Lawyering helped ease pain of Pfizer's $160 billion breakup


By Neil Gluckman

Pfizer Inc.’s proposed $160 billion merger with Allergan plc fizzled dramatically on Wed-nesday, after months of public anger and regulatory angst over the controversial tax inversion deal.

So why should Pfizer be thanking its lawyers?

On Monday, the U.S. Treasury Department an-nounced new regulations to make inversions more difficult. It took just two days for Pfizer to announce that it was walking away from the megadeal with Ireland’s Allergan, which would have allowed the American drug giant to take advantage of Ireland’s lower tax rates. There was speculation that the new Treasury rules were targeted directly at scuttling the Pfizer inversion.

This month The American Lawyer named Wachtell, Lip-ton, Rosen & Katz’s David Lam a Dealmaker of the Year for his work for Pfizer on the Allergan deal. That’s partly because of its size—the combined company would have been the world’s largest drugmaker—but also because Lam and his team anticipated the regulatory dangers and structured the deal accordingly.

Under the terms of the deal worked out by Pfizer’s lawyers at Wachtell and Allergan’s team at Cleary Gottlieb Steen & Hamilton, Pfizer had to pay a termination fee of just $150 million, the company said in a press release. That’s less than 0.1 percent of the deal’s value.

To put that in perspective, when a $54.8 billion deal between Abbvie and Shire fell through in 2014, also because of new inversion-adverse regulations, the breakup fee totaled about $1.64 billion. Last year, Electrolux’s $3.3 billion bid for General Electric Co.’s appliance business fell through, resulting in a $175 million breakup fee that went to GE.

Breakup fees tend to range between 3 and 4 percent of a deal’s value, according to a 2012 analysis by Kirkland & Ellis partner David Fox, though the percentage goes down as deals get bigger.

When Pfizer and Allergan inked their merger agreement in November, the companies stipulated that if either one terminated the deal because of an “adverse tax law change,” the termination fee wouldn’t exceed $400 million. If one of the companies bowed out for some other reason, the fee could have been up to $3.5 billion.

Other companies have also structured inversion deals to include low or nonexistent breakup fees when tax regulations threatened to change. Had the 2014 deal between Med-tronic and Covidien fallen through because of a U.S. tax law change, Medtronic would have paid no breakup fee, Reuters reported. Endo Inter-national PLC also wasn’t obligated to pay a fee if its deal with Paladin Labs Inc. hadn’t come to fruition, according to The Wall Street Journal.

Wachtell’s Lam didn’t re-spond for a request for comment Wednesday, but last month he said that one of the goals of the deal was to protect “shareholder value in the case of a regulatory change that could affect that value.”

Thanks to those protections, Pfizer can easily absorb the financial fallout from its broken deal. But what about the lawyers?

An M&A partner at a different firm said that in general, lawyers advising on a deal get paid for the time they work, and that’s that. Wachtell, however, has its own way of doing things.

A fee agreement presented to a Wachtell client in 2012 offered a rare glimpse at the firm’s billing practices. The agreement stated: “While our fees are not based on the amount involved in a matter, experience indicates that merger and acquisition and takeover fees have typically ranged [from] 1 percent or more on matters under $250 million and 0.1 of 1 percent or less on matters over $25 billion.”

Wachtell does not comment on its fees, and its agreement with Pfizer is not public. But if the terms followed those laid out in the 2012 agreement, Wachtell’s fee from Pfizer might have topped out at a whopping $160 million.

Another M&A lawyer not involved in this transaction said Wachtell also would have likely negotiated its own breakup fee, which would kick in under exactly the circum-stances facing the firm this week.

The Cleary Gottlieb team that advised Allergan was led by corporate and M&A partners Paul Shim and Jim Langson. The team also included lawyers from Latham & Watkins; Weil, Gotshal & Manges; and Dublin-based Arthur Cox. The Wachtell lawyers advising Pfizer worked with Skadden, Arps, Slate, Meagher & Flom; Clifford Chance; Morgan, Lewis & Bockius; and Dublin-based A&L Goodbody.

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