The other arbitrage in the movement of drug company domicile for EU tax inversions
Last month, Pfizer attempted to purchase and merge with AstraZeneca in order to obtain a lower corporate tax rate in the European Union. While the pharma giant’s effort may have been a failure, this week’s non-hostile merger of EU-based Covidien PLC (a company actually run by a U.S. management team) with Medtronic is an even bigger whopper, and another lesson on just how far a company will go to in order to reduce its tax rates.
In addition to tax reductions, the merged company could also see their Directors’ & Officers’ Liability (D&O) insurance rates drop. Historically, there have been several different ways to structure D&O programs for these re-domiciled entities. In recent years, many U.S. companies facing compliance issues while re-domiciling (frequently through a merger) have moved their D&O program from a U.S. placement to an international one. Since D&O programs provide coverage for the Parent Company and all majority owned entries under it, the merged company is able to follow that organizational structure and receive coverage.
Covidien (formally Tyco Healthcare before a corporate scrubbing changed its name) is a large and successful medical device company based in Massachusetts but tax-domiciled in Ireland. With 38,000 employees and billions in sales, it hardly needs Medtronic to get attention in the markets for its products. The merged Medtronic, based in Ireland, will return more profits to shareholders due to Ireland’s low corporate tax rate. While it pales in comparison to tax bites, D & O insurance is a significant annual expense for U.S. publicly traded companies, who typically buy their D & O Insurance from U.S.-domiciled insurers. Not surprisingly though, a company that shifts jurisdiction from the U.S. to the E.U. is likely to start buying D&O coverage in Europe, most often from the London marketplace, with some exceptions for certain countries. These purchase changes can occur even if the company continues to trade on a U.S. based stock exchange.
As a leader in D&O Insurance, William Gallagher Associates has found that, in addition to the benefits described above, U.S. companies involved in tax inversions often experience more competitive D&O premiums. The D&O marketplace in the EU tends to offer more competitive programs than those provided to U.S. domiciled companies.
“In the London marketplace in particular, we’re seeing very aggressive premiums for re-domiciled entities, with broad terms that are similar to what we are negotiating in the U.S.” said WGA’s ExecutiveRisk Practice Leader Jennifer Sharkey. “At the same time, we are able to get the same quality of insurance operating in both markets.”
About the Author
Phil Edmundson is the Chairman and CEO of William Gallagher Associates, insurance brokers and consultants for businesses with over 30 years in the insurance industry. He manages strategy, talent acquisition and development, and management / acquisitions at WGA.