UK/US: Pfizer ends AstraZeneca bid but the tax issues it raised live on
28 May 2014
Posted by: Author: Eurika Morphy
Author: Eurika Morphy (Forbes)
So another multi-billion dollar proposed merger between corporate giants is kaput. Pfizer announced on Monday it is abandoning its unsolicited bid to acquire British pharmaceutical company AstraZeneca after the company rejected its offers four times.
The why, when and what comes next of the deal’s demise can be found here and here and here.
A less obvious ramification of the proposed deal, though, still must play out even though Pfizer is throwing in the towel: namely Pfizer’s bid infuriated many in Congress because it would allow the company to reincorporate in the U.K.
It is another flavor of the perennial issue on how to tax U.S. companies both here and globally; an issue that is routinely aired whenever a high profile event highlights how U.S. companies shift operations overseas to maximize profits or minimize labor costs. Not surprisingly, legislation to prevent this or that move inevitably follows.
This time with Pfizer was no exception. Earlier this month the New York Times reported that 14 senators introduced The Stop Corporate Inversions Act of 2014, which would tightened requirements on the structure Pfizer would have used (They are called inversions and the brief definition is that they allow U.S. companies to reincorporate elsewhere after a takeover of a smaller international firm. A better and more detailed definition can be found in Cadwalader’s newsletter for Corporate Board Members).
Companies can move overseas if foreign shareholders own at least 20 percent of their stock under the current law. The bill would raise that threshold to 50 percent for two years.
Granted, in an election year it is difficult to envision anything even remotely controversial, such as a change in tax policy, passing Congress—even a tax policy change that invokes images of U.S. companies abandoning their homeland for lower tax locales.
But it’s not just Congress tracking this issue; the Treasury Department raised it in March 2014, with its own proposal to amend the rules to allow inversions only if the former shareholders of the U.S. corporation own no more than 50 percent of the combined company after the merger or acquisition, Cadwalader reported. The law firm called it ” a change that would significantly reduce the possibility for corporate inversion transactions.” (Hat tip to CFO.com for highlighting the Cadwalader note).
Thanks to Pfizer’s bid, legislation to restrict inversion is now on a more public radar and it is not inconceivable that Treasury put in place its proposal in this environment. Warren Buffet at least thinks so, according to comments he made on CNBC earlier this month. "This whole thing on the foreign situation, I think, will cause one hell of a fight in Corporate America.
Certainly Cadwalader is advising companies to move forward with any inversions they may be contemplating–even though legislation is uncertain at best for this year–to "avoid the application of the proposed amendment and any similar amendments that Treasury re-proposes in 2015 or later with the same effective date of January 1, 2015.”
They are the experts so I will bow to their judgment. Go, U.S. companies, and purse that inversion if that is best for your operations and your shareholders, most of who are likely to be U.S. citizens or residents. For the record, I am not a big fan of simplifying an issue for the purposes of demonizing it and the entities that use it. Inversion is legal under U.S. law and companies have a duty to their shareholders to maximize profits.
Also for the record, I am definitely not a big fan of spinning each and every proposed business-friendly measure as "a job creator” when often they are nothing of the kind.
But something is clearly amiss in the U.S. tax code, and our legislative system in general, when the only way a Congressperson can push for a change in tax policy is to do one or other—demonize or play the jobs card–and not debate its larger merits or drawbacks.
This article first appeared on forbes.com.