Corporate Behavior
Taxation

AbbVie-Shire takeover at risk following US calls to halt tax inversion ... Treasury secretary urges Congress tax committee to act now to stop US firms moving their tax domicile abroad

Burgess COMMENTARY

Peter Burgess

AbbVie-Shire takeover at risk following US calls to halt tax inversion ... Treasury secretary urges Congress tax committee to act now to stop US firms moving their tax domicile abroad

IMAGE Vitamins made by Shire. Photograph: Suzanne Plunkett/Reuters

Fresh calls for a US crackdown on so-called tax inversion have hit shares in British pharmaceutical firm Shire, which is trying to hammer out a £31bn deal with US suitor AbbVie.

The news comes at a time of intense negotiations ahead of Friday's formal 5pm bid deadline and both sides are likely to seek protective clauses in the agreement in case the deal later falls apart over this issue.

AbbVie wants to shift its tax base from the US to Britain as part of the deal, a move that would cut its effective corporation tax rate from 22% to 13% by 2016. The Chicago based drug firm is one of a string of US companies looking to redomicile abroad to save billions on tax, most notably Pfizer, whose failed £69bn attempt to buy AstraZeneca in May was partly motivated by the tax savings it could make.

But the US treasury secretary, Jacob Lew, urged the leaders of the congressional tax-writing committees to act now to stop US firms redomiciling for tax purposes. He wrote: 'Congress should enact legislation immediately – and make it retroactive to May 2014 – to shut down this abuse of our tax system,' the Wall Street Journal reported.

Lew called for comprehensive business tax reform to lower the US corporate tax rate, broaden the tax base, close loopholes and simplify the tax system.

Shares in Shire were the second-biggest faller on the FTSE 100 indexclosing down 79p at £47.86, a 1.6% fall.

AbbVie, which makes the world's top-selling drug Humira for rheumatoid arthritis, and Shire, known for its hyperactivity treatments, have been in 'detailed talks' since the board of Shire decided to back AbbVie's latest offer (its fifth) on Monday, despite harbouring doubts over the tax structure.

Shire is likely to be pushing for a sizeable reverse break fee in the event the deal collapses. AbbVie, for its part, may want to add a clause that allows both sides to walk away if the US clamps down on tax inversion. It is also taking a closer look at Shire's drug pipeline in light of its forecast that it can double revenues to $10bn by 2020.

As both sides have agreed on the price of a deal – although the mix of the shares-and-cash offer could still change – the UK Takeover Panel is likely to grant an extension of the deadline if this is requested.

Shire's chief executive Flemming Ornskov, who took the reins in January 2013, could land a windfall of up to £21m if the deal goes through at £53.20 a share and all his long term incentive schemes pay out. His predecessor, Angus Russell, owns shares worth £21m in the company, while the former finance director, Graham Hetherington, who left in March, could pocket nearly £30m from his shareholdings and long-term awards.

Two days ago, the US drugmaker Mylan clinched a $5.3bn (£3.9bn) deal to buy Abbott Laboratories' generic drugs business in developed markets outside the US, with plans to transfer the assets to a new firm set up in the Netherlands so that Mylan can shift its tax base there.

UK baby goods chain Mothercare has rejected two takeover proposals from US rival Destination Maternity, which wants to incorporate the combined business in Britain. Its boss, Ed Krell, described tax savings as the 'icing on the cake'.

President Barack Obama included in his latest budget a proposal to ensure that companies cannot change their corporate tax domicile without a change in control of the company itself. About 50 US firms have reincorporated overseas through inversion over the last decade, most of them since 2008.

US lawmakers remain divided on the issue. Republicans as well as some influential Democrats in Congress favour a comprehensive overhaul of the tax regime to limit inversions, with some warning that a quick fix could lead to competitive disadvantages for US companies. Even Democratic senator Ron Wyden, who chairs the Senate finance committee and urged in May that 'this [inversion] loophole must be plugged,' has not pushed for a quick fix.

At the weekend, UK business secretary Vince Cable said the government was looking at introducing multimillion-pound fines for foreign firms that break promises on protecting jobs and investment after taking over British businesses. He said the government may go even further and widen the public interest test to offer British companies greater protection against hostile takeovers.

AbbVie's approach to Shire has not led to the same job fears as Pfizer's abortive bid for AstraZeneca did.