In July of this year, Britain based Shire and north Chicago-based AbbVie, both drugmakers, came to an agreement that AbbVie would purchase Shire for $55 billion. Prior to accepting AbbVie’s offer, Shire had been approached by AbbVie on several occasions as the company made unsolicited offers to acquire Shire. Now, the deal is off after AbbVie agreed to pay Shire a $1.64 billion breakup fee, according to an article at SRN News.

AbbVie’s reason for backing out of the merger was newly created limitations on tax benefits created by the U.S. government. AbbVie had hopes to reincorporate on Jersey, a British island, however the overseas incorporation would not have provided the tax benefits AbbVie had hoped for.

Essentially, many companies involve themselves in complicated transactions such as the merger of these two companies in order to reduce their tax bill in the U.S. Rule changes have resulted in fewer companies attempting to transform the earnings in foreign markets into U.S. loans, a process known as “hopscotch” loans. Chairman and CEO Richard Gonzalez of AbbVie said that U.S. companies are at a disadvantage to foreign competitors because of the U.S. tax code, which he believes should be reformed.

Ultimately, had the acquisition of Shire gone forward, AbbVie would not have enjoyed the profits the company hoped to gain because under the government’s new rules, the cash AbbVie had stashed overseas for reincorporating in Britain would have been taxed.

Gonzalez said that companies based in the U.S. are at a distinct disadvantage to foreign competitors because of an outdated U.S. tax code. Gonzalez believes that in order to stimulate investment in the economy, comprehensive tax reform is critical.

Following news of the inversion implosion, Shire shares were down more than 25%, while AbbVie shares ticked up 1.85% following the news of authorization of a $5 billion stock buyback program by AbbVie which would increase the company’s quarterly cash dividend which is currently $0.42 to $0.49 per share over the next several years.

As experienced Los Angeles business acquisition attorneys, we understand the complexities of mergers and that until the deal is done, many things can happen. Companies in the LA area who are acquiring or merging with another company can rely on our staff of skilled lawyers for unsurpassed legal guidance and representation.