Paul Hodgson: So, will it be corporate governance as usual at Pfizer-Allergan?

The so-called ‘tax inversion’ merger has other major governance implications for investors to ponder.

In the blanket coverage of the merger between US pharmaceutical giant and Ireland-based pharma company Allergan, it has not escaped notice that Pfizer makes Viagra and Allergan makes Botox.
But many people, however, seem to have forgotten that Allergan incorporated in Ireland in May 2015, by buying a pharmaceutical company called Actavis. And Actavis only incorporated in Ireland by buying a pharmaceutical company called Warner Chilcott in 2013. Before that, in 2000, in an unusual move, Galen, which was Irish, became Warner Chilcott and acquired US-listing status, by buying the US pharmaceutical company of that name. Of course none of these companies actually moved; the vast majority of their operations, corporate headquarters, and everything else remained and remains in the US.
So Pfizer’s incorporation in Ireland is only the last in a long and very direct line of US companies fleeing the shores of the US to the same office in Dublin, at least in name.
This last merger, however, has raised the ire of commentators, politicians, activists, though not as yet of shareholders, in a way that other “tax inversions” have not. These specific mergers are described as tax inversions because they are designed to take advantage of lower corporate taxes in non-US territories.
Despite all the deadlines and a firestorm of criticism and political posturing following the announcement – what of the governance implications? The merger must be approved by both sets of shareholders, but neither of Pfizer’s principal shareholders – BlackRock and Vanguard – would comment on the situation. Other shareholders have been conspicuously silent on this issue.
Since there has been a history of such mergers, I looked back to previous annual reports published by Actavis and Allergan. Actavis filed a US proxy statement in May 2015, when it held its second, and Allergan’s first, AGM in Ireland, and just prior to the name change to Allergan. That proxy statement, filed with the SEC, had a US-style Say on Pay vote, asking shareholders to approve executive pay, as well as two shareholder proposals calling for executives to retain stock and for the board to publish a sustainability report. A very similar report was published in 2014.It seems that this situation will continue with Pfizer. Joan Campion, a spokeswoman for the company, confirmed that Pfizer will “continue to engage with investors, including through the proxy process.” This means the company will continue to file a proxy statement with the SEC, continue to hold US-style Say on Pay votes, continue to have shareholder engagement both on and off the ballot. With this in mind, what do we know about the rest of governance going forward?

At the time of the merger, the new board will consist of 15 directors, 11 of which will be from Pfizer and four from the Allergan board, including Allergan’s executive chairman and CEO. Pfizer’s CEO will be the combined company CEO and Allergan’s will become president and CEO. Allergan, the supposed “acquirer” in the relationship will, as did Actavis before it, change its name. The final iteration – until the next tax inversion – will be Pfizer plc. This sounds and looks, however, like a US-constituted board.
As far as Say on Pay is concerned, most of the combined companies’ shareholders will still be the same, and they have already approved in 2015, 2014 pay of $23.3 million for Read and $36.6 million for Saunders, making them likely the highest paid CEOs in Ireland. As a comparison, Patrick Coveney, chief executive at Irish food company Greencore, part of the FTSE 250, was paid £3,325,000 in 2015. It looks like shareholders will also get the opportunity to vote on retention awards for Pfizer executives; $1 million cash payment to retain them for just three months following the merger. And to vote on “make-whole” agreements for existing Allergan executives which will pay any special taxes due on accelerated incentives caused by the merger.
Such moves would hardly pass muster in Europe, but it seems governance as usual for Pfizer/Allergan and, apparently, for its shareholders, many of whom also remain in the US. However, the fact that shareholders will still be able to engage with the company will not bring US public opinion over to Pfizer, they’re still spitting mad.

Paul Hodgson is an independent governance analyst.