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Southeastern Pennsylvania Transportation Authority v. AbbVie Inc.

Court of Chancery of Delaware

April 15, 2015

ABBVIE INC., Defendant. JAMES RIZZOLO, Plaintiff,
ABBVIE INC., Defendant.

Submitted: February 11, 2015

Additional Submission: April 9, 2015

Pamela S. Tikellis, Robert J. Kriner, Jr., Scott M. Tucker, and Matthew T. Arvizu, of CHIMICLES & TIKELLIS LLP, Wilmington, Delaware; Attorneys for Southeastern Pennsylvania Transportation Authority.

Craig J. Springer and Peter B. Andrews, of ANDREWS & SPRINGER, LLC, Wilmington, Delaware; Attorneys for James Rizzolo.

Lisa A. Schmidt, A. Jacob Werrett, and J. Scott Pritchard, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware; OF COUNSEL: Robert J. Kopecky, Sallie G. Smylie, P.C., and Christa C. Cottrell, of KIRKLAND & ELLIS LLP, Chicago, Illinois; Attorneys for AbbVie Inc.


GLASSCOCK, Vice Chancellor

The board of AbbVie, Inc. ("AbbVie" or the "Company") decided to pursue a merger with a Jersey entity, [1] Shire plc ("Shire"), in part to take advantage of favorable tax treatment of income that would result under the then-current interpretation of U.S. tax law as enforced by the Treasury Department. Like practically all decisions taken by corporate boards, that action involved risk. Here the risk-which proved substantial-was that the law, or its interpretation by regulators, would change before sufficient tax advantages could be realized to offset the costs to stockholders of the transaction. As it turned out, the Treasury's interpretation of applicable tax law changed in a way that eliminated the tax advantages of the merger before its consummation, and the board concluded that the Company would be better off withdrawing from the merger-and paying a substantial breakup fee-than proceeding.

The Plaintiffs here are AbbVie stockholders. They contend that the risk of loss of the tax advantages inherent in the merger with Shire was so substantial, and so obvious, that the directors must have breached their fiduciary duties to the stockholders by entering the deal. In these actions under Section 220, they seek to obtain records from the Company that will allow them to demonstrate this liability sufficiently to allow them to pursue a derivative action on behalf of AbbVie against the directors. Under the statute, they need only produce evidence demonstrating a credible basis that actionable corporate wrongdoing on the part of the directors has occurred, a notably low standard of proof designed to ensure that the costs and effort required to answer the demand for documents does not outweigh the potential advantage to the corporation and its stockholders of production. Notwithstanding this low standard, however, the Plaintiffs have failed to meet it here: They have shown only that the directors took a risky decision that failed at substantial cost to the stockholders. Evaluating risk is the raison d'être of a corporate director. These directors are insulated from liability for breaches of a duty of care, and the Plaintiffs have failed to establish a credible basis to believe that the directors have acted disloyally here-that is, were interested in the transaction, not independent, or were acting in bad faith. If the stockholders believe that the directors acted unwisely, they have a remedy in the corporate franchise, but these stockholders have failed to establish a credible basis on which to imply actionable corporate wrongdoing sufficient to confer a right to the records they seek.


A. The Parties and Relevant Non-Parties

Defendant AbbVie is a "global, research-based biopharmaceutical company, " which since its spin-off from Abbott Laboratories in 2013 "has grown to become an approximately $86 billion market capitalization company with approximately 25, 000 employees worldwide across over 170 countries and sales of nearly $19 billion in 2013."[3] AbbVie is a publicly-traded Delaware corporation with its principal place of business in North Chicago, Illinois.[4]

Non-party Shire is a "leading global specialty biopharmaceutical company that focuses on developing and marketing innovative specialty medicines."[5] Shire is a public limited company registered in the island of Jersey, a Crown Dependency of the United Kingdom, with its principal place of business in Dublin, Republic of Ireland.[6]

Plaintiffs Southeastern Pennsylvania Transportation Authority ("SEPTA") and James Rizzolo ("Rizzolo") were the beneficial owners of shares of AbbVie common stock at all times relevant to this dispute.[7]

B. AbbVie Draws Up a Tax Inversion

These coordinated actions to inspect certain corporate books and records of AbbVie pursuant to Section 220 of the Delaware General Corporation Law both arise from the highly publicized failed merger of AbbVie with Shire in late 2014 (the "Proposed Inversion"). The concept for the Proposed Inversion was born among AbbVie's senior management in 2013 as part of its ongoing and periodic review of the Company's business, which included "evaluation of potential opportunities for business combinations, acquisitions, and other financial and strategic alternatives."[8] In October 2013, AbbVie's senior management identified several companies, including Shire, as potential partners in a strategic transaction.[9]With the help of J.P. Morgan, AbbVie's senior management continued to internally evaluate potential transactions through the spring of 2014, with an increasing focus on a "significant strategic transaction" with Shire known as an "inversion."[10]

A corporate inversion is a corporate reorganization in which a company changes its country of residence by resituating its parent element in a foreign country.[11] Inversions are-or were-attractive as a strategic business maneuver because they allow a corporation to adopt a foreign country's more favorable tax or corporate governance regime.[12] In the past few decades, inversions have become especially popular among corporations domiciled in the United States, due to the United States' onerous-relative to that of many other countries-corporate tax code, under which a U.S. corporation must pay a relatively high tax (up to 35%) both on all income earned within U.S. borders and on income earned outside U.S. borders when that foreign income is repatriated to the domestic corporation.[13]Inversions' role in helping U.S. corporations avoid federal tax obligations has earned these transactions the moniker in this country of "tax inversions."[14]

Due to regulatory restrictions, which will be addressed below, the Proposed Inversion envisioned by AbbVie's senior management in late 2013 and early 2014 necessitated a partner like Shire, and would require a series of transactions and merger subsidiaries to take effect. In simplified terms, AbbVie was to form a wholly owned subsidiary under the laws of Jersey ("New AbbVie"), acquire Shire for mixed consideration of cash and New AbbVie common stock[15] (referred to by the parties as the "Arrangement"), and convert AbbVie common stock into New AbbVie common stock (referred to by the parties as the "Merger").[16] At the culmination of these transactions, AbbVie and Shire would each be indirect, wholly owned subsidiaries of New AbbVie-effectively expatriating AbbVie.[17]

C. AbbVie Successfully Woos Shire, the Reluctant Bride

AbbVie's senior management first brought the Proposed Inversion to the Company's board of directors at a regular board meeting on February 20, 2014.[18]In the following weeks, the Company engaged with J.P. Morgan and AbbVie's U.S. and U.K. legal advisors to further analyze the transaction's strategic business and legal considerations.[19] On April 7, 2014, AbbVie formally retained J.P. Morgan to serve as its financial advisor, in which capacity J.P. Morgan met with AbbVie's officers the next day to discuss "financial analyses, transaction considerations[, ] and tactical considerations relating to a potential strategic transaction with Shire."[20] On April 30, 2014, at a special board meeting, senior management communicated the "legal, financial, and other considerations" of the Proposed Inversion to AbbVie's board, which then granted senior management authorization to reach out to Shire with a non-binding, preliminary proposal for the transaction.[21]

With the board's blessing, in May 2014 AbbVie's Chief Executive Officer, Richard Gonzalez, began a lengthy back-and-forth courtship of Shire via its NonExecutive Chairman, Susan Kilsby. At Gonzalez's request, the pair first met in Switzerland on May 5, where Gonzalez informed Kilsby of AbbVie's interest in a strategic transaction and floated AbbVie's first proposal, valuing Shire at £39.50 per share.[22] On May 9, Kilsby notified Gonzalez that Shire's board had rejected the offer.[23] Gonzalez regrouped with AbbVie's board, senior management, and financial and legal advisors and submitted AbbVie's second bid days later on May 13, valuing Shire at £40.97 per share.[24] Following the second offer, J.P. Morgan reached out to Shire's financial advisors directly to discuss the terms, but to no avail; Shire's board rejected the second proposal on May 20.[25] Gonzalez floated a third proposal on May 30, valuing Shire at £46.26 per share, this time meeting in person with Kilsby and Shire's Chief Executive Officer in France to discuss the transaction, but on June 16 Shire's board rejected this proposal as well, indicating that AbbVie was still undervaluing Shire and that "continuing discussions at such an offer level would be a distraction for Shire['s] management team."[26] Shortly thereafter, the U.K. Panel on Takeovers and Mergers forced AbbVie and Shire to acknowledge press rumors of a potential transaction and reveal the details of AbbVie's overtures, requiring the parties to continue their previously private negotiations in the public light.[27]

Undeterred by the publicity or Shire's rebuffing, AbbVie rebounded with an additional series of proposals in July 2014. On July 8, AbbVie issued a press release announcing a fourth proposal, valuing Shire at £51.15 per share.[28] This proposal was sufficient to land the Company a private meeting with Shire executives to better evaluate the value of the transaction.[29] Following the meeting, Gonzalez submitted a fifth proposal to Kilsby on July 12, valuing Shire at £52.25 per share.[30] On July 13, Gonzalez and Kilsby met to discuss "the Fifth Proposal and closing conditions, break fees[, ] and arrangements for Shire employees in a potential recommended transaction."[31] In light of that conversation, AbbVie's board authorized and extended a sixth proposal later that day, valuing Shire at £53.20 per share, which Kilsby indicated to Gonzalez "the Shire Board would be willing to recommend . . . subject to satisfactory resolution of the other terms" of the proposal.[32]

