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Inversion Transactions Likely to Continue and Expand into Other Markets and Industries

Author(s): Firoz Ahmed, Paul Seraganian

May 7, 2014

During recent months there has been a surge in cross-border M&A activity in which U.S. and non-U.S. companies combine in so-called inversion transactions. Examples of these transactions are Endo International’s acquisition of Canadian-based Paladin Labs (February 2014), Perrigo Company’s acquisition of Ireland-based Elan Corporation (December 2013), the combination of Liberty Global and Virgin Media (June 2013) and Pfizer Inc.’s recently announced $98.7 billion bid to take over U.K-based AstraZeneca. While the parties emphasize the strong non-tax business drivers for these deals, it is apparent that these transactions are also carefully structured to allow the U.S. corporation to essentially expatriate to a non-U.S. jurisdiction (and thereby reduce its effective U.S. tax burden on future income). As this wave of inversion transactions gathers momentum, there will be greater pressure on the United States Congress to take action to stem this outflow. The perception that the U.S. anti-inversion rules may be amended has, in turn, created a sense of urgency on the part of U.S. corporations, including some that may be experiencing market pressures to follow the footsteps of their competitors that have already inverted. As discussed below, Canada’s legal and tax system may make it an attractive jurisdiction for the parent corporation in an inversion transaction.

In general, an “inversion” is a transaction in which a U.S. parent corporation is structurally inverted so that it becomes a subsidiary of a non-U.S. parent corporation. Once the U.S. corporation has expatriated in this manner, it is positioned to engage in cross-border tax planning that can dramatically reduce the U.S. corporation’s effective U.S. tax rate. The precise nature of this planning depends on the facts of each case but, in many cases, it will parallel the tax planning customarily used by foreign-based multinationals to reduce the U.S. tax burden of their own U.S. subsidiaries. This can include increasing the amount of leverage carried by the U.S. corporation; migrating intangible property offshore; and efficiently accessing foreign earnings that may have effectively been trapped offshore before the inversion.

Although inversion transactions may be structured in several alternative ways, progressive tightening of the U.S. anti-inversion rules in recent years has severely restricted the scenarios in which an inversion may be achieved from a tax perspective. Inversions remain possible, however, as part of a merger between a U.S. corporation and a non-U.S. operating corporation in which the resulting parent corporation is formed outside the U.S. In general, such an inversion may be viable under current rules as long as the combination is primarily motivated by business synergies (as opposed to the desire to reduce taxes), the former shareholders of the U.S. company end up owning less than 80% of the resulting corporation, and certain other requirements are met.

To date, most of the recently reported inversion deals have involved large publicly traded corporations, predominantly in the pharmaceutical sector. However, there is emerging interest in these transactions among smaller companies in a more diverse range of industries. Since the opportunities associated with inversion transactions are not strictly limited to particular industries or to large-cap companies, it is reasonable to expect this trend to continue with further transactions in the middle market and/or private company space. In addition, because of appealing attributes of the Canadian legal system (such as Canada’s extensive tax treaty network, exempt surplus regime and sophisticated corporate law); it is likely that Canadian corporations will be combined with U.S. corporations in these inversion transactions. 


Authored by Firoz Ahmed, Paul Seraganian