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In this Talking Points video, our guest speaker Selina Sagayam, International Corporate Finance Partner at Gibson Dunn & Crutcher, discusses trends and hot topics with Kavita Bassan, part of the Lexis®PSL Corporate team.
The video focuses on:
To provide more details to the discussion in the video, we have also produced the following summary.
The video starts by looking at what has been driving foreign companies to seek to acquire UK listed companies in the last year. Foreign bidders have dominated the UK public M&A market due to various factors, including:
Tax inversions, where US corporations re-domicile their headquarters overseas for tax savings reasons, have been hitting the headlines with renewed vigour in the past year. In the video, we examine the backdrop to the recent surge in US tax inversion transactions, outlining the relevant US tax rules and the methods that US companies have used to try to make tax savings/benefit from tax breaks.
The US has one of the highest corporation tax rates in the world, and US corporations are taxed on their global revenues. Over the years, US corporations have made use of various tax loopholes to try and reduce the amount of tax they pay. While some loopholes have been closed off, US companies could still mitigate the impact of the US global tax rules by merging with a non-US corporation and redomiciling their headquarters overseas—provided US shareholders did not constitute more than (broadly) 80% of the enlarged shareholder group.
Recent bids such as Pfizer's much publicised hostile bid for AstraZeneca earlier in 2014 prompted the US administration to look again at the use of tax inversion strategies and the video discusses the steps now being taken to combat them, including:
The new rules severely curtail the benefits of the tax inversion loophole and therefore make it more difficult for US corporations to reduce the amount of tax they have to pay. Where tax reduction is the primary driving force for making a bid for an overseas company, bidders are likely to re-assess the merits of making such a bid. A likely consequence in the immediate future is that US corporations will make fewer bids for UK listed companies until there is greater certainty on the new rules and what the forthcoming additional rules will look like.
In parallel with the changes to the US tax rules, developments in Europe (eg the EU’s scrutiny of what it regards as ‘potentially disguised state aids’) are also leading US corporations to tread more cautiously.
As a means to attract R&D to the UK, Chancellor George Osborne introduced competitive tax breaks for patents in the UK. Under the UK patent box scheme (which came into effect on 1 April 2013), companies that meet the relevant requirements pay a reduced corporation tax rate of 10% on income from UK or European patents held in the UK. The scheme has proved to be successful with the likes of GlaxoSmithKline investing millions in the UK as a result (see GSK announces £200 million investment in UK advanced manufacturing and science).
Since summer last year, Germany has publicly criticised and challenged the use of patent box tax incentives by the UK (and other EU Member States) as being (among other things) anti-competitive/constituting a harmful tax practice. Germany filed a complaint with the European Commission, which led to the scheme being discussed at last December’s ECOFIN meeting (see Press release of the 3281st Council meeting Economic and Financial Affairs on 10 December 2013, page 21).
The issue is also relevant for the OECD Forum on Harmful Tax Practices which has led work in relation to the OECD’s Base Erosion and Profit Shifting project, specifically Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance.
With this backdrop, the UK and German Governments recently released a joint announcement setting out their agreed proposals for new rules for preferential intellectual property regimes (ie, on restricting the availability of patent box tax breaks). The proposed reforms will mean that tax breaks for patents will only be granted if they are tied directly to research, development and innovation operations situated in the UK. See our news analysis piece on the proposals, Levelling the IP tax landscape, as well as Germany and UK agree patent box compromise, LNB News 11/11/2014 102 for further details.
Currently, patent box scheme rules effectively give companies a tax break of 10% of revenues derived from intellectual property. The proposed reforms will mean that tax breaks for patents will only be granted if they are tied directly to research, development and innovation operations situated in the UK.
In summary, the landscape has become difficult to predict leading to significant deal risk in the case of deals driven primarily by potential tax savings.
There has also been fallout this side of the Atlantic from Pfizer's bid for AstraZeneca. In May 2014, Business Secretary Vince Cable suggested that another public interest test should be introduced, giving the UK Government the power to intervene in, and block, hostile bids which are against the national interest (see eg The Andrew Marr Show—transcript of interview with Vince Cable, 13 July 2014 pp 1–4). Shadow Business Secretary Chukka Umunna, in his open letter to Vince Cable on the public interest test in light of the proposed Pfizer takeover of AstraZeneca, suggests that the maintenance of strategic R&D and science (the so-called 'science-based' test) be added as an additional category to the public interest test already exists in English law pursuant to the Enterprise Act 2002 (EnA 2002).
In short, the discussion concludes that there has been some backtracking on the need for an additional public interest test and the signs are pointing to it being unlikely that one will be introduced.
There has been much media debate about hostile bids by foreign bidders for UK listed companies. In this section of the video, Selina questions:
One aspect of policing takeovers is the concept of requiring bidders to give positive assurances about certain matters and, if they do, how to enforce them.
During Pfizer's possible offer for AstraZeneca, Pfizer stated publicly that (subject to a successful combination with AstraZeneca) it would make several binding commitments for a minimum of five years. Pfizer's statements caused confusion in the market—there was uncertainty about their weight, impact and enforceablity in the event of non-compliance by Pfizer.
Although the Takeover Code requires bidders to make statements of intention in relation to certain issues (eg relocation of place of business, intentions regarding employees), it does not (and is unlikely in the future to) require bidders to provide purportedly binding undertakings. Where such statements of intention are made, however, the Panel will treat them as binding commitments for 12 months or such other period as is specified.
In direct response to Pfizer's statements, the Takeover Panel issued on 15 September 2014 its Consultation on post-offer undertakings and intention statement in relation to proposed amendments to the Takeover Code to deal with post offer assurances (see also Panel plans new regulation of statements framework, LNB News 15/09/2014 126). The consultation closed on 24 October 2014 and the Panel's response is still awaited.
In this section of the video, Selina outlines the Takeover Panel's proposals, which distinguish between:
The video also:
In light of these proposed changes to the Takeover Code, practitioners are advising their bidder clients to tread extremely carefully and certainly not to make any voluntary commitments or undertakings.
This video was part of the Talking Points series. Find other Talking Points videos here.
LexisPSL Corporate subscribers can also access all our Talking Points videos from the multimedia section of the Lexis®PSL Corporate homepage
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