The Inversion Excursion

July 30, 2014

Tax stock calculation sheetFor 20 years, a steady trickle of U.S. corporations has chosen exile – renouncing U.S. corporate citizenship and reincorporating abroad. From Fruit of the Loom to Chiquita to AbbVie, a broad range of companies has sought asylum in a variety of exotic locales, from The Cayman Islands to Australia.

2002 National Bureau of Economic Research paper identified several factors influencing the decision to expatriate, including “tax liabilities on foreign-source income,” significant borrowing, and “share of firm assets located abroad.”  All three of these factors are essentially tax considerations, and two of them concern U.S. taxation of foreign operations. Removing foreign assets and foreign business activity from ownership by a U.S. corporation effectively eliminates U.S. tax on income they generate. Thus, companies expatriate to avoid paying U.S. taxes on foreign operations.

Most corporate expatriations are accomplished via a merger with a smaller company incorporated in the foreign country of choice. Early deals were reverse mergers whereby a US parent was acquired by a smaller foreign subsidiary. These first deals were dubbed “inversions” because the expatriate company’s corporate structure was inverted.  True inversion reorganizations have become less common in favor of strategic mergers with local companies.

In 2011, two U.S. public companies pulled up stakes and went abroad. This expatriation rate is consistent with prior years back as far as 1993, but in 2012 the number of companies expatriating more than tripled to seven. Five more US companies decamped in 2013, and this year’s corporate defections appear likely to outdo the last two years combined. If the present rate of corporate flight continues, a dozen companies will have expatriated by the end of 2014.

The chart below summarizes all expatriation mergers between 2011 and July 2014 in which one party was a U.S. public company.

 

Date US-Party Non-US-Party Industry Merged Co Domicile Transaction Type Agreement
5/9/2011 Alkermes, Inc. EDT unit of Elan Corp plc Pharmaceuticals Ireland Merger Business Combination Agreement
9/19/2011 Jazz Pharmaceuticals Azur Pharma Limited Pharmaceuticals Ireland Merger Agreement and Plan of Merger and Plan of Reorg.
1/12/2012 Aon Corporation N/A Insurance UK Restructuring Agreement and Plan of Merger and Plan of Reorg.
2/27/2012 Rowan Companies Inc. N/A Energy UK Restructuring Agreement and Plan of Merger and Plan of Reorg.
4/20/2012 Tronox Incorporated Exxaro Resources Ltd. Chem. / Mining Australia Merger Transaction Agreement
5/21/2012 Eaton Corporation Cooper Industries Manufacturing Ireland Merger Transaction Agreement
5/31/2012 BioCanCell Therap. N/A Pharmaceuticals Israel Restructuring Agreement and Plan of Merger
6/8/2012 China Transinfo Tech. Transcloud Company Ltd. Logisitics Cayman Is. Merger Agreement and Plan of Merger
7/30/2012 Tower Group, Inc. Canopius Holdings Bermuda Insurance Bermuda Merger Agreement and Plan of Merger
2/5/2013 Liberty Global Virgin Media Inc. Media UK Merger Agreement and Plan of Merger
5/19/13 Actavis, Iinc. Warner Chilcott plc Pharmaceuticals Ireland Merger Transaction Agreement
7/27/2013 Omnicom Group Publicis Groupe SA Advertising Netherlands Merger Business Combination Agreement
7/28/2013 Perrigo Elan Corp PLC Pharmaceuticals Ireland Merger Transaction Agreement
9/24/2013 Applied Materials Tokyo Electron Limited Technology Netherlands Merger Business Combination Agreement
2/17/2014 Forest Laboratories Actiavis plc Pharmaceuticals Ireland Merger Agreement and Plan of Merger
3/10/2014 Chiquita Brands Int’l Fyffes PLC Food Ireland Merger Transaction Agreement
3/18/14 Horizon Pharma, Inc. Vidara Therapeutics, Ltd. Pharmaceuticals Ireland Merger Transaction Agreement
4/5/2014 Questcor Pharma, Inc. Mallinckrodt plc Pharmaceuticals Ireland Merger Agreement and Plan of Merger
6/14/2014 Medtronic, Inc. Covidien PLC Medical Tech. Ireland Merger Transaction Agreement
7/8/2014 Salix Pharma Ltd. Cosmo Technologies Ltd. Pharmaceuticals Ireland Merger Agreement and Plan of Merger and Plan of Reorg.
7/13/2014 Mylan Inc. non-US assets of Abbott Pharmaceuticals Netherlands Merger Business Transfer Agreement and Plan of Merger
7/18/2014 AbbVie Inc. Shire PLC Pharmaceuticals UK Merger Agreement and Plan of Merger


Like Gerard Depardieu, these corporate tax exiles have caught the attention of the media, with a proportional increase in rhetorical vitriol. Miles D. White, CEO of Abbott Labs, wrote an Op-Ed in the Wall Street Journal defending expatriation inversions and railing against those who labeled them “an abuse of the tax code, cheating and unpatriotic.” Congress has also taken note.  Internal Revenue Code s. 7874 (26 U.S.C.A. s. 7874) attempts to restrain expatriation inversions by requiring that the foreign target be at least 20 percent the size of the US acquirer, but a Senate bill, dubbed the “Stop Corporate Inversions Act of 2014” would raise the threshold to 50 percent.

Although the current crop of exiles includes a media company reincorporating in the U.K. and an advertising company moving to the Netherlands, the typical expatriation is a pharmaceutical company that reorganizes in Ireland.  While Ireland’s charms are apparent – it is an EU. .member state, has a highly educated, English-speaking workforce, and one of the lowest corporate tax rates in the world – it is not clear why the pharmaceutical industry is relocating there en masse. David Gelles, writing in the New York Times DealBook, suggested pharmaceutical companies may just be copying their peers – “an expensive game of keeping up with the Joneses.”

For more information on inversion mergers, please read:

Inversions to Ireland: Finnerty, McLaughlin, and Cox, Practical Law Article 8-562-1585

Agreement highlights corporate inversion’s importance to Salix acquisition: Glasser, 2014 WL 3360488

Companies look to corporate inversions to reduce tax burdens: Glasser, 2014 WL 2748364