CHICAGO (CN) – A Shire shareholder sued AbbVie for backing out of its proposed acquisition of the Irish drugmaker after the Obama administration strengthened the penalties for corporate inversions that avoid U.S. taxes.
In July 2014, Illinois-based pharmaceutical company AbbVie made an offer to buy Irish pharmaceutical firm Shire for £53.20 per share, or about $67.
As part of the deal, AbbVie intended to reincorporate in Jersey, where Shire is headquartered.
This kind of deal is called a tax inversion, where a U.S. corporation purchases a foreign company in a tax haven, then exchanges all of the shares in the domestic corporation for shares in the foreign corporation. Significant penalties are attached to the conversion of the domestic stock into foreign stock to discourage such transactions.
The Obama administration strengthened these penalties just months after the AbbVie-Shire announcement, in response to Burger King’s purchase of the Canadian coffee-and-doughnut chain Tim Hortons, which enabled Burger King to move its headquarters out of the country to enjoy a lower corporate tax rate.
These rule changes caused AbbVie to reconsider its merger plans, according to a lawsuit filed by ODS Capital in Cook County, Ill. on Friday.
“AbbVie shocked the market on October 14, 2014, when it announced it was reconsidering the Shire acquisition due to the Treasury Department’s changes to the tax inversion regulations. A day later, AbbVie issued a press release stating its board had withdrawn its recommendation in favor of the acquisition,” the complaint states.
ODS Capital says it purchased Shire American depositary receipts based on AbbVie’s intention to acquire the company, but they lost 30 percent of their value when AbbVie canceled the deal.
The complaint says AbbVie’s CEO Richard Gonzalez was repeatedly asked by investment analysts whether the tax benefits were critical to the Shire acquisition, and he denied that the tax benefits of the inversion were the primary motivation for the merger.
“We would not be doing it if it was just for the tax impact,” Gonzalez allegedly said.
ODS Capital says it relied on this statement and others when it bought Shire shares, and seeks punitive damages for fraudulent misrepresentation and fraudulent concealment.
It is represented by Louis C. Ludwig with Pomerantz LLP in Chicago and Briand Murray with Glancy, Prongay & Murray in New York.
AbbVie did not immediately respond to a request for comment.