Pfizer-Allergan merger dead after tax rule change makes inversion harder

The $160 billion merger agreement between Pfizer Inc. and Dublin-based Allergan plc has been called off by the companies’ mutual agreement. Pfizer cited a notice by the U.S. Department of Treasury on April 4, 2016, that will curb tax-avoiding corporate “inversion,” which the companies concluded qualified as an “adverse tax law change” under the agreement.

Companies undertake an inversion transaction when they move their tax residence overseas to avoid U.S. taxes without making significant changes in their business operations, according to the Department of the Treasury. After an inversion, the companies often continue to take advantage of the benefits of being based in America, while shifting a greater tax burden to both other business and taxpayers in the U.S. The Department of the Treasury aims to limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies, preventing foreign companies acquiring American companies in stock-based transactions form using the increase in size to avoid current inversion thresholds for any subsequent U.S. acquisitions.

Treasury rules previously required that an inverted company, such as the proposed Pfizer plc, be a tax-resident in its new home country under the country’s rules, not just U.S. law, to pass the test of whether it has 25 percent of its business activity in the new country. A company can be recognized as a foreign-based company by passing the 24 percent threshold. Before the Department’s announcement, the Treasury rules alone were not likely to stop the merger because Pfizer stockholders would have held a majority of the combined company, with 56 compared to the 44 percent held by Allergan’s shareholders (see Big pharma gets bigger: Pfizer and Allergan in $160B deal, Health Law Daily, November 23, 2015).

Big pharma gets bigger: Pfizer and Allergan in $160B deal

In one of the largest corporate deals ever, valued at approximately $160 billion, U.S pharmaceutical giant Pfizer Inc. and its Irish rival Allergan plc announced a merger that would create the world’s largest pharmaceutical company. Under the terms of the proposed transaction, the businesses of Pfizer and Allergan will be combined under Allergan plc, which will be renamed Pfizer plc. According to both companies, the deal is expected to be completed by the end of 2016 and predicted to have more than $25 billion in operating cash flow beginning in 2018.

Pfizer, based in New York, has the blockbuster cholesterol-lowering drug Lipitor® and erectile dysfunction drug Viagra® amongst its many offerings. Allergan, based in Dublin, Ireland, is best known as the manufacturer of the cosmetic drug Botox®. The merger will create some angst amongst politicians, as the combined company’s headquarters will be in Dublin. In a process known as corporate tax inversion, where bigger American companies buy smaller foreign ones and then relocate their headquarters to the location of the smaller company, the move would slash the combined company’s U.S. corporate tax bill substantially.

The U.S. Treasury Department recently unveiled new rules to make it harder for companies to do inversions. However, the Treasury rules alone will likely not stop the merger because former Pfizer stockholders will hold approximately 56 percent of the combined company and Allergan shareholders will own approximately 44 percent of the combined company. The Treasury rules require that an inverted company be tax-resident in its new home country under that country’s rules, not just U.S. law, to pass a test of whether it has 25 percent of its business activity in the new country. A company can be recognized as foreign-based by passing the threshold percentage.