Shire break fee shows tax inversion confidence
AbbVie’s [NYSE:ABBV] move to not include a "get out free" clause for its acquisition of Shire [LON:SHP] if US tax laws change indicates confidence policy makers will not agree on inversions before year end, this news service was told.
Shire also considers it unlikely a law change can be enacted by the time the deal is set to close in 4Q14, a source close to the company said. As part of a co-operation agreement, the two parties agreed AbbVie would pay a 3% break fee in case its board adversely changes or modifies its recommendation of the offer and its shareholders do not approve the deal.
Regulatory conditions for the deal do not apply to proposed or enacted tax law changes that would cause the new company to be treated as a US corporation for federal income tax purposes, AbbVie said in Appendix 1 of its offer document for Shire. The Medtronic [NYSE:MDT]/Covidien [NYSE:COV] tie-up earlier this year included a condition providing the deal would not go through if a bill was passed in Congress that would force the redomiciled entity to shift back to the US.
US officials and politicians have stepped up calls for policy makers to clamp down on a law allowing US companies to shift their tax domicile out of the US. This can be done if shareholders of a foreign target end up owning more than 20% of the combined company following a takeover.
US Treasury Secretary Jack Lew called this week for tax inversion law reform to be backdated to May 2014. Retroactive changes to the tax code, if passed by Congress after the deal closes, will not affect the transaction, the source said. Bankers and lawyers have previously told this news service they do not expect an agreement between Democrats and Republicans on tax law changes until at least 2016-17.
Shire shareholders are set to own 25% of the new AbbVie. The new company will be redomiciled from the US to the UK, but will still be headquartered and listed in the US.
The risk of a law change before the deal goes through is also mitigated by the short timeline to closing, it was said. The deal is conditional on shareholder approval from both companies, and antitrust reviews in the EU, US, Canada, Russia, Ukraine and Israel.
Break fees from target companies are banned under the UK Takeover Code. Reverse break fees offered by bidders are relatively rare, said a corporate lawyer. But given AbbVie’s long public pursuit of Shire and the risk of a change in tax inversion laws, a reverse break fee is “perfectly reasonable” in this case, the lawyer said.
Meanwhile, the companies are now working on the timeframe to send scheme of arrangement documents out to Shire shareholders. There is no more concrete timeframe other than “autumn”, said the source and two people briefed on the matter. Work until today’s (18 July) put up-or-shut-up deadline focussed on price and conditions, they said.
The deal should be closed very soon after shareholder votes, the source said.