Sallie Mae's lawsuit seeks a declaration that the buyer group has reneged on the merger agreement, that no "material adverse change" has occurred, and that Sallie Mae may terminate the takeover and collect the $900 million.
A material adverse change is a condition that could cause a substantial reduction in earnings power and it can give buyers or lenders a "walk right" from their obligations.
The lawsuit is being seen by many as a hard-ball attempt by Sallie Mae to force the buyer group to stick to the original deal, in which the group offered $60 a share, or come up with something closer to it than its revised proposal of $50 a share, or $20.6 billion offer, plus extra payments depending on how the company performed.
"We are prepared to close under the contract the parties signed in April," said Sallie Mae chairman Albert Lord in a statement late on Monday. "Sallie Mae has honored its obligations under the merger agreement. We ask only that the buyer group do the same."
The original buyout agreement has a $900 million breakup fee. But if the buyers could prove the student lender has suffered a material adverse change, they would not have to pay it.
J.C. Flowers & Co said on Tuesday their revised buyout offer has expired and that the future of deal would be resolved in court.
"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. "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."
J.C. Flowers repeated its stance that a material adverse change has occurred and that Sallie Mae has misinterpreted the merger contract.
Joel Greenberg, co-chair of law firm Kaye Scholer LLP's corporate and finance department, said it would be difficult for J.C. Flowers to argue there has been a material adverse change, because the contract specifically addressed the question of new legislation.
"Is it so substantially worse than the company predicted that it is a material adverse change? It's a very hard argument," Greenberg added.