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More than a decade ago, when corporate inversions first came under scrutiny, a group of leading New York tax lawyers took a principled stand and called for urgent action to stop these deals.
In 2002, the New York State Bar’s Tax Section issued a 71-page report presenting a policy argument for why these deals—in which U.S. companies avoid paying a high domestic corporate tax by reincorporating in another country where the tax rate is lower—were bad for this nation and its tax system. Even though the deals were legal, they should be eliminated because they undermined the integrity of the tax system, the report maintained.
The lead author was Peter Sicular, a partner at Paul, Weiss, Rifkind, Wharton & Garrison. Lawyers from New York’s most prominent corporate firms contributed to the report, including Peter Canellos of Wachtell, Lipton, Rosen & Katz; Sally Thurston of Skadden, Arps, Slate, Meagher & Flom; Willard Taylor of Sullivan & Cromwell; and Michael Schler of Cravath, Swaine & Moore.
Twelve years later, a new wave of corporate inversions has sparked controversy and calls for reform, with opponents citing some of the very same reasons as the New York State Bar Tax Section in 2002. President Barack Obama has flatly called inversions “wrong,” and his administration has threatened to take administrative action, with the Treasury Department considering regulations that might make inversions less attractive.
This time, however, the tax bar’s leading lawyers are silent. The New York State Bar Tax Section, the most influential bar group on corporate tax issues, hasn’t publicly commented on the issue, and the section’s chairman, David Schnabel of Debevoise & Plimpton, declined to comment. Paul Weiss’ Sicular, who authored the 2002 report and who is now the first vice chair of the Tax Section, also didn’t respond to a request for comment. Other contributors to the earlier report also declined to talk or didn’t respond to requests for comment.
Since 2002, the Tax Section has instead focused on the details of structuring these deals. In that time, it has issued five reports addressing technical questions, with its most recent report two years ago recommending against a bright-line rule that would determine which foreign corporations qualify for a safe harbor provision. Lise Bang-Jensen, the public affairs director for the New York State Bar Association, says the Tax Section is working on another technical report, but as of now, “has no other inversion reports in the pipeline.”
At the American Bar Association, the corporate tax committee has not taken a position on inversions, according to chairman Julie Hogan Rodgers of Wilmer, Cutler, Pickering, Hale and Dorr.
The deafening silence on the policy of inversions comes at a time when tax partners at corporate firms face mounting pressure to boost their revenues. “Because of the highly competitive legal environment, tax lawyers at major firms increasingly feel less free to speak their mind on tax policy issues than they did in the past,” says Stephen Shay, a professor at Harvard Law School who was a tax partner at Ropes & Gray for 22 years. (Shay is a member of the executive committee of the New York State Bar’s Tax Section, but stresses that he can’t speak about the Tax Section’s activity.) One prominent tax lawyer at a major firm explained that he couldn’t even discuss the issue on background because it’s “too sensitive.”
Shay points out that the inversion discussion today is more complex than in 2002, when the deals under attack were more aggressive. Back then, companies could do a “naked inversion” by simply creating a foreign shell in a tax haven like the Cayman Islands. Legislation in 2004 effectively eliminated those deals, and now if a company wants to invert, it must find a real operating business as merger partner. The law also requires that the company’s shareholders own less than 80 percent of the combined entity in order to qualify for the lower taxes of the foreign country into which it is reincorporating.
The 2004 law tried to deter these 80 percent deals by taxing the shareholders of the inverting company. But that hasn’t served as enough of a deterrent in recent years, leading some in Congress to propose stricter legislation.
Senator Carl Levin (D-Michigan) has introduced the Stop Corporate Inversions Act of 2014, which would lower the U.S. ownership threshold from 80 percent to 50 percent and would treat a merged company as a U.S. company if its management remains in the U.S, among other things. Levin and others have also introduced The No Federal Contracts for Corporate Deserters Act, which would deny government contracts to inverting companies. In early August, Treasury Secretary Jack Lew said the administration is considering taking unilateral action, and not waiting for Congress. He didn’t specify what action the administration might take, but the Treasury Department could write regulations that affect how existing law is implemented.
In the meantime, law firms have been reaping big payouts by advising on inversions. At least 35 U.S. law firms have worked on these types of deals since 2010, according to American Lawyer data. For some firms, like Skadden, the deals have been hugely profitable. Skadden has been involved in the most deals—at least 13, worth a collective $234.8 billion, according to our data; Wachtell ranks second, with eight deals worth $157.4 billion, while Latham & Watkins has seven totaling $100.4 billion.
In the past few months, many firms have been visibly marketing their inversion expertise. In late July, for instance, Skadden tax partner David Rievman was among the speakers at a dinner program on inversion deals sponsored by Oppenheimer & Co. Inc. The event took place at a private room at the Manhattan restaurant Maloney & Porcelli, and was attended by roughly 75 hedge fund managers and other activist investors. In fact, The Wall Street Journal, in an Aug. 5 article, credited Skadden with helping to “set the wheels in motion” for inversion deals back in 2010, when some partners devised a strategy during a bike trip in France. Skadden declined to comment.
One Skadden tax lawyer who has been active in these deals is Sally Thurston, who helped draft the 2002 report by the New York State Bar’s Tax Section. Thurston worked on Medtronic Inc.’s $43 billion purchase of Irish drugmaker Covidien in June, as well as Pfizer Inc.’s failed attempt in May to take control of AstraZeneca PLC for $119 billion.
Skadden took the lead on two other high-profile pharmaceutical inversions: counseling Valeant Pharmaceuticals International on its hostile bid for Allergan Inc., and AbbVie Inc. on its $54.8 billion acquisition of Dublin-based Shire PLC, making it the largest-ever corporate inversion.
Other firms have trumpeted their expertise with more conventional approaches. Davis Polk & Wardwell held a webinar on Aug. 7 led by partners Neil Barr and Michael Mollerus, who explained various inversion techniques, including “more creative” structures such as “spinversions,” which allow a U.S. company to spin off foreign assets into a new foreign holding company.
The Davis Polk partners told their audience that they think it would be difficult for the Obama administration to prevent corporate inversions. It was unclear, they said, if the Treasury Department has the authority to issue curtailing regulations. Still, the administration’s threatened action could create a chilling effect, they said.
Near the end of the 45-minute presentation, one viewer asked the Davis Polk lawyers if they considered inversions to be aggressive tax planning. “In my mind, a corporate inversion is not aggressive at all,” Barr said. “It’s a bright-line test [to qualify as an inversion]. One may or may not like the underlying tax policy, but I think it’s a reasonably prudent transaction under current law.”
Barr is a member of the executive committee of the New York State Bar Tax Section. He and Mollerus declined to discuss inversions beyond their statements in their webinar.
Harvard’s Shay does believe Treasury can and should issue regulations that would curb these inversion deals. Limiting interest deductions to discourage income stripping could be one approach, he suggests. He agrees that the current corporate tax rules that encourage inversions don’t make policy sense. But that doesn’t mean companies should rush to do these deals.
“Whether it’s the right thing as a matter of patriotism or morality … is another question,” he says. “A responsible corporation should take into account a lot of factors and multiple constituencies, including shareholders, employees and customers. Having a fiduciary obligation to shareholders doesn’t mean it’s to the exclusion of all other considerations.”
American Lawyer intern Vinayak Balasubramanian contributed to this report.