The Inversion That a Rule Ended, 2016Medium

A very large announced merger abandoned days after a tax authority changed a technical rule — the clearest illustration that approval risk includes rules that do not exist yet.

3 min read · 497 words

What happened

• November 2015 — a US pharmaceutical company and an Irish-domiciled one announce a merger that would place the combined group's tax residence outside the United States.
• The structure is an inversion: the smaller, foreign-domiciled company is the nominal acquirer, so the combined group is not a US taxpayer on the same basis.
• April 2016 — the US Treasury issues temporary regulations. One of them disregards, for the ownership test, recent US acquisitions made by the foreign party over the preceding three years.
• Days later — the transaction is terminated by mutual agreement. A break fee is paid.
• No court, no competition authority and no shareholder vote was involved. The condition that failed was one nobody had drafted for.

The mechanism

• Tax residence is a test with inputs. The ownership percentage after the combination decides the treatment; changing what counts in that percentage changes the answer without changing the deal.
• A rule can be retroactive in effect without being retroactive in law. Disregarding prior acquisitions applied to transactions already completed, which is what made it decisive here.
• No condition protects against this. A material adverse change clause is normally carved out for changes in law, and a specific tax condition would have been a public admission of the rationale.
• The break fee did what break fees do — it paid for the work, and the calculator on the M&A desk shows how little of a large transaction that usually is.
• The approval blocker is broader than competition law. What kills a deal counts it across all seventy transaction types on this site.

What it teaches

• If the case for a transaction is a tax treatment, the counterparty is a government. Governments are not bound by the deal timetable.
• Ask what the deal is for. A merger whose stated industrial logic survives without the tax outcome would not have been abandoned in a week.
• Long timetables carry political risk. The longer the period to closing, the more legislative and regulatory sessions the transaction has to survive.
• Read the conditions for what is carved out. Changes in law are usually the buyer's risk, and that allocation is invisible until it decides everything.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• What kills a deal — approval risk, counted across every transaction type.
• Recommended offer — the conditions and the long stop date.
• Synergies — what is left of a case when one rationale is removed.
• The M&A desk — where the conditions are negotiated.