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By Manuel Baigorri, David Welch and Matthew Campbell
Oct. 16 — AbbVie Inc.'s board recommended that shareholders vote against a $52 billion takeover of Shire Plc, saying tax-rule changes would undermine the deal's rationale.
“Although the strategic rationale of combining our two companies remains strong, the agreed-upon valuation is no longer supported as a result of the changes to the tax rules and we did not believe it was in the best interests of our stockholders to proceed,” AbbVie Chief Executive Officer Richard A. Gonzalez said in an Oct. 16 statement.
Shire is considering the situation and will make a further announcement “in due course,” the company said in a statement.
AbbVie has also been concerned about the potential for more changes to U.S. laws, whether through executive branch action or legislation in Congress, that will increase future tax bills, people familiar with the matter have said.
The price AbbVie agreed to pay for Shire was the highest that it was able to offer, and the loss of some tax benefits and the related prospect of having to borrow more for the merger have eroded its attractiveness, the people said.
The merger would be the largest casualty yet of rules announced in September by the Treasury Department to make tax inversion deals more difficult.
In such transactions, U.S. companies seek to lower their tax bill by moving their legal address abroad, often after buying a foreign company. President Barack Obama's administration has said the rules are necessary to prevent the erosion of the U.S. corporate tax base.
The new rules have had some effect on other deals already. Medtronic Inc. said it will borrow $16 billion to finance its purchase of Covidien Plc instead of using cash it keeps overseas, and Salix Pharmaceuticals Ltd. and Auxilium Pharmaceuticals Inc. canceled planned inversions.
Treasury is contemplating a second set of rules that would limit companies from engaging in earnings stripping, a practice used by non-U.S.-based companies to load up U.S. operations with debt and effectively shift profits to countries with lower tax rates.
AbbVie began a comprehensive review of the merger after Treasury Secretary Jacob J. Lew announced the measures, people with knowledge of the matter said in September, including the prospect of borrowing as much as $7 billion more than it initially anticipated.
The rules, which apply to deals that close starting Sept. 22, include a prohibition on “hopscotch” loans that let companies access foreign cash without paying U.S. taxes, and impose new curbs on actions that companies can use to make such transactions qualify for favorable tax treatment.
Congress, which could impose even more stringent rules, is deadlocked on the issue and isn't scheduled to return to Washington until after the Nov. 4 elections.
Following AbbVie's statement, Senate Finance Committee Chairman Ron Wyden (D-Ore.) said he will keep pushing legislation to curb corporate inversions.
Wyden said Oct. 17 he would continue discussions about inversion-related measures and welcomed news that directors of AbbVie Inc. had abandoned a proposal to buy Dublin-based Shire.
“It's encouraging that companies like AbbVie, and their shareholders, recognize the strategic business value of remaining an American company,” Wyden said. “While it looks like the rush of inversions is slowing, we are continuing to examine the issue while focusing on fixing the root problem—our broken tax code. I'm committed to continued work across the aisle to close loopholes and get bipartisan, comprehensive tax reform done.”
Senate Democrats have been pushing legislation to further fight inversions. Talks have been stymied in part because of disagreements with Republicans about applying changes retroactively to companies that have already put inversions in place.
With assistance from Ian Katz in Washington and Oliver Staley in London.
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