Pfizer, Allergan and Upset Investors: How the New Anti-Trust Rules Impact Shareholders

Tax law rarely makes major headlines, but the IRS and the Treasury Department’s April 2016 proposed tax regulations were a fascinating exception. The anti-trust regulations had a timely impact on Pfizer, and resulted in the dissolution of what was almost one of the most significant mergers in the business world.

The broken $152 billion deal posed a greater challenge for some parties involved in the merger than for others, but overall it raised important questions about the options shareholders have when new legislation is introduced. In these situations, what degree of accountability can they demand of the company itself?

The biggest pharmaceutical company in the world

Allergan is a pharmaceutical company based in Ireland, best known for producing Botox. Pfizer planned to merge with Allergan, which would have resulted in the largest pharmaceutical corporation in the world. Allergan had itself acquired other companies in the past.

Though Pfizer claimed that the merger was primarily for the purposes of innovation, the federal government became concerned that large multinational corporations may be using these types mergers to take advantage of tax loopholes.

The IRS and the Treasury Department introduced new legislation to stop multi-national companies from abusing tax loopholes.

With Pfizer’s official headquarters in Ireland, the company could enjoy lower tax rates, even though it would technically continue its normal operations in the United States. In order to block this type of move, the government passed new Anti-Trust laws closing such tax loopholes for serial inverters.

The tax rules were passed just before the merger was set to take place, and Pfizer choose to break the deal. The company itself suffered relatively minor losses, having to pay only a $125 million payment to Allergan for the broken deal, but Pfizer’s shareholders were understandably concerned.

Even though Pfizer’s shares went up slightly after the Treasury Department’s tax rules were introduced, Allergan’s dropped significantly. This turn of events led to shareholder concerns that the merger may have been overvalued to begin with.

It wasn’t such a good day for the advisers who had negotiated the deal, either; they stood to lose approximately $200 million in fees. Though the fallout of Pfizer’s failed merger could have been far more detrimental, shareholders elsewhere may rightfully be worried about whether the companies they’ve invested in could experience harsher repercussions.

Investor fallout

Shareholders in other companies should take note if they are aware of these tax avoidance practices being used, because any tension with the Treasury Department’s new rules could be bad for business if the companies under scrutiny aren’t sufficiently prepared.

Pfizer sidestepped the brunt of the financial repercussions because its contract with Allergan included a relatively low breakup fee in the event that tax rules changed, but it’s possible that not all corporations have been as thorough.

It’s not just the new anti-trust rules that could dissolve mergers in progress; it’s any potential violation of appropriate corporate practices.

The Justice Department has sued Halliburton, for example, to block it from acquiring Baker Hughes, a prominent rival, because the merger may suppress competition in the oil industry.

Shareholders have a right to stay informed

The anti-trust rules were in the works for awhile, so savvy companies should have had time to anticipate potential fallout and adjust their strategies or contracts accordingly, as Pfizer appears to have done. If they didn’t, however, and shareholders suffer losses, those investors have the right to demand transparency and accountability from the company.