AbbVie board recommends rejecting Shire deal

AbbVie's board recommended that shareholders vote against a $52 billion takeover of Shire, saying tax-rule changes would undermine the deal's rationale.

“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 A. Gonzalez said in a statement.

Shire is considering the situation and will make a further announcement “in due course,” the company said today.

AbbVie also has been concerned about the potential for more changes to U.S. laws, whether through executive-branch action or legislation in Congress, that will increase future tax bills, people familiar with the matter have said.

The price AbbVie agreed to pay for Shire was the highest it was able to offer, and the loss of some tax benefits and the related prospect of having to borrow more for the merger have eroded its attractiveness, the people said.

AbbVie said Oct. 14 it was reconsidering its support for the acquisition. The cash-and-stock offer values Shire at about 55.07 pounds ($80.03) a share based on yesterday's closing price for AbbVie.

The merger would be the largest casualty yet of rules announced last month by the Treasury Department to make tax inversion deals more difficult. In such transactions, U.S. companies seek to lower their tax bill moving their legal address abroad, often after buying a foreign company. President Barack Obama's administration has said the rules are necessary to prevent the erosion of the U.S. corporate tax base.

The new rules have had some effect on other deals already. Medtronic said it will borrow $16 billion to finance its purchase of Covidien instead of using cash it keeps overseas, and Salix Pharmaceuticals and Auxilium Pharmaceuticals Inc. canceled planned inversions.

Treasury is contemplating a second set of rules that would limit companies from engaging in earnings stripping, a practice used by non-U.S.-based companies to load up U.S. operations with debt and effectively shift profits to countries with lower tax rates.

Congress, which could impose even more stringent rules, is deadlocked on the issue and isn't scheduled to return to Washington until after the Nov. 4 election.

AbbVie began a comprehensive review of the merger after Treasury Secretary Jack Lew announced the measures, people with knowledge of the matter said last month, including the prospect of borrowing as much as $7 billion more than it initially anticipated.

The rules, which apply to deals that close starting Sept. 22, include a prohibition on “hopscotch” loans that let companies access foreign cash without paying U.S. taxes, and impose new curbs on actions companies can use to make such transactions qualify for favorable tax treatment.