AbbVie board rejects tax-cutting inversion plan

The board of U.S. biopharmaceutical firm AbbVie (ABBV) is recommending shareholders abandon plans to pursue a tax-cutting re-incorporation overseas, bowing to new Washington rules designed to make such deals less profitable.

The North Chicago-based firm had planned to buy Ireland-based Shire (SHPG) and re-incorporate overseas in a $55 billion deal aimed at cutting the newly combined firms' future tax bills. But after reviewing the new U.S. Treasury rules, AbbVie, in a statement released late Wednesday, advised its shareholders to vote against the transaction.

"Although the strategic rationale of combining our two companies remains strong, the agreed-upon valuation is no longer supported as a result of the changes to the tax rules, and we did not believe it was in the best interests of our stockholders to proceed," AbbVie CEO Richard Gonzalez said in a statement explaining the decision.

The company will be required to pay Shire a breakup fee of more than $1.6 billion under the original deal terms if AbbVie shareholders vote to reject the merger. Shire could use that to pursue new corporate deals, continuing its track record of seeking new acquisitions to fuel growth.

Shire said Thursday its board of directors "is considering the current situation, and a further announcement will be made in due course."

AbbVie shares closed down nearly 3.2% at $52.90 Thursday. Shire shares closed up nearly 4.7% at $178.46.

The outcome gives the Obama administration a victory in its campaign to stop so-called corporate tax inversions — a procedure in which U.S.-based companies shift their legal headquarters to lower-tax nations overseas while keeping many domestic operations in place.

Corporate America has largely embraced the tactic, contending that the shifts help them compete with foreign rivals by easing the bite from the top U.S. tax rate of 35% on company earnings.

Among the U.S. companies involved in roughly a dozen pending inversion deals are Medtronic (MDT), Burger King (BKW) and Chiquita (CQB). An estimated 47 U.S. companies have re-incorporated overseas through inversions during the past decade, according to the Congressional Research Service.

However, President Obama in July argued that domestic firms pursuing inversions were unfairly "gaming the system."

Treasury Secretary Jacob Lew on Sept. 22 announced new rules that made it more difficult for U.S. firms that pursue inversions to tap cash held in overseas subsidiaries without paying federal taxes on the holdings. The rules, effective as of the announcement date, closed what Lew called a "glaring loophole in the U.S. tax code" that enabled U.S. companies to cut their future U.S. tax payments by switching their citizenship.

Since the announcement, Medtronic and Burger King have said they would proceed with their plans to reincorporate outside the U.S. Chiquita said Wednesday it was reviewing a sweetened takeover offer from a team of Brazil-based corporate suitors before deciding whether the company would complete its plan to buy Ireland rival Fyffes.