Representatives of both companies met in the following days to negotiate the transaction's "other terms, " which included

the conditions to the transaction, the process and timing of obtaining antitrust and competition clearances, whether a break fee or other compensation payment would apply if the [Proposed Inversion] were not to be completed under various scenarios (including the AbbVie Board changing its recommendation or the AbbVie shareholders failing to approve the [Proposed Inversion]) and arrangements for Shire employees.[33]

On July 17, AbbVie's board held a special meeting to consider the final terms reached by the parties. After hearing from the Company's senior management and advisors, including J.P. Morgan, which rendered a fairness opinion in favor of the transaction on the agreed-upon terms, [34] AbbVie's board approved the Proposed Inversion and authorized Company officials to enter into a formal agreement with Shire.[35]

D. Terms of the AbbVie-Shire Union

1. Price and Structure

On July 18, 2014, AbbVie and Shire publicly announced the Proposed Inversion in a press release detailing the basic terms agreed upon by the parties (the "Announcement"): Shire's stockholders were to receive £24.44 in cash and be issued 0.8960 share of New AbbVie common stock per share of Shire common stock in the Arrangement, and shares of AbbVie common stock would be converted into shares of New AbbVie common stock at a one-to-one ratio in the Merger.[36] On these terms, the parties expected that, after the culmination of the Proposed Inversion, AbbVie's former stockholders would own approximately 75% of the New AbbVie common stock, and Shire stockholders would have received approximately £14.6 billion in the aggregate and own approximately 25% of the New AbbVie common stock.[37] The combined cash and stock consideration that AbbVie was to pay Shire's stockholders in the Arrangement priced Shire at approximately £32 billion, approximately $54 billion at the time the transaction was announced.[38]

2. The Pre-Nup: The Co-Operation Agreement and Reverse Termination Fees

The same day as the they released the Announcement, AbbVie and Shire executed an agreement "set[ting] out certain mutual commitments to regulate the basis on which [the parties were] willing to implement the [Proposed Inversion]" (the "Co-Operation Agreement").[39] The Co-Operation Agreement contains the parties' covenants and conditions in connection with the transactions necessary to effect the Proposed Inversion (i.e., the Arrangement and Merger), as well as establishes a two-tiered scheme of reverse termination fees payable to Shire by AbbVie if the deal were to fall apart under certain enumerated circumstances.

First, Section 7.1 provides that "on the occurrence of a Break Fee Payment Event . . . AbbVie will pay to Shire an amount in cash in U.S. Dollars equal to three per cent . . . of the indicative value of the cash and shares" that AbbVie was to deliver to Shire's stockholders in the Arrangement, calculated to be approximately $1.635 billion (the "Break Fee").[40] Section 7.2 enumerates the circumstances constituting a "Break Fee Payment Event;" relevant here, Section 7.2.1 states such an Event will occur if (1) the AbbVie board withdraws or modifies in a manner adverse to the Proposed Inversion its recommendation of the Merger; and (2) either (a) the AbbVie stockholders vote and do not adopt the Merger Agreement at a stockholder meeting following the board's change in recommendation, or (b) no stockholder meeting takes place within 60 days after the board's change in recommendation.[41]

Second, Section 10.3 of the Co-Operation Agreement further provides that if AbbVie stockholders vote to not adopt the Merger Agreement in circumstances that do not trigger the Break Fee-for example, where AbbVie's board has not withdrawn or modified its recommendation of the Merger-AbbVie must still pay Shire to reimburse and compensate it for costs incurred in connection with the Proposed Inversion (the "Cost Reimbursement Payment").[42] The Cost Reimbursement Payment is calculated based on actual costs incurred by Shire, but in any event can be no less than $500 million or no more than "one per cent . . . of the indicative value of the cash and shares" that AbbVie was to deliver to Shire's stockholders in the Arrangement-approximately $545 million.[43]

The Co-Operation Agreement does not include a clause permitting AbbVie to abandon the Proposed Inversion without paying the Break Fee or Cost Reimbursement Payment if the U.S. government acted to deter inversions.[44]

E. The Posting of the Banns: AbbVie Touts the Benefits and Explains the Risks of the AbbVie-Shire Union

In addition to detailing the deal's terms, the Announcement provided the Company's rationale for pursuing the Proposed Inversion. In the section entitled, "Background to and reasons for the Transaction, " the Company listed several strategic and financial benefits that it expected to capture, including that "AbbVie expects the [Proposed Inversion] to reduce the effective tax rate for New AbbVie to approximately 13 per cent. by 2016, " and that "[t]he new tax structure will provide AbbVie with flexible access to its global cash flows."[45] The Company repeated and elaborated on its rationales in the preliminary proxy statement, including "the potential realization of ...

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