The battle over the $25 billion (£12.3 billion) buyout of SLM is heading for the courts, after America’s biggest student lender filed a lawsuit seeking $900 million in damages from a financial consortium for breaching the terms of their agreed takeover deal.

The suit seeks to force the consortium, led by JC Flowers, the private equity firm currently stalking Northern Rock, to pay a $900 million “break fee” or honour the deal signed in April after the buyers last week sought to cut $4 billion from the agreed price.

The consortium, which also includes Friedman Fleischer & Lowe along with the banks JPMorgan Chase and Bank of America, said that it had reduced its offer price because a new law would result in much steeper-than-expected cuts in federal subsidies to SLM, the parent company of Sallie Mae, which it is also known as.

It added that tightening credit markets would add to the problems by making it more difficult and expensive to access funds and argued that the two developments constituted a “material adverse effect”.

A material adverse effect is a legal term in a deal that allows the buyers to walk away without being penalised if events that were unforeseen when the deal was agreed significantly reduce the outlook for the target company before the deal is completed.

In its complaint, filed this week in Delaware Chancery Court, Sallie Mae argues that it disclosed all the potential legislation that could potentially drag down its profits, including some that were worse than what was passed over the summer.

“As a matter of logic and clear contractural language, legislation that is only marginally worse for Sallie Mae than the disclosed proposals, cannot be a material adverse effect,” the complaint read. “The differential effect of enacted legislation as compared to the disclosed proposals must itself be material to the disclosed proposals, must itself be material to Sallie Mae’s financial condition, business or results of operations.”

However, the buying consortium is unwilling to budge from its new offer.

In a statement after the lawsuit was filed, the consortium said: “The lawsuit filed by Sallie Mae rests on a fundamental misunderstanding of the terms of our contract, and is without merit. This dispute should be resolved in the boardroom not the courtroom.”

The 17 per cent reduction in the offer price for Sallie Mae came a week after Goldman Sachs and Kohlberg Kravis Roberts walked away from their agreed $8 billion takeover of Harman International Industries, the audio speaker maker. They also claimed a “material adverse effect” since the deal was agreed.

The first significant price cut on a previously arranged leveraged buyout occurred in August, as Home Depot agreed to cut $2 billion from the sale price of its building unit in the face of threats that the acquiring consortium would walk away. The consortium - Carlyle, Bain Capital and Clayton, Dubilier & Rice – argued that the housing market slump had significantly hurt the unit’s prospects, justifying the lower price tag of $8.5 billion.Under the new legislation that effects the Sallie Mae deal, student loan companies will collectively receive $22.3 billion of subsidy cuts, compared with President Bush’s proposal for $15.5 billion.

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