Pfizer was founded by German immigrants to the United States 166 years ago, but it is difficult to imagine a company that is more American in character and business practices. An then, on November 23, 2015 it was announced that Pfizer will combine with Allergan in a $160 bn. deal (the largest pharmaceutical transaction ever, and the second-largest one in all history), with the merged company to be domiciled in… Ireland, where Allergan is incorporated.
Wait – isn’t Allergan also a U.S. company? For all practical matters and purposes, it certainly is. – But on more than one level, things are not quite as they seem if you go only by company names.
Technically, the deal is a takeover of Pfizer, Inc. (currently valued at approximately $199 bn.) by the smaller Allergan plc ($123 bn. valuation, but only about half the size of Pfizer as measured by annual revenue). Allergan plc had been created by the March 2015 acquisition of Allergan, Inc. by the generics company Actavis plc, which used to go as Watson Pharmaceuticals – also quite American, but domiciled in Ireland. In June 2015 Actavis plc renamed itself Allergan plc.
The entity to be created by the Pfizer-Allergan merger will be the biggest pharmaceutical player, and while it might or might not undergo the renaming exercise after a few weeks, the final company name is set to be – surprise! – Pfizer plc. Of course, headquarters will remain in New York, and will continue to be managed by Pfizer’s CEO, Ian C. Read. In economic effect, it is a takeover of Allergan by Pfizer; with the important addition that the “New Pfizer” will be able to take advantage of the Irish corporate tax rate which is 12.5%, much less than in the United States. We are looking at what is called a tax inversion, and it is not the first large one.
The outcry was predictable, especially in the United States’ current pre-election environment. If the new construct had already been in place in 2014, Pfizer would have saved almost one third of the $3.1 billion in U.S. taxes it paid for that year; and much of what it paid anyway would have been pocketed by the Irish tax office. In addition, layoffs will be a natural consequence of streamlining the New Pfizer. U.S. Democrats lambast the deal as “fundamentally unfair” and “neo-liberal”. But Republicans, not habitually averse to Big Business, are also fuming, calling it “unpatriotic” and “disgusting.” Shedding its U.S. citizenship is not going to be smooth sailing for Pfizer.
However, all this is totally besides the point, and for the same reasons as the yammering over “tax loophole exploits” that some European Union member states raise over the accounting practices of U.S. companies such as Apple, Amazon, Google, and Starbucks. Never mind that any person educated in law will tell you that there simply are no laws with loopholes, only well-made and badly made ones; that’s not the point either.
The actual point is: all these companies are public, and subject to all the securities laws that protect the interest of their owners — the stockholders – who can be anything from corporations to institutional investors to individual middle-class citizens. These laws differ slightly across the world, but all have one thing in common: they mandate operative management to take any and all legally permissible actions that increase shareholder value, and to avoid anything that decreases it. (Actually, laws for non-owner directors of private companies are quite similar.)
In other words, a CEO who does not consider exploiting differences in tax law across the globe for the good of his company’s owners (on the basis of “fairness,” “patriotism,” or for any other reason) is not only subject to dismissal by shareholders but also legally liable as a person. (And because the corporation is a legal entity by definition, even a unanimous instruction by its owner(s) might not protect the CEO.) All that according to laws which have been have been promulgated and issued after due process by democratically elected governments.
And so, what Google’s CEO Larry Page exclaimed when the French authorities questioned the company’s tax setup applies to Pfizer and its newest tax inversion construct in equal measure: “You don’t want us to do what we are doing? Change the laws!”