AbbVie's board of directors has decided to withdraw its recommendation that it made on July 18, 2014, recommending a proposed $54.7-billion acquisition of the specialty pharmaceutical company, Shire, and is advising its stockholders to vote against the transaction. AbbVie and its board of directors made this determination after considering the impact of the US Department of Treasury's changes to tax rules, as issued on September 22, 2014, which addressed the issue of tax inversion. Corporate tax inversion is a transaction in which a US-based multinational restructures so that the US parent is replaced by a foreign parent, in order to achieve a lower corporate tax rate.

AbbVie’s $54.7-billion acquisition proposal of Shire involved a tax inversion structure. Under the proposed deal, AbbVie would form a new company, New AbbVie, which was to be incorporated in Jersey, the UK, Shire’s current place of incorporation. Following the completion of the deal, New AbbVie would become the holding company of the Shire Group and the AbbVie Group. Through its incorporation in the UK, the AbbVie board expected the transaction to reduce New AbbVie’s effective tax rate to approximately 13% by 2016. The new company planned to retain operational headquarters in Chicago with a presence in both the US and UK and be listed on the New York Stock Exchange.

In deciding to withdraw its recommendation for the Shire acquisition, AbbVie cited the recent changes in US tax rules. “The breadth and scope of the changes, including the unexpected nature of the exercise of administrative authority to impact longstanding tax principles, and to target specifically a subset of companies that would be treated differently than either other inverted companies or foreign domiciled entities, introduced an unacceptable level of uncertainty to the transaction. Additionally, the changes eliminated certain of the financial benefits of the transaction, most notably the ability to access current and future global cash flows in a tax efficient manner as originally contemplated in the transaction. This fundamentally changed the implied value of Shire to AbbVie in a significant manner.”

Under the conditions of AbbVie’s offer and the terms of the cooperation agreement between Abbott and Shire, the withdrawal of the recommendation alone will not cause a lapse of AbbVie’s offer or terminate the cooperation agreement between AbbVie and Shire. Unless Shire and the UK Takeover Panel agree otherwise, AbbVie must convene an AbbVie stockholder meeting to consider the adoption of the US merger agreement. AbbVie's offer will lapse if the company's stockholders do not adopt the agreement. Assuming Shire provides the requisite cooperation and consents, a pre-effective amendment to the registration statement filed by AbbVie Private Limited in connection with the combination is expected to be filed with the US Securities and Exchange Commission as soon as practicable. Under the terms of the co-operation agreement, following the withdrawal of the AbbVie board of directors’ recommendation, a break fee of approximately $1.635 billion will be payable to Shire if either: AbbVie stockholders do not approve the adoption of the US merger agreement at an AbbVie stockholder meeting or such a meeting does not occur by December 14, 2014.

Commenting on the withdrawal of the recommendation, AbbVie's Chairman and Chief Executive Officer, Richard A. Gonzalez said: “AbbVie has always been financially disciplined and we have rigorous standards in place to ensure transactions are financially sound and deliver compelling stockholder returns. 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.”

In response, Shire issues the following statement: “The board of Shire plc notes the announcement by AbbVie Inc. of its board's decision to withdraw its recommendation of the offer for Shire. The board of Shire is considering the current situation and a further announcement will be made in due course.”

Source: AbbVie and Shire