July 30, 2014
For 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.
A 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: