Why I Will Vote “No” on the Pfizer-Allergan Deal

If you are a business owner or leader and are as disturbed as I am about the values expressed by inversion transactions such as the Pfizer-Allergan deal, you can take the Proud to be an American Business Pledge offered by the American Sustainable Business Council.

I was still mourning the end of another Great company when the Pfizer-Allergan inversion was announced.

When it comes to investing, I fancy myself an efficiency investor.  This means that I’m lazy; I like to buy stock in Great companies and hold it for the long haul.  Medtronic was one of my Great companies until it bought Covidian and re-domiciled in Ireland earlier this year in an inversion transaction.

My financial advisor tells me that Medtronic is still “an outstanding company, with excellent products, strategy and commitment.” That may well be true but I am so angry at Medtronic’s board of directors for sacrificing the company’s fabled Mission to re-domicile in Ireland to save on taxes that I voted against the entire slate in the proxy for this year’s annual meeting.  I was also among the shareholders holding 24.8% of the shares that voted against the Covidian transaction.

To be fair to Medtronic, the Chief Justice of the Delaware Supreme Court recently stated that under prevailing corporate law “tax arbitrage is a permissible way to reduce the corporate tax bill and further stockholder welfare”.  Under prevailing law, Medtronic’s board did the right thing.

In the context of US corporate law, Delaware is the prevailing jurisdiction.  64% of the Fortune 500 and approximately one in six US corporations are incorporated in Delaware.  Under Delaware corporate law, the sole legitimate purpose of the corporation is to maximize stockholder welfare.  Although the old Medtronic, a Minnesota corporation, was not subject to it, prevailing corporate law trumped Minnesota law in the transaction.  Although the 49 other states are not subject to Delaware corporate law, Medtronic’s transaction to re-domicile in Ireland illustrates how it often de facto becomes their prevailing law.

Minnesota is one of 32 US states with some form of a constituency statute.  Constituency statutes generally allow directors the discretion to consider the interests of other corporate stakeholders in addition to stockholders in determining whether an action is in the best interest of the corporation.    Minnesota’s statute, for example, allows directors to consider “the interests of the corporation’s employees, customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations, and the long-term as well as short-term interests of the corporation and its shareholders.”  The Minnesota constituency statute gave the board an effective tool to ensure that Medtronic could fulfill its main purpose of providing human benefit.

I’m angry that Medtronic’s board effectively ignored Minnesota’s constituency statute in its deliberations about the transaction.  The required disclosures about the board’s deliberations in the transaction’s proxy statement contain no discussion of the interests of any of Medtronic’s stakeholders, other than shareholders.   There was, for example, no discussion of the effect of the transaction upon the state and federal tax base and whether the transaction aligned with one of the principle tenets of the Mission: “to maintain good citizenship as a company.”

It’s easy to understand how Medtronic came to ignore Minnesota law and its own Mission. Its 13 directors understandably underestimated the power of Medtronic’s Mission in creating and inspiring a Great company because none of them ever worked as a Medtronic employee with the exception of Chairman and CEO Omar Ishrak who only recently joined the corporation in 2011.  Medtronic’s professional advisors, its New York investment bankers and corporate lawyers, were oriented towards the prevailing law.

I could forgive the board if it had only failed to ponder the transaction through the lens of Minnesota’s constituency statute and in the context of the Mission.  Unfortunately, Medtronic threw its shareholders, the State of Minnesota, Uncle Sam and, ultimately, its Mission under a bus for a better tax rate.

The shares of the Minnesota corporation were exchanged for shares of a new Irish corporation in a taxable transaction.  In other words, all shareholders were treated as though they sold their shares and are subject to capital gains taxes as a result of the transaction.  As an efficiency investor, I just wanted to hold on to my shares in a Minnesota corporation.

It gets worse, however.  To discourage inversion transactions, the IRS subjects management to a special 15% federal excise tax on any personal gain.  In Medtronic’s case this amounted to an estimated $72 million.  Medtronic’s board overrode the company’s long-established policy of not-grossing up officers and directors for tax liability and voted to gross up them up for this tax.

It was bad enough that the transaction was taxable to shareholders but it added insult to injury to have the board vote itself and management tax gross up payments for their personal excise tax liability.  I suspect that Medtronic’s founder Max Bakken who authored its Mission in 1960 would be saddened by how his company sold its Minnesota soul for Ireland’s lower corporate tax rate.

With another one of my Great companies, Pfizer, announcing the year’s biggest deal, a $150 billion acquisition of Allergan, which will also result in it re-domiciling in Ireland, I had to speak up about the madness of these inversion transactions from a national security and public policy perspective.  Our current tax code and prevailing law perversely encourage US multinational corporations to transcend the nation state and sacrifice fealty for low taxes. Their allegiance is to profits and not to Us the People to whom they ultimately owe their right to exist. We have given corporations the rights of citizens but have created tax and corporate laws that encourage them to eschew their civic responsibilities.

The same phenomenon is happening in Europe, with EU member states protesting Ireland’s aggressive pursuit of corporations through low corporate tax rates.  Unless we put a stop to this madness, we will continue to erode our state and federal tax base and encourage a race to the bottom.  Unless we are careful, most of the Fortune 500 will soon be domiciled in Ireland never to return.  What is needed is a universal global corporate tax rate and uniform corporate tax policy to inspire corporations to act appropriately as responsible, tax paying global citizens.  Until we have a sane tax policy, however, directors’ duty to maximize stockholder welfare under prevailing law practically requires them to pursue inversion transactions.

I plan to vote against the Pfizer-Allergan deal, which will likely mark the end of another Great company. In voting “no”, I’ll be voting against the race to the bottom and for a sane corporate tax policy.

While we await a saner tax policy, there is an alternative.  Kickstarter recently converted into a Delaware public benefit corporation which allows it to transcend certain aspects of prevailing corporate law and do the right thing by society. Its certificate of incorporation contains its charter which includes a commitment to “not use loopholes or other esoteric but legal tax management strategies to reduce its tax burden.”  Thank you Kickstarter for modeling Great.

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