M&A parties are using new closing conditions to
protect against the effects of anti-inversion laws proposed in
the US earlier this year.
Legislation to limit the number of these
transactions appears only to be driving more inversion deals, as companies attempt to
pre-empt any such restrictions. As a precaution, recent deal
documents include conditions precedent that allow one or both
parties to walk away if legislation lessens the
The growing consensus is that legislative action
should be taken to minimise these deals, which see US buyers
structure their acquisitions of foreign targets in a way that
lets them redomicile to a lower-tax jurisdiction.
But congressional gridlock and widely
differentiating ideas about what that action should be will
likely continue to stall any law preventing such deals. The effect of this limbo will be to force new closing
conditions in all proposed deals, while companies wait for the
government to act.
"The key change to the deal terms that has arisen
as the result of possible legislation is the presence in many
deals of a closing condition that would allow one or both
parties to get out of the deal if there is an adverse
legislative development," said Kevin Rinker, a Debevoise &
He added that it is hard to assess how many
transactions that were being contemplated are now being shelved
as a result of the potential for a change in law.
- Inversions are becoming subject to new closing
conditions to protect against possible changes in US law that
would make the tax savings less beneficial;
- The proposals have included lowering the
threshold of US ownership for tax purposes and reclassifying
debt as equity;
- Inversion deals that may be beneficial without
inversions are beginning to include clauses which allow for
renegotiation should legislation pass.
The new conditions are usually highly tailored to
each deal, but they address the same purpose. Originally the
proposals to prevent inversions focused on bringing the foreign
company directly under US tax laws. One suggested lowering the
percentage of US shareholder ownership to qualify as a US
company to 50% down from 80%.
"Many of the protections that have been written
into contracts address the right to call off the deal if new
legislation lowers the ownership threshold or otherwise causes
the foreign company to be taxed as a US company," said Gary
Friedman, another partner at Debevoise & Plimpton.
New proposals fall short of designating foreign
companies under US tax law, but could still dampen inversions.
Senator Carl Levin has suggested that new rules
against earnings stripping be created which would lower
companies’ ability to use intercompany debt.
Additionally, the Democrats have proposed a bill that would
prevent any inverted company from receiving government
The Whitehouse has suggested it could take
unilateral action or that the treasury could use existing
regulation to reclassify US companies’ debt as
equity. This would restrict the benefits of a US company
issuing intercompany debt, which is a key driver in many
inversion deals, but could also harm non-inversion
The majority of deals have not included
inversion-specific closing conditions. However, the goal of the
conditions to avoid adverse legislative development remains the
"The problem, of course, is that once the deal
closes that sort of protection by definition goes away,"
explained Rinker. "If the transaction has already been
consummated and there is then legislation enacted with
retroactive effect, it could have a significant impact on some
of the key benefits of the inversion."
"Companies clearly need to consider the political
and legislative landscape going forward unless the particular
deal makes sense on its own without the inversion benefits,"
Rinker said. "I would therefore expect that the ongoing policy
debate may have somewhat of a chilling effect on these types of
Many deals using this structure make sense
irrespective of the tax savings to come from the inversion.
These deals may need to include clauses which allow for
renegotiation should legislation pass, to alter certain deal
Premiums are a good example.
"If you have negotiated a deal that gives the
foreign side a premium and then legislation is enacted that
removes the tax benefits, you have a big incentive to change
the deal because you don’t want to give a premium
to the foreign shareholders and not get anything for it," said
Any legislative change is unlikely before the
November midterm elections. The robust deal terms are likely to
stay in place for any new deals considering inversion.
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