Inversion bills spark new closing conditions

Author: Zoe Thomas | Published: 12 Aug 2014
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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 deal’s benefits.

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 & Plimpton partner.

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 contracts.

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 transactions.

New conditions

The majority of deals have not included inversion-specific closing conditions. However, the goal of the conditions to avoid adverse legislative development remains the same.

"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 transactions."

Non-inversion deals

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 terms.

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 Friedman.

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.

Further reading

Inversions: structuring your move

Inversion fears threaten M&A renaissance

Élan: Ireland’s hostile takeover milestone