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US law firms’ secret deal weapon blunted as Pfizer pulls plug on $160bn inversion bid

The wave of ‘inversion’ bids into Europe from US companies could be set to end, with the strategy pioneered by Skadden, Arps, Slate, Meagher & Flom hit this week as US drug maker Pfizer terminated its $160bn deal to acquire Allergan amid US tax reforms.

Pfizer’s tie-up with the Ireland-based Allergan was set to become the largest ever inversion deal, the controversial structure in which US corporates reduce domestic taxes after taking over foreign companies and switching domicile to lower tax nations. Under the deal, Pfizer would have moved its headquarters to Dublin, where corporation tax is 12.5% compared with 35% in the US.

The tactics have been contentious in the US, where president Barack Obama (pictured) has branded such bids an ‘unpatriotic tax loophole’.

The US Treasury Department ramped up the pressure on Pfizer on Monday (4 April) by releasing its third and most far-reaching set of curbs on inversions in a move regarded as explicitly aimed at this deal.

Pfizer confirmed today (6 April) that it was abandoning the deal, citing ‘actions announced by the US Department of Treasury…, which the companies concluded qualified as an “Adverse Tax Law Change” under the merger agreement’.

The US pharma giant also said it would pay $150m to cover Allegan’s expenses. Pfizer’s total costs on the bid have been estimated as high as $400m.

While curbs on inversion deals may not be a stake through the heart, there is now uncertainty as to their future after helping law firms to cash in on a record year for M&A as inversions helped to drive buyers to spend $3.8trn on M&A in 2015, the highest amount ever, according to Bloomberg.

The development also comes as a reverse to Skadden, which famously pioneered the deal structure after lawyers at the firm came up with the idea on a bike ride through France organised by Scott Simpson, the firm’s global transactions co-head. The wave of inversion deals into Europe helped Skadden become the first law firm to advise on over $1trn of announced M&A deals in a single year in 2015. But this is the second high-profile inversion deal Skadden has advised Pfizer on to fall through, following the collapse of its attempt to combine with UK rival AstraZeneca in 2014.

Skadden’s team advising Pfizer on corporate and tax matters is led by New York-based M&A partners Paul Schnell, Sean Doyle and Michael Chitwood. Wall Street leader Wachtell, Lipton, Rosen & Katz and Dublin’s A&L Goodbody were also advising Pfizer.

Allergan are advised by Cleary Gottlieb Steen & Hamilton, Latham & Watkins and Ireland’s Arthur Cox.

One City partner told Legal Business: ‘The stuff that came out of the US Treasury obviously has consequences for Pfizer that are striking, but this story has a long way to run…everyone said tax inversion was dead 18 months ago.’ He added: ‘It will be interesting to see whether the end result is as dramatic as it appears today.’

Freshfields Bruckhaus Deringer partner Bruce Embley commented: ‘People will increasingly focus on termination fees and similar arrangements, where there is a deal where there is a real risk from external factors.’

Despite the reverse for US advisers, the news comes amid a period in which top American law firms are pushing into mainstream deal work in the City, a trend helped by a string of major transatlantic bids, robust private equity activity and the vogue for US-driven financing.

tom.moore@legalease.co.uk