A January 6th post in the Harvard Law School Forum on Corporate Governance and Financial Regulation focuses on the major challenges faced by corporate communications departments in trying to justify their decision to go ahead with tax inversion deals.
Blog author Charles Nathan of RLM Finsbury notes: “The many facets of inversion deals and their shifting nature create far more complicated communications challenges than any other type of M&A deal structure.”
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Nathan points out that — with some exceptions — shareholders are rarely opposed to tax inversion deals.They, not unreasonably, want the firms they invest in to be as profitable as possible, so they typically feel that corporate structures designed to avoid taxes are just “good business”
The general public, and their elected representatives, however, have a strongly negative attitude about deals obviously designed for tax avoidance purposes. Nathan notes that politicians at all levels “…publicly characterize these deals as unfair, “un-American” tax avoidance.”
Advance planning to manage conflicting interests
Given current public attitudes about tax inversion deals, potential U.S. inverters must assess the sentiment surrounding inversion across a large variety of audiences in advance of a deal. At the least, this should include surveys and polling to provide data to inform the deal communications strategy and assess potential messaging to investors, customers, employees, political figures and so forth.
Firms should also prepare an effective public affairs campaign before announcing an inversion, including IDing potential third party influencers who would support the inversion deal.
Thoughtful explanation of rationale for decision
Nathan highlights that the current political situation means “…there is simply no such thing as a routine cross-border deal announcement in situations where a U.S. company is acquiring a foreign firm. From the very first announcement (including responses to leaks) the inversion story needs to be thoughtfully explained, even if the story is that the parties are considering, but have not decided on an inversion, or that inversion is a by-product of the deal but not a deal driver or that the deal will not in fact use an inversion structure”.
He also points out that ironically the choice to not pursue an inversion deal as part of a merger may “pose the greatest communications challenge” given markets and investors understanding of the real value and importance of tax efficiencies for the combined company.
Communication issues with to-be-acquired company (and country)
Also of note, the communications challenges of tax inversion aren’t limited to the U.S. party in a merger. The to-be-acquired company includes audiences of investors, regulators, press, politicians and government that frequently have very different perspectives than their American counterparts.
Nathan highlights that managing foreign communications may be complicated by negative press generated in the U.S. This can result in the target company shareholders becoming concerned about execution risks in the U.S. arising from the public controversy over tax inversion or lack of support from the acquiring company’s shareholders. He notes: “These concerns need to be recognized and dealt with in the acquirer’s strategic communications plan in a coordinated fashion with that of the target.”