MYL PRGO TEVA The Unintended Twist of Tax Inversions
APRIL 24, 2015
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Credit Harry Campbell
Deal Professor
By STEVEN DAVIDOFF SOLOMON
Teva’s unsolicited $40 billion bid for the drug maker Mylan and Mylan’s own unsolicited offer for the rival Perrigo are sweet revenge for the United States taxpayer.
The reason is their flight from the United States in tax inversions has made both more exposed to hostile takeovers. Their executives may now rue the day they left the United States simply to save a few dollars in taxes.
Before Perrigo moved to Ireland, it was incorporated in Michigan, which has rather favorable anti-takeover laws, including a business combination law that limits parties that have acquired 10 percent or more of the shares in a company from acquiring the rest for five years. Under Michigan law, directors are also allowed to consider other interests, like employees, when deciding whether to accept a takeover. And if those laws are not helpful enough in fending off a hostile bid, the Michigan Legislature has been willing to protect its own by amending its takeover laws, something it did in the battle over Taubman Centers, the owner of shopping malls.
Perhaps more important for Perrigo, as a United States company it had a couple of defensive advantages. It had a staggered board, meaning only one-third of its directors were up for election in any given year. In addition, Perrigo had the ability to adopt a poison pill at any time, which would effectively halt any hostile takeover unless the board decided to redeem the pill. The net effect would be that it would take a hostile bidder like Mylan two years to replace the board with a majority of directors who could redeem the pill and allow the offer to proceed.
But Perrigo is now incorporated in Ireland, where it lacks almost any protection. Under the Irish takeover code, “frustrating actions,” like the ones mentioned above, are prohibited. And while Perrigo might try to be creative and invent new defenses, Irish regulators are pretty strict in enforcing this rule as illustrated in the battle over Elan, which Perrigo ultimately won.
This means that Perrigo can do little else but try to persuade its shareholders to reject the Mylan bid. It made its latest effort to do so on Friday, when it urged shareholders to take no action on a revised Mylan offer that it characterized as inadequate.
Mylan has its own predicament after moving to the Netherlands.
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RELATED COVERAGE
Mylan Raises Its Offer for Perrigo, Which Rejects ItAPRIL 24, 2015
Before acquiring part of Abbott Laboratories’ generic drug business and undertaking an inversion, Mylan was incorporated in Pennsylvania, the graveyard of hostile takeovers, at least according to deal makers.
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Pennsylvania has adopted at least six different anti-takeover laws, depending upon how you count. While Mylan elected not to be subject to all of them, it did embrace three. One was the control share cashout statute, which requires that shareholders be permitted to “put” their shares at “fair value” to any acquirer that accumulates at least 20 percent of the company’s stock. This provision held up CSX’s 1998 bid for Conrail, allowing Northfork Southern time to make its own competing bid.
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And while Mylan did not have a staggered board, it could still adopt a poison pill at any time, pushing out any hostile bid until its next annual meeting.
Still, Mylan’s position is not as bad as Perrigo’s. The Netherlands, unlike Ireland, allows for a poison pill equivalent. A Netherlands company can issue preferred shares to a foundation known as a stichting. The foundation can then exercise these shares to take voting control over the company if the foundation determines it is in the best interests of that company and necessary to maintain the status quo or to explore alternatives. However, the foundation’s voting control is only temporary.
Mylan has already set up such a defense, appointing as its head Pieter Bouw, formerly of KLM, who led the foundation that the telecommunications company KPN used to defeat a hostile bid by Carlos Slim Helú.
But the maneuver has some drawbacks. First, it is very heavy-handed. Instead of the array of defenses and tactics Mylan would have in the United States, it instead has been left with only a “nuclear” option. It also has been used only a few times, and even in KPN’s situation, the foundation took the position that its actions were temporary to try to buy “peace” until a price could be negotiated. Moreover, if the foundation does act, Mylan’s mostly American shareholders will be unhappy because of the loss of voting control over Mylan. And such a highhanded move might scare off the same shareholders Mylan needs to approve a Perrigo acquisition, something Mylan cannot avoid under Netherlands law.
Even worse, a stichting is notoriously independent and because of this was used as a legal structure to protect assets from the Nazis, among other things. Accordingly, Mylan has no legal control over this foundation, meaning it can act even if Mylan does not want it to. In other words, Mylan has no control over its big defense. Its fate is in the hands of an independent third party.
New government restrictions largely closed the inversion spigot, but Mylan and Perrigo demonstrate that perhaps executives have not fully considered the implications of moving abroad. No doubt the chief executives of Mylan and Perrigo are “enjoying” learning about Irish and Dutch law, but that may not be the best use of anyone’s time, and it may lead to some bizarre results and unintended consequences.
The shareholders of the two companies may come out winners. They have reaped the tax savings of a move abroad and now face the possible premium of a takeover. And while the companies’ executives may receive a windfall, they may have also outsmarted themselves, something they can contemplate on the unemployment line.
For the United States taxpayer, another foreign notion may apply: schadenfreude.
