

The Flowers' Group Letter

What follows is a copy of what I am told is the letter the Flowers group sent to SLM today which triggered SLM's lawsuit:

Mr. Albert Lord

SLM Corporation
12061 Bluemont Way
Reston, Virginia  20190

Dear Mr. Lord:

We are writing in response to your letter of October 3, 2007, in which Sallie Mae purports to set the closing date of the merger for November 5, 2007.

It would be easier to discuss these matters in person rather than through an exchange of letters.  We also would welcome the opportunity to meet with management to discuss our proposal and review the Company’s projections so that we can better understand its views of the values in the Company and the strength of its business plan.

Turning to your letter, we note at the outset that we disagree with your assertion that we have violated any confidentiality obligation.  We also disagree with your claim that Sallie Mae is entitled to take the unilateral action of setting a closing date, for at least three reasons.  (Capitalized terms used herein that are not defined have the same meaning as provided in the Merger Agreement.)

1.      The conditions to closing have not been satisfied because the Company has suffered a Material Adverse

Under Section 2.01(b) of the Merger Agreement, and as acknowledged by Sallie Mae in its July 18, 2007 Proxy Statement to shareholders, the buying group is not obligated to complete the Merger until the earlier to occur of (i) a date during the Marketing Period specified by the buying group on at least three business days notice to Sallie Mae and (ii) the final day of the Marketing Period, subject in each case to the satisfaction or waiver of all conditions to consummation.  As Section 8.09(a) of the Merger Agreement requires the Marketing Period to be kept open for 30 consecutive calendar days, the Closing Date cannot be set until 30 calendar days after the Marketing Period has commenced.  Section 8.09(a) of the Merger Agreement makes clear that the Marketing Period will not commence until all other conditions to the consummation of the merger (except for receipt of the officer’s certificate) are satisfied or waived.  These other conditions include, without limitation, a condition that the representations and warranties of the Company set forth in the Merger Agreement (including the representation in Section 4.10 entitled “Absence of Certain Changes”) shall be true and correct.

As you know, we believe that if the conditions to the closing of our transaction were required to be measured today, the conditions to our obligation to close would not be satisfied because the Company has suffered a Material Adverse Effect within the meaning of the Merger Agreement.  Substantial grounds for our view have been explained to your Board.  In light of this, the Marketing Period has not commenced.

2.      The Company has not provided us with the Required Information necessary to finance the transaction.

Section 8.09(a) of the Merger Agreement provides — “for the avoidance of doubt” — that “the Marketing Period shall not be considered to have commenced or expired . . . unless during and at the end of the Marketing Period Parent shall have (and its financing sources shall have access to), in all material respects, the Required Information.”  The definition of Required Information includes, among other things, “information of the type required by Regulation S-X and Regulation S-K promulgated under the Securities Act and of type and form customarily included in a registration statement on Form S-1.”  The definition also includes financial or other information regarding the Company “as otherwise reasonably required in connection with the Debt Financing,” which customarily includes projections based on reasonable assumptions required in connection with the syndication of the bank credit facilities.

After the last due diligence session, we outlined several areas in which we believe that the Company’s projections are questionable.  The Company’s representatives indicated that they would present us with updated projections and with further justification and back up for the assumptions underlying those projections.  That has not yet happened.  The Company also has not provided us with updated pro formas.  Since the Company has not provided the buying group with pro formas, MD&A and risk factor disclosure “of the type and form customarily included in a registration statement on Form S-1” and has not provided us with projections of the type required to consummate the Debt Financing, Sallie Mae has failed to provide us with the Required Information necessary for the Marketing Period to commence.

3.      FDIC approval of the transfer of the Company Bank has not yet been obtained.

Under the Merger Agreement, approval of the FDIC for the acquisition of the Company Bank is required prior to closing.  Section 8.01(a) provides that the buying group shall agree to liquidation or divestiture only if the buying group is unable to obtain regulatory approval in a “reasonably timely manner customary for other transactions of a similar nature . . . .”  We do not believe that your assertion that the buying group has been unable to obtain such approval in a “reasonably timely manner customary for transactions of a similar nature” is correct.  The processing period for industrial bank applications approved by the FDIC in 2007 ranged from 7 months to 21 months.

We also do not believe that your assertion that our actions have “almost certainly eliminated any likelihood of obtaining such approvals in the near future, if at all” is correct.  Our regulatory counsel has been in communication with the FDIC concerning the application, and all indications to us are that the FDIC is continuing to process the application in the ordinary course.  Indeed, on October 3, about five hours before you sent us your letter, our counsel called yours to inform him of the latest communication with the FDIC staff.

We do not believe that liquidating the Company Bank makes commercial sense for the Company.  Nonetheless, if the Company wishes to pursue this course, without conceding any rights under the Merger Agreement, we are willing to consider this alternative at this time.  Please advise us as to the details of how the Company would suggest that this alternative approach to the Company Bank would work.

*        *        *

In closing, on behalf of our group, let us again state that the issues between our group and the Company would better be dealt with through a meeting than through exchanges of letters.  It would be most helpful if management would share its views of the Company’s prospects at that meeting so that we can better understand the value of the Company.  We, of course, reserve all rights and waive none.

Very truly yours,

Sally Rocker

Cc:       Board of Directors
            George R. Bason, Jr.


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