Treasury rule changes make inversion ‘too uncertain’ and remove financial benefits

US pharma firm AbbVie has cancelled its proposed £32 billion merger with Irish-headquartered Shire. AbbVie has recommended its shareholders vote against the deal, and if that happens, the company will pay Shire a break-off fee of $1.6 billion (£1 billion).

The back-track is in response to rule-changes enforced by the US Treasury on 22 September, designed to stem the tide of ‘tax inversion’ deals that has seen several US firms take over foreign rivals and transfer their registered tax base abroad to avoid high US tax rates.

AbbVie’s chief executive Richard Gonzalez was initially dismissive of the Treasury’s rules, saying he was ‘more energised than ever’ about the merger in a memo to Shire employees on 29 September. However, on 15 October, the company changed its mind, saying that the rules ‘introduced an unacceptable level of uncertainty to the transaction’. Gonzalez also highlighted that the rules wiped out a big financial incentive of the inversion deal: ‘Although the strategic rationale of combining our two companies remains strong, the agreed valuation is no longer supported as a result of the changes to the tax rules,’ he said in a statement.