Investors Can’t Inspect Pfizer Records Over Tax Issue

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By Michael Greene

Sept. 1 — Pfizer Inc. doesn't have to turn over internal documents to investors seeking to investigate whether directors failed to ensure the company was complying with accounting rules, the Delaware Chancery Court ruled Aug. 31 ( Beatrice Corwin Living Irrevocable Tr. v. Pfizer Inc., 2016 BL 286139, Del. Ch., No. 10425-JL, 8/31/16 ).

The plaintiffs sought information related to the company's decision not to calculate a particular deferred tax liability. Judge Abigail M. LeGrow found that the plaintiffs failed to show they had a credible basis to investigate whether Pfizer's board breached its oversight duty.

“The plaintiffs' evidence at trial and arguments in their briefs did not address Pfizer's reporting system, or lack thereof, or whether any 'red flags' might have been raised but ignored by Pfizer's board,” LeGrow wrote. “Nor is there anything in the record from which the Court might infer the absence of such a reporting system or the presence of such red flags.”

`Caremark' Investigation

The plaintiffs' inspection request was sparked by a New York Times article that identified Pfizer as a company that doesn't calculate its deferred repatriation tax liability.

A company's foreign earnings that are indefinitely reinvested overseas aren't taxed until they are brought back to the U.S. Under generally accepted accounting principles (GAAP), a company doesn't have to report the repatriated tax liability it is deferring when it isn't “practicable” to do so.

The investors presented at trial an expert who testified that it was practicable for Pfizer to calculate the liability.

According to the court's decision, the investors sought to investigate what is known as a Caremark claim. Under the theory, directors can be held liable for consciously disregarding their duties to oversee the company's compliance with applicable laws.

The court said the plaintiffs failed to produce evidence of an “actionable corporate wrongdoing.” LeGrow also said the plaintiffs failed to show that the board wasn't justified in relying on an outside accounting firm's opinion that Pfizer financial statements were free of material misstatements and complied with GAAP.

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To contact the editor responsible for this story: Yin Wilczek at

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