AT&T Gets Unusual Protections in Leap Wireless Deal

Buyers almost always protect themselves from material adverse changes in a target’s business by reserving the right to walk away if a “MAC” happens. But in AT&T’s acquisition of Leap Wireless International, the merger agreement also contains what might be referred to as a material favorable change clause.

Although a similar provision has been included in a few previous merger agreements, it is unusual. To protect against a topping bid, buyers usually secure a breakup fee and certain procedural protections before the board can change its recommendation. AT&T negotiated a very favorable—but not particularly unusual– package of protections in this area. But what AT&T also has is a series of unusual protections if developments cause the board to change its mind in the absence of a competing bid. The biggest protection is that if that board announces that it has changed its mind when there is no higher bid and AT&T loses the deal, Leap will owe AT&T $71 million. That represents almost 6% of the reported valuation of the aggregate purchase price of the Leap stock in the AT&T deal. That is a big penalty for the board discovering better news for its shareholders. (It essentially says that the first 6% of any appreciation in the equity in this situation goes to AT&T for its efforts.)

And there is more. The Leap board cannot even change its mind—and is contractually required to recommend in favor of the AT&T deal– if the event that causes the board to want to recommend against the deal was reasonably foreseeable when the agreement was signed, is a development in the cell-phone industry, is a change in market price of the Leap stock, or is the company exceeding its own projections. These sound like they have been taken from the clause that limits a buyer from claiming a MAC—which is why I would call this a material favorable change clause. In my view, there is some question whether this limitation on the board changing its recommendation is enforceable.